Table of Contents

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

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

For the quarterly period ended June 30, 2022

2023

OR

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

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)

(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.

YESYes  ☒    NO  ☐

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  ☐

YesNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one)

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2
of the Exchange Act).    YES  ☐    NO  ☒
6,372,641

YesNo

6,155,077 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of July 28, 2022.

31, 2023.

Table of Contents

1895 Bancorp of Wisconsin, Inc.

Form

10-Q

Table of Contents

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

1

Consolidated Balance Sheets at June 30, 20222023 (unaudited) and December 31, 20212022

1

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022 and 2021 (unaudited)

2

Consolidated Statements of Comprehensive Income (Loss) Income for the Three and Six Months Ended June 30, 2023 and 2022 and 2021 (unaudited)

3

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022 and 2021 (unaudited)

4

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 and 2021 (unaudited)

5

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

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

30

38

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

50

Item 4.

Controls and Procedures

43

50

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

43

50

Item 1A.

Risk Factors

43

50

Item 2.

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

43

50

Item 3.

Defaults Upon Senior Securities

43

50

Item 4.

Mine Safety Disclosures

43

50

Item 5.

Other Information

43

50

Item 6.

Exhibits

44

51

SIGNATURES

44

52

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

Item 1. Financial Statements

1895 BANCORP OF WISCONSIN, INC.

Bancorp of Wisconsin, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

   
June 30,
2022
  
December 31,
2021
 
        
   
(unaudited)
    
Assets
     
Cash and due from banks
  $19,102  $65,300 
Fed funds sold
   1,119   1,503 
   
 
 
  
 
 
 
Cash and cash equivalents
   20,221   66,803 
Marketable equity securities, stated at fair value
   2,867   3,544 
Available-for-sale
securities, stated at fair value
   126,676   112,440 
Loans held for sale
   262   1,183 
Loans, net of allowance for loan losses of $3,132 and $2,858 at June 30, 2022 and December 31, 2021, respectively
   349,619   323,789 
Premises and equipment, net
   5,685   5,864 
Mortgage servicing rights, net
   1,939   2,036 
Federal Home Loan Bank (FHLB) stock, at cost
   3,032   3,032 
Accrued interest receivable
   1,027   948 
Cash value of life insurance
   14,101   13,892 
Other assets
   10,197   6,108 
   
 
 
  
 
 
 
TOTAL ASSETS
  $535,626  $539,639 
   
 
 
  
 
 
 
Liabilities and Stockholders’ Equity
         
Deposits
  $383,062  $384,501 
Advance payments by borrowers for taxes and insurance
   7,739   1,860 
FHLB advances
   57,435   55,442 
Accrued interest payable
   128   109 
Other liabilities
   6,296   6,834 
   
 
 
  
 
 
 
TOTAL LIABILITIES
   454,660   448,746 
   
 
 
  
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized at June 30, 2022 and December 31, 2021
   —     —   
Common stock (par value $0.01 per share)
Authorized – 90,000,000 shares at June 30, 2022 and December 31, 2021
Issued – 6,402,704 at June 30, 2022 and 6,402,571 at December 31, 2021
(includes 80,967 and 97,128 unvested shares, respectively)
Outstanding – 6,372,641 at June 30, 2022 and 6,372,508 at December 31, 2021
(includes 80,967 and 97,128 unvested shares, respectively)
   64   64 
Additional
paid-in
capital
   52,855   52,805 
Unallocated common stock of Employee Stock Ownership Plan (ESOP), 463,658 and 377,077 shares at June 30, 2022 and December 31, 2021, respectively
   (4,401)   (3,432) 
Less treasury stock at cost, 30,063 shares at June 30, 2022 and December 31, 2021
   (301)   (301) 
Retained earnings
   41,319   41,615 
Accumulated other comprehensive (loss) income, net of income taxes
   (8,570)   142 
   
 
 
  
 
 
 
Total stockholders’ equity
   80,966   90,893 
   
 
 
  
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $535,626  $539,639 
   
 
 
  
 
 
 

 

 

June 30,
2023

 

 

December 31,
2022

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

18,782

 

 

$

26,029

 

Fed funds sold

 

 

4,013

 

 

 

2,315

 

Cash and cash equivalents

 

 

22,795

 

 

 

28,344

 

 

 

 

 

 

 

 

Marketable equity securities, stated at fair value

 

 

3,416

 

 

 

2,924

 

Available-for-sale securities, stated at fair value

 

 

107,631

 

 

 

114,492

 

Loans held for sale

 

 

—

 

 

 

125

 

Loans, net of deferred costs

 

 

384,159

 

 

 

362,777

 

Allowance for credit losses for loans

 

 

(3,643

)

 

 

(3,203

)

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

 

 

380,516

 

 

 

359,574

 

Premises and equipment, net

 

 

5,308

 

 

 

5,451

 

Mortgage servicing rights, net

 

 

1,777

 

 

 

1,860

 

Federal Home Loan Bank (FHLB) stock, at cost

 

 

4,870

 

 

 

3,429

 

Accrued interest receivable

 

 

1,266

 

 

 

1,257

 

Cash value of life insurance

 

 

13,813

 

 

 

14,316

 

Other assets

 

 

11,983

 

 

 

11,244

 

TOTAL ASSETS

 

$

553,375

 

 

$

543,016

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Deposits

 

$

371,190

 

 

$

387,721

 

Advance payments by borrowers for taxes and insurance

 

 

8,141

 

 

 

1,029

 

FHLB advances

 

 

91,488

 

 

 

71,464

 

Accrued interest payable

 

 

698

 

 

 

291

 

Other liabilities

 

 

7,732

 

 

 

7,149

 

TOTAL LIABILITIES

 

 

479,249

 

 

 

467,654

 

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

 

 

—

 

 

 

—

 

Common stock (par value $0.01 per share) Authorized - 90,000,000 shares at
   June 30, 2023 and December 31, 2022; Issued – 6,187,587 at
   June 30, 2023 and 6,236,168 at December 31, 2022 (includes 172,833 and
   211,349 unvested shares, respectively); Outstanding – 6,158,069 at
   June 30, 2023 and 6,206,105 at December 31, 2022 (includes 172,833 and
   211,349 unvested shares, respectively)

 

 

62

 

 

 

62

 

Additional paid-in capital

 

 

49,964

 

 

 

49,931

 

Unallocated common stock of Employee Stock Ownership Plan (ESOP), 444,010 and
   453,792 shares at June 30, 2023 and December 31, 2022, respectively

 

 

(4,214

)

 

 

(4,307

)

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

 

 

(295

)

 

 

(301

)

Retained earnings

 

 

39,816

 

 

 

41,468

 

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

 

 

(11,207

)

 

 

(11,491

)

Total stockholders’ equity

 

 

74,126

 

 

 

75,362

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

553,375

 

 

$

543,016

 

See accompanying notes to the unaudited consolidated financial statements.

1

Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts) – Unaudited

   
Three months ended

June 30
  
Six months ended

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

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

4,238

 

 

$

3,009

 

 

$

8,064

 

 

$

6,299

 

Securities, taxable

 

 

588

 

 

 

566

 

 

 

1,191

 

 

 

1,114

 

Other

 

 

191

 

 

 

92

 

 

 

476

 

 

 

139

 

Total interest and dividend income

 

 

5,017

 

 

 

3,667

 

 

 

9,731

 

 

 

7,552

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

1,296

 

 

 

187

 

 

 

2,278

 

 

 

356

 

Borrowed funds

 

 

654

 

 

 

181

 

 

 

1,148

 

 

 

350

 

Other interest-bearing funds

 

 

1

 

 

 

2

 

 

 

3

 

 

 

4

 

Total interest expense

 

 

1,951

 

 

 

370

 

 

 

3,429

 

 

 

710

 

Net interest income

 

 

3,066

 

 

 

3,297

 

 

 

6,302

 

 

 

6,842

 

Provision for credit losses

 

 

75

 

 

 

105

 

 

 

150

 

 

 

210

 

Net interest income after provision for credit losses

 

 

2,991

 

 

 

3,192

 

 

 

6,152

 

 

 

6,632

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and other fees

 

 

239

 

 

 

257

 

 

 

464

 

 

 

493

 

Loan servicing, net

 

 

157

 

 

 

171

 

 

 

330

 

 

 

348

 

Net gain on sale of loans

 

 

30

 

 

 

106

 

 

 

68

 

 

 

184

 

Increase in cash surrender value of insurance

 

 

110

 

 

 

105

 

 

 

217

 

 

 

209

 

Unrealized gain (loss) on marketable equity securities

 

 

225

 

 

 

(522

)

 

 

444

 

 

 

(733

)

Other

 

 

159

 

 

 

1

 

 

 

165

 

 

 

7

 

Total noninterest income

 

 

920

 

 

 

118

 

 

 

1,688

 

 

 

508

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,060

 

 

 

2,034

 

 

 

5,973

 

 

 

4,318

 

Advertising and promotions

 

 

21

 

 

 

99

 

 

 

71

 

 

 

113

 

Data processing

 

 

222

 

 

 

209

 

 

 

446

 

 

 

410

 

Occupancy and equipment

 

 

299

 

 

 

330

 

 

 

637

 

 

 

684

 

FDIC assessment

 

 

85

 

 

 

36

 

 

 

121

 

 

 

62

 

Other

 

 

1,005

 

 

 

976

 

 

 

1,885

 

 

 

2,041

 

Total noninterest expense

 

 

4,692

 

 

 

3,684

 

 

 

9,133

 

 

 

7,628

 

Loss before income taxes

 

 

(781

)

 

 

(374

)

 

 

(1,293

)

 

 

(488

)

Income tax (benefit)

 

 

(273

)

 

 

(133

)

 

 

(424

)

 

 

(192

)

Net loss

 

$

(508

)

 

$

(241

)

 

$

(869

)

 

$

(296

)

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

 

$

(0.04

)

 

$

(0.16

)

 

$

(0.05

)

Diluted(1)

 

$

(0.09

)

 

$

(0.04

)

 

$

(0.16

)

 

$

(0.05

)

Average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

5,545,335

 

 

 

5,843,104

 

 

 

5,548,562

 

 

 

5,858,449

 

Diluted(1)

 

 

5,545,335

 

 

 

5,843,104

 

 

 

5,548,562

 

 

 

5,858,449

 

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

Table

1895 Bancorp of Contents

1895 BANCORP OF WISCONSIN, INC.
Wisconsin, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

(In thousands) - Unaudited

                 
   
Three months ended

June 30
  
Six months ended

June 30
 
   
2022
  
2021
  
2022
  
2021
 
Net (loss) income
  $(241)  $(51)  $(296)  $470 
   
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive (loss) income:
                 
Unrealized holding (losses) gains arising during the period
   (4,791)   447   (11,934)   (354) 
Reclassification adjustment for gains realized in net income
   —     —     —     (12) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive (loss) income before tax effect
   (4,791)   447   (11,934)   (366) 
Tax effect of other comprehensive (loss) income items
   1,294   (120)   3,222   99 
   
 
 
  
 
 
  
 
 
  
 
 
 
Other comprehensive (loss) income, net of tax
   (3,497)   327   (8,712)   (267) 
   
 
 
  
 
 
  
 
 
  
 
 
 
Comprehensive (loss) income
  $(3,738)  $276  $(9,008)  $203 
   
 
 
  
 
 
  
 
 
  
 
 
 

 

Three months ended
June 30,

 

 

Six months ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net loss

 

$

(508

)

 

$

(241

)

 

$

(869

)

 

$

(296

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1,841

)

 

 

(4,791

)

 

 

388

 

 

 

(11,934

)

Other comprehensive (loss) income before tax effect

 

 

(1,841

)

 

 

(4,791

)

 

 

388

 

 

 

(11,934

)

Tax effect of other comprehensive (loss) income items

 

 

497

 

 

 

1,294

 

 

 

(104

)

 

 

3,222

 

Other comprehensive (loss) income, net of tax

 

 

(1,344

)

 

 

(3,497

)

 

 

284

 

 

 

(8,712

)

Comprehensive (loss)

 

$

(1,852

)

 

$

(3,738

)

 

$

(585

)

 

$

(9,008

)

See accompanying notes to the unaudited consolidated financial statements.

3

3
Table

1895 Bancorp of Contents

1895 BANCORP OF WISCONSIN, INC.
Wisconsin, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands) - Unaudited

   
Common stock
   
Additional paid-

in capital
  
Unallocated
common stock of
ESOP
  
Treasury
Stock
  
Retained
earnings
  
Accumulated
other
comprehensive
income (loss)
  
Total
 
Balance as of March 31, 2022
  $64   $52,852  $(3,900)  $(301)  $41,560  $(5,073)  $85,202 
Net loss
   —      —     —     —     (241)   —     (241) 
Other comprehensive loss
   —      —     —     —     —     (3,497)   (3,497) 
ESOP shares committed to be released (9,865 shares)
   —      7   44   —     —     —     51 
Purchase of ESOP shares
   —      —     (545)   —     —     —     (545) 
Retirement of common stock
   —      (64)   —     —     —     —     (64) 
Stock compensation expense
   —      60   —     —     —     —     60 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of June 30, 2022
  $64   $52,855  $(4,401)  $(301)  $41,319  $(8,570)  $80,966 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of March 31, 2021
  $49   $20,180  $(1,597)  $(1,228)  $42,051  $544  $59,999 
Net loss
   —      —     —     —     (51)   —     (51) 
Other comprehensive income
   —      —     —     —     —     327   327 
ESOP shares committed to be released (1,755 shares)
(1)
   —      13   17   —     —     —     30 
Retirement of common stock
   —      (70)   —     —     —     —     (70) 
Stock compensation expense
   —      65   —     —     —     —     65 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of June 30, 2021
  $49   $20,188  $(1,580)  $(1,228)  $42,000  $871  $60,300 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of January 1, 2022
  $64   $52,805  $(3,432)  $(301)  $41,615  $142  $90,893 
Net loss
   —      —     —     —     (296)   —     (296) 
Other comprehensive loss
   —      —     —     —     —     (8,712)   (8,712) 
Reimbursement of stock offering costs
   —      1   —     —     —     —     1 
Purchase of ESOP shares
   —      —     (1,062)   —     —     —     (1,062) 
ESOP shares committed to be released (14,798 shares)
   —      8   93   —     —     —     101 
Retirement of common stock
   —      (78)   —     —     —     —     (78) 
Stock compensation expense
   —      119   —     —     —     —     119 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of June 30, 2022
  $64   $52,855  $(4,401)  $(301)  $41,319  $(8,570)  $80,966 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of January 1, 2021
  $49   $20,134  $(1,615)  $(1,228)  $41,530  $1,138  $60,008 
Net income
   —      —     —     —     470   —     470 
Other comprehensive loss
   —      —     —     —     —     (267)   (267) 
Purchase of treasury stock
   —      —     —     (15)   —         (15) 
ESOP shares committed to be released (3,510 shares)
(1)
   —      16   35   —     —     —     51 
Issuance of treasury stock – stock compensation plan
   —      (15)   —     15   —     —     —   
Retirement of common stock
   —      (70)   —     —     —     —     (70) 
Stock compensation expense
   —      123   —     —     —     —     123 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance as of June 30, 2021
  $49   $20,188  $(1,580)  $(1,228)  $42,000  $871  $60,300 
   
 
 
   
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(1) 
Amounts related to periods prior to the date of Conversion (July 2021) have not been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1).

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 March 31, 2022

$

64

 

 

$

52,852

 

 

$

(3,900

)

 

$

(301

)

 

$

41,560

 

 

$

(5,073

)

 

$

85,202

 

Net loss

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(241

)

 

 

—

 

 

 

(241

)

Other comprehensive (loss) income

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,497

)

 

 

(3,497

)

Purchase of 50,757 shares by ESOP

 

—

 

 

 

—

 

 

 

(545

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(545

)

ESOP shares committed to be released (9,865 shares)

 

—

 

 

 

7

 

 

 

44

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

51

 

Purchase and retirement of common stock

 

—

 

 

 

(64

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(64

)

Stock compensation expense

 

—

 

 

 

60

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

60

 

Balance as of June 30, 2022

$

64

 

 

$

52,855

 

 

$

(4,401

)

 

$

(301

)

 

$

41,319

 

 

$

(8,570

)

 

$

80,966

 

Balance as of March 31,2023

$

62

 

 

$

49,977

 

 

$

(4,260

)

 

$

(301

)

 

$

40,324

 

 

$

(9,863

)

 

$

75,939

 

Net loss

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(508

)

 

 

—

 

 

 

(508

)

Other comprehensive (loss) income

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,344

)

 

 

(1,344

)

ESOP shares committed to be released (4,918 shares)

 

—

 

 

 

(16

)

 

 

46

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

30

 

Repurchase and cancellation of common stock-stock repurchase program (14,400 shares)

 

—

 

 

 

(103

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(103

)

Sale of common stock by Rabbi Trust

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Purchase and retirement of common stock

 

—

 

 

 

(43

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(43

)

Stock compensation expense

 

—

 

 

 

149

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

149

 

Balance as of June 30, 2023

$

62

 

 

$

49,964

 

 

$

(4,214

)

 

$

(295

)

 

$

39,816

 

 

$

(11,207

)

 

$

74,126

 

Balance as of January 1, 2022

$

64

 

 

$

52,805

 

 

$

(3,432

)

 

$

(301

)

 

$

41,615

 

 

$

142

 

 

$

90,893

 

Net loss

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(296

)

 

 

—

 

 

 

(296

)

Other comprehensive (loss)

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,712

)

 

 

(8,712

)

Reimbursement of stock offering costs

 

—

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1

 

Purchase of 96,446 shares by ESOP

 

—

 

 

 

—

 

 

 

(1,062

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1,062

)

ESOP shares committed to be released (14,798 shares)

 

—

 

 

 

8

 

 

 

93

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

101

 

Purchase and retirement of common stock

 

—

 

 

 

(78

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(78

)

Stock compensation expense

 

—

 

 

 

119

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

119

 

Balance as of June 30, 2022

$

64

 

 

$

52,855

 

 

$

(4,401

)

 

$

(301

)

 

$

41,319

 

 

$

(8,570

)

 

$

80,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2023

$

62

 

 

$

49,931

 

 

$

(4,307

)

 

$

(301

)

 

$

41,468

 

 

$

(11,491

)

 

$

75,362

 

Net loss

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(869

)

 

 

—

 

 

 

(869

)

Other comprehensive income

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

284

 

 

 

284

 

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

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(783

)

 

 

—

 

 

 

(783

)

ESOP shares committed to be released (9,782 shares)

 

—

 

 

 

(16

)

 

 

93

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

77

 

Repurchase and cancellation of common stock-stock repurchase program (27,303 shares)

 

—

 

 

 

(232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(232

)

Sale of common stock by Rabbi Trust

 

—

 

 

 

—

 

 

 

—

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Purchase and retirement of common stock

 

—

 

 

 

(56

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(56

)

Stock compensation expense

 

—

 

 

 

337

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

337

 

Balance as of June 30, 2023

$

62

 

 

$

49,964

 

 

$

(4,214

)

 

$

(295

)

 

$

39,816

 

 

$

(11,207

)

 

$

74,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

4

4
Table of Contents

1895 BANCORP OF WISCONSIN, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) - Unaudited

   
Six months ended
June 30,
 
   
2022
  
2021
 
   
(unaudited)
 
Cash flows from operating activities:
         
Net (loss) income
  $(296)  $470 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
         
Net amortization of investment securities
   90   15 
Depreciation
   310   331 
Provision for loan losses
   210   —   
Net change in fair value of marketable equity securities
   733   (372) 
Net gain on sale of available for sale securities
   —     (12) 
Stock compensation expense
   119   123 
Adjustment to mortgage servicing rights valuation
   —     (369) 
(Benefit from) provision for deferred income tax
   (192)   102 
Originations of mortgage loans held for sale
   (13,760)   (67,969) 
Proceeds from sales of mortgage loans held for sale
   14,865   70,026 
Net gain on sale of mortgage loans held for sale
   (184)   (913) 
ESOP compensation
   101   51 
Net change in cash value of life insurance
   (209)   (201) 
Changes in operating assets and liabilities:
         
Net change in mortgage servicing rights
   97   66 
Accrued interest receivable and other assets
   (831)   (1,492) 
Accrued interest payable and other liabilities
   (520)   667 
   
 
 
  
 
 
 
Net cash provided by operating activities
   533   523 
   
 
 
  
 
 
 
Cash Flows From Investing Activities
         
Proceeds from sales of available for sale securities
   —     1,018 
Maturities, prepayments, and calls of available for sale securities
   10,879   5,116 
Purchases of available for sale securities
   (37,139)   (39,218) 
Net change in marketable equity securities
   (56)   —   
Net increase in loans
   (26,040)   (1,830) 
Net capital expenditures for premises and equipment
   (131)   (94) 
   
 
 
  
 
 
 
Net cash used in investing activities
   (52,487)   (35,008) 
   
 
 
  
 
 
 
Cash Flows From Financing Activities
         
Net (decrease) increase in deposits
   (1,439)   86,336 
Net increase in advance payments by borrowers for taxes and insurance
   5,879   6,430 
Proceeds from issuance of Federal Home Loan Bank advances
   10,000   —   
Principal payments on Federal Home Loan Bank advances
   (8,007)   (4,975) 
Reimbursement of stock offering costs
   1   —   
Purchases of treasury stock
   —     (15) 
Purchase of ESOP shares
   (1,062)   —   
   
 
 
  
 
 
 
Net cash provided by financing activities
   5,372   87,776 
   
 
 
  
 
 
 
Net (decrease) increase in cash and cash equivalents
   (46,582)   53,219 
Cash and cash equivalents at beginning of period
   66,803   92,526 
   
 
 
  
 
 
 
Cash and cash equivalents at end of period
  $20,221  $145,817 
   
 
 
  
 
 
 
Supplemental cash flow information:
         
Cash paid during the year for interest
  $691  $902 
Noncash activities:
         
Retirement of common stock
  $78  $70 
Issuance of treasury stock – stock compensation plans
   —     15 

Six months ended June 30,

 

2023

 

 

2022

 

Cash flows from operating activities

 

 

 

 

 

Net loss

$

(869

)

 

$

(296

)

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

Net amortization of investment securities

 

37

 

 

 

90

 

Depreciation

 

252

 

 

 

310

 

Provision for credit losses

 

150

 

 

 

210

 

Net change in fair value of marketable equity securities

 

(444

)

 

 

733

 

Stock compensation expense

 

337

 

 

 

119

 

(Benefit from) deferred income tax

 

(424

)

 

 

(192

)

Originations of mortgage loans held for sale

 

(4,043

)

 

 

(13,760

)

Proceeds from sales of mortgage loans held for sale

 

4,236

 

 

 

14,865

 

Net gain on sale of mortgage loans held for sale

 

(68

)

 

 

(184

)

ESOP compensation

 

77

 

 

 

101

 

Net change in cash value of life insurance

 

(217

)

 

 

(209

)

Changes in operating assets and liabilities

 

 

 

 

 

Net change in mortgage servicing rights

 

83

 

 

 

97

 

Accrued interest receivable and other assets

 

(135

)

 

 

(753

)

Accrued interest payable and other liabilities

 

192

 

 

 

(520

)

Net cash (used in) provided by operating activities

 

(836

)

 

 

611

 

Cash flows from investing activities

 

 

 

 

 

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

 

7,212

 

 

 

10,879

 

Purchases of available-for-sale securities

 

—

 

 

 

(37,139

)

Purchase of marketable equity securities

 

(54

)

 

 

(56

)

Net (increase) in loans

 

(21,371

)

 

 

(26,040

)

Net (increase) in FHLB stock, net

 

(1,441

)

 

 

—

 

Proceeds from cash value life insurance death benefits

 

720

 

 

 

—

 

Distribution of marketable equity securities

 

12

 

 

 

—

 

Net capital expenditures for premises and equipment

 

(108

)

 

 

(131

)

Net cash used in investing activities

 

(15,030

)

 

 

(52,487

)

Cash flows from financing activities

 

 

 

 

 

Net (decrease) increase in deposits

 

(16,531

)

 

 

(1,439

)

Net increase in advance payments by borrowers for taxes and insurance

 

7,112

 

 

 

5,879

 

Proceeds from the issuance of Federal Home Loan Bank advances

 

99,500

 

 

 

10,000

 

Principal payments on Federal Home Loan Bank advances

 

(79,476

)

 

 

(8,007

)

Reimbursement of stock offering costs

 

—

 

 

 

1

 

Repurchase and cancellation of common stock

 

(232

)

 

 

—

 

Purchase and retirement of common stock

 

(56

)

 

 

(78

)

Purchases of ESOP shares

 

—

 

 

 

(1,062

)

Net cash provided by financing activities

 

10,317

 

 

 

5,294

 

Net increase (decrease) in cash and cash equivalents

 

(5,549

)

 

 

(46,582

)

Cash and cash equivalents at beginning of period

 

28,344

 

 

 

66,803

 

Cash and cash equivalents at end of period

$

22,795

 

 

$

20,221

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the year for interest

$

3,022

 

 

$

691

 

See accompanying notes to the unaudited consolidated financial statements.

5

Table of Contents

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%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$2.0 million were deferred and deducted from the sales proceeds of the offering.

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

The accompanying unaudited interim consolidated financial statements and the notes thereto have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, results of operations, changes in stockholder’sstockholders' equity and cash flows as of and for the periods presented. Certain amounts from prior periods have been reclassified to conform with current period presentation.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the audited annual consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form

10-K
for the year ended December 31, 2021,2022, as filed with the Securities and Exchange Commission on March 29, 2022.
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 loancredit 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 (the “JOBS Act”) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies and define an “emerging growth company.” As an emerging growth company, the Company may delay adoption of new or revised financial accounting standards until such date that the standards are required to be adopted by
non-issuer
companies. If such standards would not apply to
non-issuer
companies, no deferral would be applicable. The Company intends to take advantage of the benefits of the extended transition periods allowed under the JOBS Act.
6
Table of Contents
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION (continued)

Accordingly, the Company’s financial statements may not be comparable to those of public companies that adopt new or revised financial accounting standards as of an earlier date. The effective dates of the recent accounting standards in Note 2 reflect those that relate to

non-issuer
companies.

6

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

Subsequent Events

The Company

Management has evaluated subsequent eventsreviewed the Company's operations for potential recognition and/disclosure or disclosure throughfinancial statement impacts related to events occurring after June 30, 2023, but prior to the daterelease of the unaudited consolidated financial statements includedcontained in this quarterly report on Form

10-Q
were issued.
On July 29, 2022, the Company announced the Board of Directors of the Company had adopted a stock repurchase program. Under the repurchase program, the Company may repurchase up to 5% of the current outstanding shares. The program is subject to regulatory
non-objection.

There were no additional significant subsequent event disclosures or financial statement impacts related to events for the quarter endedoccurring after June 30, 2022 through the issuance date of these unaudited consolidated financial statements2023 that warranted adjustment to or disclosure in thethese unaudited consolidated financial statements.

NOTE 2 – RECENTSIGNIFICANT ACCOUNTING STANDARDS

The followingPOLICIES

On January 1, 2023, we adopted 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 Updates. 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 (“ASUs”CECL”) have been issuedmodel, 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. 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.

7

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)

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 maturity (WARM) 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 loan 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 Board (“FASB”) and may impact the Company’s financial statements in future reporting periods:

ASU

2016-13,
Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326)
. ASU
2016-13
requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. In November 2019, the FASB issued ASU
2019-10,
Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, amending the effective date for this standard. ASU
2016-13
will be effective for fiscal years beginning after December 15, 2022, and interim periods within fiscal years beginning after December 15, 2022. In March 2022, the FASB issued ASU
2022-02— 2022-02, Financial
Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for TDRstroubled debt restructurings by creditors, in Subtopic
310-40,
Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, ASU
2022-02
requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic
326-20,
Financial Instruments—Credit Losses—Measured at Amortized Cost inLosses. The Company adopted ASU 2016-13 and ASU 2022-02 as of January 1, 2023 using the vintage disclosures required by paragraph
326-20-50-6.
ASU
No. 2022-02
is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The amendments should be applied prospectively, however, an entity has the option to apply a modified retrospective transition method related to the recognitionfor all financial assets measured at amortized cost and measurement of TDRs, which would result in a cumulative effect adjustment to retained earnings in the period of adoption. Management has elected to deferoff-balance sheet credit exposures. The adoption of ASC
2016-13,
as well as ASU
2022-02,
until January 1, 2023. The Company has implemented and is currently testing and evaluating a third-party software solution to assist with the adoption of ASU
2016-13.
The impact of adopting ASU
2016-13
on the Company’s consolidated financial statements is still being quantified. Management will continue to progress on its implementation project plan and improve the Company’s approach throughout the deferral period.
ASU
2016-02,
Leases (Topic 842)
. This ASU affects any entity that enters into a lease and is intended to increase the transparency and comparability of financial reporting. The ASU requires, among other changes, a lessee to recognize on its balance sheet a lease asset and a lease liability for those leases previously classified as operating leases. The lease asset will represent the right to use the underlying asset for the lease term, and the lease liability will represent the discounted value of the required lease payments to the lessor. The ASU will also require entities to disclose key information about leasing arrangements. ASU
2016-02
is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted.
7
Table of Contents
NOTE 2 – RECENT ACCOUNTING STANDARDS (continued)
On November 15, 2019, the FASB issued ASU
2019-10,
Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, amending the effective date for this standard. On June 3, 2020, the FASB issued ASU
2020-05,
Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective D
ates for Cert
ain Entities, updating the effective date for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted ASC 842 on January 1, 2022. The cumulative effect did not have a material impact on the Company’s statements of operations. Where the Company is a lessee, the Company recorded2016-13 resulted in an initial increase in both assets and liabilities of $529,000$412,000 to reflect the right of use assetallowance for credit losses for loans and the lease liability.​​​​​​​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

AVAILABLE-FOR-SALE
SECURITIES

The amortized costs and fair values of securities

available-for-sale
were as follows:

 

June 30, 2023

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

 

(in thousands)

 

U.S. Treasury notes

 

$

29,639

 

 

$

—

 

 

$

(2,913

)

 

$

26,726

 

Obligations of states and political subdivisions

 

 

19,864

 

 

 

2

 

 

 

(3,329

)

 

 

16,537

 

Government-sponsored mortgage-backed securities

 

 

68,497

 

 

 

—

 

 

 

(9,032

)

 

 

59,465

 

Asset-backed securities

 

 

3,990

 

 

 

—

 

 

 

(48

)

 

 

3,942

 

Certificates of deposit

 

 

994

 

 

 

—

 

 

 

(33

)

 

 

961

 

Total

 

$

122,984

 

 

$

2

 

 

$

(15,355

)

 

$

107,631

 

 

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

 

                                                                                                 
   
June 30, 2022
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
                 
   
(in thousands)
 
U.S. Treasury notes
  $29,555   $—     $(2,227)   $27,328 
Obligations of states and political subdivisions
   21,418    17    (2,889)    18,546 
Government-sponsored mortgage-backed securities
   80,261    19    (6,579)    73,701 
Asset-backed securities
   5,723    —      (71)    5,652 
Certificates of deposit
   1,459    —      (10)    1,449 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $138,416   $36   $(11,776)   $126,676 
   
 
 
   
 
 
   
 
 
   
 
 
 
                                                                                             
   
December 31, 2021
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
                 
   
(in thousands)
 
U.S. Treasury notes
  $19,501   $8   $(25)   $19,484 
Obligations of states and political subdivisions
   20,758    207    (205)    20,760 
Government-sponsored mortgage-backed securities
   64,049    563    (463)    64,149 
Asset-backed securities
   6,479    45    (1)    6,523 
Certificates of deposit
   1,459    65    —      1,524 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $112,246   $888   $(694)   $112,440 
   
 
 
   
 
 
   
 
 
   
 
 
 
Available-for-sale
securities with a carrying

The fair value of $4.1 million and $1.8 millionavailable-for-sale securities that were pledged as collateral at June 30, 20222023 and December 31, 2021,2022, were $8.9 million and $3.6 million, respectively.

The amortized costs and fair values of available-for-sale securities,

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

 

June 30, 2023

 

 

Amortized Cost

 

 

Fair Value

 

 

(in thousands)

 

Debt and other securities:

 

 

 

 

 

 

Due in one year or less

 

$

1,080

 

 

$

1,058

 

Due after one through 5 years

 

 

29,133

 

 

 

26,429

 

Due after 5 through 10 years

 

 

17,170

 

 

 

14,312

 

Due after 10 years

 

 

3,114

 

 

 

2,425

 

Total debt and other securities

 

 

50,497

 

 

 

44,224

 

Mortgage-related securities

 

 

68,497

 

 

 

59,465

 

Asset-backed securities

 

 

3,990

 

 

 

3,942

 

Total

 

$

122,984

 

 

$

107,631

 

8

10

Table of Contents

NOTE 3 –

AVAILABLE-FOR-SALE
SECURITIES (continued)

   
June 30, 2022
 
   
Amortized Cost
   
Fair Value
 
         
   
(in thousands)
 
Debt and other securities:
          
Due in one year or less
  $1,790   $1,783 
Due after one through 5 years
   20,892    19,646 
Due after 5 through 10 years
   18,661    16,772 
Due after 10 years
   11,089    9,122 
   
 
 
   
 
 
 
Total debt and other securities
   52,432    47,323 
Mortgage-related securities
   80,261    73,701 
Asset-backed securities
   5,723    5,652 
   
 
 
   
 
 
 
Total
  $138,416   $126,676 
   
 
 
   
 
 
 

Gross unrealized losses on securities

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

 

June 30, 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

 

$

—

 

 

$

—

 

 

$

26,726

 

 

$

(2,913

)

 

$

26,726

 

 

$

(2,913

)

Obligations of states and political
   subdivisions

 

 

648

 

 

 

(29

)

 

 

15,547

 

 

 

(3,300

)

 

 

16,195

 

 

 

(3,329

)

Government-sponsored mortgage-backed
   securities

 

 

5,169

 

 

 

(325

)

 

 

54,296

 

 

 

(8,707

)

 

 

59,465

 

 

 

(9,032

)

Asset-backed securities

 

 

208

 

 

 

—

 

 

 

3,734

 

 

 

(48

)

 

 

3,942

 

 

 

(48

)

Certificates of deposit

 

 

—

 

 

 

—

 

 

 

961

 

 

 

(33

)

 

 

961

 

 

 

(33

)

Total

 

$

6,025

 

 

$

(354

)

 

$

101,264

 

 

$

(15,001

)

 

$

107,289

 

 

$

(15,355

)

 

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

)

                                                                                                                               
   
June 30, 2022
 
   
Less than 12 months
  
12 months or longer
  
Total
 
   
Fair Value
   
Unrealized
Loss
  
Fair Value
   
Unrealized
Loss
  
Fair Value
   
Unrealized
Loss
 
                       
   
(in thousands)
 
U.S. Treasury notes
  $27,328   $(2,227)  $—     $—    $27,328   $(2,227) 
Obligations of states and political subdivisions
   14,506    (2,102)   3,433    (787)   17,939    (2,889) 
Government-sponsored mortgage-backed securities
   67,633    (5,849)   4,724    (730)   72,357    (6,579) 
Asset-backed securities
   5,345    (71)   —      —     5,345    (71) 
Certificates of deposit
   1,234    (10)   —      —     1,234    (10) 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $116,046   $(10,259)  $8,157   $(1,517)  $124,203   $(11,776) 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
                                                                                                                               
   
December 31, 2021
 
   
Less than 12 months
  
12 months or longer
  
Total
 
   
Fair
Value
   
Unrealized
Loss
  
Fair Value
   
Unrealized
Loss
  
Fair Value
   
Unrealized
Loss
 
                       
   
(in thousands)
 
U.S. Treasury notes
  $12,971   $(25)  $—     $—    $12,971   $(25) 
Obligations of states and political subdivisions
   5,414    (82)   4,105    (123)   9,519    (205) 
Government-sponsored mortgage-backed securities
   39,392    (463)   —      —     39,392    (463) 
Asset-backed securities
   808    (1)   —      —     808    (1) 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total
  $58,585   $(571)  $4,105   $(123)  $62,690   $(694) 
   
 
 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 

At June 30, 20222023 and December 31, 2021,2022, respectively, the Company had 9085 and 2492 debt securities with unrealized losses representing aggregate depreciation of approximately 9.3%12.5% and 1.1%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.

11

The following table provides a summary of the proceeds from sales of securities
available-for-sale,
as well as gross gains and losses, for the periods presented:
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2022
   
2021
   
2022
   
2021
 
                 
   
(in thousands)
   
(in thousands)
 
Proceeds from sales of securities
available-for-sale
  $—     $—     $—     $1,018 
   
 
 
   
 
 
   
 
 
   
 
 
 
Gross realized gains
  $—     $—     $—     $12 
Gross realized losses
   —      —      —      —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Net realized gains
  $—     $—     $—     $12 
   
 
 
   
 
 
   
 
 
   
 
 
 
9
Table of Contents

NOTE 4 – LOANS

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

 

June 30,
2023

 

 

December 31,
2022

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

222,273

 

 

$

210,858

 

Land development

 

 

—

 

 

 

—

 

Other

 

 

47,135

 

 

 

43,708

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

92,788

 

 

 

85,444

 

Construction

 

 

1,776

 

 

 

3,248

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

19,131

 

 

 

18,590

 

Other

 

 

175

 

 

 

99

 

Subtotal (1)

 

 

383,278

 

 

 

361,947

 

Net deferred loan costs

 

 

881

 

 

 

830

 

Allowance for credit losses for loans

 

 

(3,643

)

 

 

(3,203

)

Loans, net

 

$

380,516

 

 

$

359,574

 

(1) Totals do not include accrued interest receivable, which was $944,000 and $874,000 at June 30, 2023 and December 31, 2022, respectively, which is recorded separately on the Company’s Consolidated Balance Sheets.

   
June 30,
2022
   
December 31,
2021
 
         
   
(in thousands)
 
Commercial:
          
Real estate
  $205,402   $185,223 
Land development
   —      1,400 
Other
   42,858    38,160 
Residential real estate:
          
First mortgage
   83,165    80,661 
Construction
   3,726    3,388 
Consumer:
          
Home equity and lines of credit
   16,592    17,032 
Other
   145    128 
   
 
 
   
 
 
 
Subtotal
   351,888    325,992 
Net deferred loan costs
   863    655 
Allowance for loan losses
   (3,132)    (2,858) 
   
 
 
   
 
 
 
Loans, net
  $349,619   $323,789 
   
 
 
   
 
 
 

Deposit accounts in an overdrawn position and reclassified as loans totaled $26,000$17,000 and $106,000$98,000 at June 30, 20222023 and December 31, 2021,2022, 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.

During the normal course of business, the Company may transfer a portion of a loan as a participation loan to another financial institution in order to manage portfolio risk. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, and rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan. As of June 30, 20222023 and December 31, 2021,2022, respectively, the Company had transferred $34.9$29.9 million and $32.1$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.

An analysis of past due loans is presented below:
   
June 30, 2022
 
   
30-89 Days

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

12

Table of Contents

NOTE 4 – LOANS (continued)

   
December 31, 2021
 
   
30-89 Days

Past Due
   
90 Days or
More Past
Due
   
Total
Past Due
   
Current
   
Total
Loans
 
                     
   
(in thousands)
 
Commercial:
                         
Real estate
  $—     $—     $—     $185,223   $185,223 
Land development
   —      —      —      1,400    1,400 
Other
   33    —      33    38,127    38,160 
Residential real estate:
                         
First mortgage
   342    —      342    80,319    80,661 
Construction
   —      —      —      3,388    3,388 
Consumer:
                         
Home equity and lines of credit
   —      —      —      17,032    17,032 
Other
   —      —      —      128    128 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $375   $—     $375   $325,617   $325,992 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
There were no loans 90 days or more past due and accruing interest as of June 30, 2022 or December 31, 2021, respectively.

A summary of activity in the allowance for credit losses for loans and the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2023 and in the allowance for loan losses for the three and six months ended June 30, 2022, and June 30, 2021, respectively, is presented below:

   
Commercial
   
Residential
   
Consumer
   
Total
 
                 
   
(in thousands)
 
Three months ended June 30, 2022
                    
Allowance for loan losses
                    
Beginning balance
  $1,814   $745   $458   $3,017 
Provision for loan losses
   105    —      —      105 
Loans
charged-off
   —      —      (1)    (1) 
Recoveries
   5    —      6    11 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $1,924   $745   $463   $3,132 
   
 
 
   
 
 
   
 
 
   
 
 
 
Three months ended June 30, 2021
                    
Allowance for loan losses
                    
Beginning balance
  $1,614   $745   $340   $2,699 
Provision for loan losses
   —      —      —      —   
Loans
charged-off
   —      —      (1)    (1) 
Recoveries
   4    —      30    34 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $1,618   $745   $369   $2,732 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
Commercial
   
Residential
   
Consumer
   
Total
 
                 
   
(in thousands)
 
Six months ended June 30, 2022
                    
Allowance for loan losses
                    
Beginning balance
  $1,657   $745   $456   $2,858 
Provision for loan losses
   210    —      —      210 
Loans
charged-off
   —      —      (4)    (4) 
Recoveries
   57    —      11    68 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $1,924   $745   $463   $3,132 
   
 
 
   
 
 
   
 
 
   
 
 
 
Six months ended June 30, 2021
                    
Allowance for loan losses
                    
Beginning balance
  $1,609   $745   $349   $2,703 
Provision for loan losses
   —      —      —      —   
Loans
charged-off
   —      —      (17)    (17) 
Recoveries
   9    —      37    46 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $1,618   $745   $369   $2,732 
   
 
 
   
 
 
   
 
 
   
 
 
 
11

 

Commercial

 

 

Residential

 

 

Consumer

 

 

Total

 

 

(in thousands)

 

Three months ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for loans

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,669

 

 

$

848

 

 

$

176

 

 

$

3,693

 

Provision for credit losses

 

 

(42

)

 

 

(17

)

 

 

1

 

 

 

(58

)

Loans charged-off

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

(1

)

Recoveries

 

 

5

 

 

 

—

 

 

 

4

 

 

 

9

 

Ending balance

 

$

2,632

 

 

$

831

 

 

$

180

 

 

$

3,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for unfunded loan commitments(2)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

640

 

 

$

25

 

 

$

—

 

 

$

665

 

Provision for credit losses

 

 

131

 

 

 

2

 

 

 

—

 

 

 

133

 

Loans charged-off

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Recoveries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Ending balance

 

$

771

 

 

$

27

 

 

$

—

 

 

$

798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allowance for credit losses for loans and unfunded loan commitments

 

$

3,403

 

 

$

858

 

 

$

180

 

 

$

4,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,814

 

 

$

745

 

 

$

458

 

 

$

3,017

 

Provision for loan losses

 

 

105

 

 

 

—

 

 

 

—

 

 

 

105

 

Loans charged-off

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

(1

)

Recoveries

 

 

5

 

 

 

—

 

 

 

6

 

 

 

11

 

Ending balance

 

$

1,924

 

 

$

745

 

 

$

463

 

 

$

3,132

 

13

Table of Contents


NOTE 4 – LOANS (continued)

 

Commercial

 

 

Residential

 

 

Consumer

 

 

Total

 

 

(in thousands)

 

Six months ended June 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for loans

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,944

 

 

$

752

 

 

$

507

 

 

$

3,203

 

Provision for credit losses

 

 

12

 

 

 

4

 

 

 

1

 

 

 

17

 

CECL Adoption Adjustment(1)

 

 

666

 

 

 

75

 

 

 

(329

)

 

$

412

 

Loans charged-off

 

 

—

 

 

 

—

 

 

 

(7

)

 

 

(7

)

Recoveries

 

 

10

 

 

 

—

 

 

 

8

 

 

 

18

 

Ending balance

 

$

2,632

 

 

$

831

 

 

$

180

 

 

$

3,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses for unfunded loan commitments(2)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Provision for credit losses

 

 

131

 

 

 

2

 

 

 

—

 

 

 

133

 

CECL Adoption Adjustment(1)

 

 

640

 

 

 

25

 

 

 

—

 

 

$

665

 

Loans charged-off

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Recoveries

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Ending balance

 

$

771

 

 

$

27

 

 

$

—

 

 

$

798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Allowance for credit losses for loans and unfunded loan commitments

 

$

3,403

 

 

$

858

 

 

$

180

 

 

$

4,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,657

 

 

$

745

 

 

$

456

 

 

$

2,858

 

Provision for loan losses

 

 

210

 

 

 

—

 

 

 

—

 

 

 

210

 

Loans charged-off

 

 

—

 

 

 

—

 

 

 

(4

)

 

 

(4

)

Recoveries

 

 

57

 

 

 

—

 

 

 

11

 

 

 

68

 

Ending balance

 

$

1,924

 

 

$

745

 

 

$

463

 

 

$

3,132

 

(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.

A summary

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 allowancerespective financial instruments. The following table presents the components of the provision for loan losses for loans evaluated individually and collectively for impairment is presented below:credit losses:

 

Three months ended June 30,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Provision for credit losses for:

 

 

 

 

 

 

Loans

 

$

(58

)

 

$

105

 

Unfunded loan commitments

 

 

133

 

 

N/A

 

Total

 

$

75

 

 

$

105

 

 

Six months ended June 30,

 

 

2023

 

 

2022

 

 

(in thousands)

 

Provision for credit losses for:

 

 

 

 

 

 

Loans

 

$

17

 

 

$

210

 

Unfunded loan commitments

 

 

133

 

 

N/A

 

Total

 

$

150

 

 

$

210

 

   
June 30, 2022
 
   
Commercial
   
Residential
   
Consumer
   
Total
 
                 
   
(in thousands)
 
Loans:
                    
Individually evaluated for impairment
  $4,009   $1,192   $35   $5,236 
Collectively evaluated for impairment
   244,251    85,699    16,702    346,652 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total loans
  $248,260   $86,891   $16,737   $351,888 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance for loan losses:
                    
Individually evaluated for impairment
  $—     $—     $—     $—   
Collectively evaluated for impairment
   1,924    745    463    3,132 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total allowance for loan losses
  $1,924   $745   $463   $3,132 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
December 31, 2021
 
   
Commercial
   
Residential
   
Consumer
   
Total
 
                 
   
(in thousands)
 
Loans:
                    
Individually evaluated for impairment
  $4,833   $1,357   $37   $6,227 
Collectively evaluated for impairment
   219,950    82,692    17,123    319,765 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total loans
  $224,783   $84,049   $17,160   $325,992 
   
 
 
   
 
 
   
 
 
   
 
 
 
Allowance for loan losses:
                    
Individually evaluated for impairment
  $—     $—     $—     $—   
Collectively evaluated for impairment
   1,657    745    456    2,858 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total allowance for loan losses
  $1,657   $745   $456   $2,858 
   
 
 
   
 
 
   
 
 
   
 
 
 

The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loancredit 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

•
Substandardratings 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

•
Doubtful ratings are assigned to loans that do not have adequate collateral and/or debt service ability such that collectability of the contractual loan payments is unlikely.
12
Table of Contents
NOTE 4 – LOANS (continued)
A summary of the Company’s internal risk ratings of loans is presented below:
   
June 30, 2022
 
   
Pass
   
Watch and
Special
Mention
   
Substandard
   
Total
 
                 
   
(in thousands)
 
Commercial:
                    
Real estate
  $196,641   $5,188   $3,573   $205,402 
Land development
   —      —      —      —   
Other
   40,556    1,866    436    42,858 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $237,197   $7,054   $4,009   $248,260 
   
 
 
   
 
 
   
 
 
   
 
 
 
   
December 31, 2021
 
   
Pass
   
Watch and
Special
Mention
   
Substandard
   
Total
 
                 
   
(in thousands)
 
Commercial:
                    
Real estate
  $172,172   $8,963   $4,088   $185,223 
Land development
   1,400    —      —      1,400 
Other
   37,414    1    745    38,160 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $210,986   $8,964   $4,833   $224,783 
   
 
 
   
 
 
   
 
 
   
 
 
 
There were 0 loans rated Doubtful or Loss as of June 30, 2022 or December 31, 2021, respectively.

Residential real estate and consumer loans are generally evaluated based on whether or not the loan is performing accordingor in nonaccrual status. Refer to Note 1 to the contractual terms of the loan. Management determines that a loan is impaired or

non-performing
when it is probable at least a portion of the loan will not be collectedConsolidated Financial Statements in accordanceour 2022 Annual Report on Form 10-K, filed with the original terms due to a deterioration inSEC on March 30, 2023, for additional information on our nonaccrual policy.

15

NOTE 4 – LOANS (continued)

The following table presents the financial conditionamortized cost basis of the borrower or the valueour loans by credit quality indicator and origination year, at June 30, 2023:

 

June 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

 

$

10,250

 

 

$

65,765

 

 

$

52,397

 

 

$

41,692

 

 

$

10,665

 

 

$

36,630

 

 

$

22

 

 

$

-

 

 

$

217,421

 

     Watch and special mention

 

 

-

 

 

 

3,129

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

243

 

 

 

-

 

 

 

-

 

 

 

3,372

 

     Substandard

 

 

-

 

 

 

162

 

 

 

610

 

 

 

-

 

 

 

294

 

 

 

414

 

 

 

-

 

 

 

-

 

 

 

1,480

 

Total commercial real estate

 

 

10,250

 

 

 

69,056

 

 

 

53,007

 

 

 

41,692

 

 

 

10,959

 

 

 

37,287

 

 

 

22

 

 

 

-

 

 

 

222,273

 

Other commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Pass

 

 

12,609

 

 

 

14,863

 

 

 

6,858

 

 

 

1,655

 

 

 

222

 

 

 

1,894

 

 

 

6,223

 

 

 

-

 

 

 

44,324

 

     Watch and special mention

 

 

-

 

 

 

-

 

 

 

171

 

 

 

159

 

 

 

24

 

 

 

64

 

 

 

51

 

 

 

-

 

 

 

469

 

     Substandard

 

 

-

 

 

 

267

 

 

 

308

 

 

 

-

 

 

 

13

 

 

 

143

 

 

 

1,611

 

 

 

-

 

 

 

2,342

 

Total other commercial loans

 

 

12,609

 

 

 

15,130

 

 

 

7,337

 

 

 

1,814

 

 

 

259

 

 

 

2,101

 

 

 

7,885

 

 

 

-

 

 

 

47,135

 

Total commercial loans

 

 

22,859

 

 

 

84,186

 

 

 

60,344

 

 

 

43,506

 

 

 

11,218

 

 

 

39,388

 

 

 

7,907

 

 

 

-

 

 

 

269,408

 

Residential real estate - first mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

7,326

 

 

 

14,426

 

 

 

33,136

 

 

 

16,168

 

 

 

3,103

 

 

 

17,947

 

 

 

-

 

 

 

-

 

 

 

92,106

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

682

 

 

 

-

 

 

 

-

 

 

 

682

 

Total residential real estate - first mortgage

 

 

7,326

 

 

 

14,426

 

 

 

33,136

 

 

 

16,168

 

 

 

3,103

 

 

 

18,629

 

 

 

-

 

 

 

-

 

 

 

92,788

 

Residential real estate - construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

-

 

 

 

437

 

 

 

1,339

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,776

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total residential real estate - construction

 

 

-

 

 

 

437

 

 

 

1,339

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,776

 

Total residential real estate

 

 

7,326

 

 

 

14,863

 

 

 

34,475

 

 

 

16,168

 

 

 

3,103

 

 

 

18,629

 

 

 

-

 

 

 

-

 

 

 

94,564

 

Consumer - home equity and lines of credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

20

 

 

 

67

 

 

 

151

 

 

 

115

 

 

 

177

 

 

 

1,397

 

 

 

16,267

 

 

 

905

 

 

 

19,099

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

32

 

 

 

-

 

 

 

-

 

 

 

32

 

Total consumer - home equity and lines of credit

 

 

20

 

 

 

67

 

 

 

151

 

 

 

115

 

 

 

177

 

 

 

1,429

 

 

 

16,267

 

 

 

905

 

 

 

19,131

 

Consumer - other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Performing

 

 

108

 

 

 

52

 

 

 

-

 

 

 

9

 

 

 

4

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

175

 

     Nonaccrual

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total consumer - other

 

 

108

 

 

 

52

 

 

 

-

 

 

 

9

 

 

 

4

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

175

 

Total consumer

 

 

128

 

 

 

119

 

 

 

151

 

 

 

124

 

 

 

181

 

 

 

1,431

 

 

 

16,267

 

 

 

905

 

 

 

19,306

 

Total loans

 

$

30,313

 

 

$

99,168

 

 

$

94,970

 

 

$

59,798

 

 

$

14,502

 

 

$

59,448

 

 

$

24,174

 

 

$

905

 

 

$

383,278

 

16

NOTE 4 – LOANS (continued)

A summary of the underlying collateral if the loan is collateral dependent. Information regarding the credit quality indicators, most closely monitored for residential real estate and consumer loansat 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

 

   
June 30, 2022
 
   
Performing
   
Non
Performing
   
Total
 
             
   
(in thousands)
 
Residential real estate:
               
First mortgage
  $82,383   $782   $83,165 
Construction
   3,726    —      3,726 
Consumer:
               
Home equity and lines of credit
   16,557    35    16,592 
Other
   145    —      145 
   
 
 
   
 
 
   
 
 
 
Total
  $102,811   $817   $103,628 
   
 
 
   
 
 
   
 
 
 
13
Table

There were no commercial loans rated Doubtful or Loss as of ContentsDecember 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 six months ended June 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 June 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)

   
December 31, 2021
 
   
Performing
   
Non
Performing
   
Total
 
             
   
(in thousands)
 
Residential real estate:
               
First mortgage
  $79,722   $939   $80,661 
Construction
   3,388    —      3,388 
Consumer:
               
Home equity and lines of credit
   16,954    78    17,032 
Other
   128    —      128 
   
 
 
   
 
 
   
 
 
 
Total
  $100,192   $1,017   $101,209 
   
 
 
   
 
 
   
 
 
 
Information regarding impaired loans is presented below:
   
As of and for the Six Months Ended June 30, 2022
 
   
Recorded
Investment
   
Unpaid
Principal
   
Reserve
   
Average
Investment
   
Interest
Recognized
 
                     
   
(in thousands)
 
Impaired loans with reserve:
                         
Commercial:
                         
Real estate
  $—     $—     $—     $—     $—   
Land development
   —      —      —      —      —   
Other
   —      —      —      —      —   
Residential real estate:
                         
First mortgage
   —      —      —      —      —   
Construction
   —      —      —      —      —   
Consumer:
                         
Home equity and lines of credit
   —      —      —      —      —   
Other
   —      —      —      —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans with reserve
   —      —      —      —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Impaired loans with no reserve:
                         
Commercial:
                         
Real estate
   3,573    3,573    NA    3,785    71 
Land development
   —      —      NA    —      —   
Other
   436    436    NA    505    62 
Residential real estate:
                         
First mortgage
   1,192    1,412    NA    1,271    32 
Construction
   —      —      NA    —      —   
Consumer:
                         
Home equity and lines of credit
   35    40    NA    36    1 
Other
   —      —      NA    —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans with no reserve
   5,236    5,461    NA    5,597    166 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans
  $5,236   $5,461   $—     $5,597   $166 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
14

 

For the six months ended June 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

 

 

-

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

7

 

Total consumer

 

 

-

 

 

 

3

 

 

 

1

 

 

 

1

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

7

 

Total current period charge-offs

 

$

-

 

 

$

3

 

 

$

1

 

 

$

1

 

 

$

-

 

 

$

2

 

 

$

-

 

 

$

-

 

 

$

7

 

18

Table of Contents

NOTE 4 – LOANS (continued)

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

 

June 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

 

$

—

 

 

$

—

 

 

$

—

 

 

$

222,273

 

 

$

222,273

 

Land development

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other

 

 

—

 

 

 

—

 

 

 

—

 

 

 

47,135

 

 

 

47,135

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage

 

 

60

 

 

 

—

 

 

 

60

 

 

 

92,728

 

 

 

92,788

 

Construction

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,776

 

 

 

1,776

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and lines of credit

 

 

—

 

 

 

—

 

 

 

—

 

 

 

19,131

 

 

 

19,131

 

Other

 

 

—

 

 

 

—

 

 

 

—

 

 

 

175

 

 

 

175

 

        Total

 

$

60

 

 

 

—

 

 

$

60

 

 

$

383,218

 

 

$

383,278

 

 

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

 

   
As of and for the Year Ended December 31, 2021
 
   
Recorded
Investment
   
Unpaid
Principal
   
Reserve
   
Average
Investment
   
Interest
Recognized
 
                     
   
(in thousands)
 
Impaired loans with reserve:
                         
Commercial:
                         
Real estate
  $—     $—     $—     $—     $—   
Land development
   —      —      —      —      —   
Other
   —      —      —      —      —   
Residential real estate:
                         
First mortgage
   —      —      —      —      —   
Construction
   —      —      —      —      —   
Consumer:
                         
Home equity and lines of credit
   —      —      —      —      —   
Other
   —      —      —      —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans with reserve
   —      —      —      —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Impaired loans with no reserve:
                         
Commercial:
                         
Real estate
   4,088    4,089    NA    5,615    213 
Land development
   —      —      NA    734    33 
Other
   745    796    NA    1,478    35 
Residential real estate:
                         
First mortgage
   1,357    1,572    NA    914    34 
Construction
   —      —      NA    —      —   
Consumer:
                         
Home equity and lines of credit
   37    41    NA    17    22 
Other
   —      —      NA    —      —   
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans with no reserve
   6,227    6,498    NA    8,758    337 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total impaired loans
  $6,227   $6,498   $—     $8,758   $337 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Management regularly monitors impaired loan relationships. In the event facts and circumstances change, additional reserves may be necessary.

There were 0 additional funds committed to impairedno loans 90 days or more past due and accruing interest as of June 30, 2022 and2023 or December 31, 2021,2022, respectively.

Nonperforming loans are as follows:
   
June 30,
2022
   
December 31,
2021
 
         
   
(in thousands)
 
Nonaccrual loans, other than troubled debt restructurings
  $630   $826 
Nonaccrual loans, troubled debt restructurings
   187    191 
   
 
 
   
 
 
 
Total nonperforming loans
  $817   $1,017 
   
 
 
   
 
 
 
Troubled debt restructurings, accruing
  $410   $418 
   
 
 
   
 
 
 
15

19

Table of Contents

NOTE 4 – LOANS (continued)

There

The following table presents the amortized cost of our loans on nonaccrual status as of June 30, 2023 and December 31, 2022. All loans that were 090 days or more past due were on nonaccrual status as of June 30, 2023 and December 31, 2022.

 

June 30,
2023

 

 

December 31,
2022

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

—

 

 

$

—

 

Land development

 

 

—

 

 

 

—

 

Other

 

 

—

 

 

 

—

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

682

 

 

 

714

 

Construction

 

 

—

 

 

 

—

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

32

 

 

 

55

 

Other

 

 

—

 

 

 

—

 

Total nonaccrual loans

 

$

714

 

 

$

769

 

Total nonaccrual loans to total loans

 

 

0.19

%

 

 

0.21

%

Total nonaccrual loans to total assets

 

 

0.13

%

 

 

0.14

%

The Company had $714,000 of loans modifiedthat were in nonaccrual status as troubled debt restructurings duringof June 30, 2023, with no related allowance for credit losses. During the six months ended June 30, 20222023, there was no interest earned on nonaccrual loans and year ended December 31, 2021, respectively.

The provisionsno accrued interest was reversed on nonaccrual loans.

At June 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 CARES Act included an electioncollateral. 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 June 30, 2023 for which the borrower is experiencing financial difficulty:

 

Loans

 

 

ACL

 

 

(in thousands)

 

Commercial:

 

 

 

 

 

 

Real estate

 

$

1,318

 

 

$

—

 

Land development

 

 

—

 

 

 

—

 

Other

 

 

2,698

 

 

 

—

 

Residential real estate:

 

 

 

 

 

 

First mortgage

 

 

883

 

 

 

—

 

Construction

 

 

—

 

 

 

—

 

Consumer:

 

 

 

 

 

 

Home equity and lines of credit

 

 

32

 

 

 

—

 

Other

 

 

—

 

 

 

—

 

        Total

 

$

4,931

 

 

 

—

 

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 not apply the guidance on accounting foradoption 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 such as extensions or deferrals, relatedwhere concessions were granted to

COVID-19
made between March 1, 2020 and the earlier of (i) December 31, 2021 or (ii) 60 days after the end of the
COVID-19
national emergency. borrowers experiencing financial difficulties. The relief can only be applied to modificationsCompany did not modify any loans for borrowers that are experiencing financial difficulty and did not have any previous modifications that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of June 30, 2022, the Company had 1 to 3 month deferrals of approximately $251,000 in interest, escrow, and principal payments on $5.7 million in outstanding loans.
The Company considers a troubled debt restructuring in default if it becomes past due more than 90 days. There were 0
troubled debt restructurings withinmade during the past twelve12 months for which there wasthat experienced a payment default during the three and six months ended June 30, 2023.

At December 31, 2022, and 2021.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

Information on
non-accrual
loans is presented below:
   
June 30,
2022
  
December 31,
2021
 
        
   
(in thousands)
 
Commercial:
         
Real estate
  $—    $—   
Land development
   —     —   
Other
   —     —   
Residential real estate:
         
First mortgage
   782   939 
Construction
   —     —   
Consumer:
         
Home equity and lines of credit
   35   78 
Other
   —     —   
   
 
 
  
 
 
 
Total
non-accrual
loans
  $817  $1,017 
   
 
 
  
 
 
 
Total
non-accrual
loans to total loans
   0.23%   0.31% 
Total
non-accrual
loans to total assets
   0.15%   0.19% 

NOTE 5 – MORTGAGE SERVICING RIGHTS

Loans serviced for others are not included in the Company’s consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $317.5$291.5 million and $332.9$304.3 million as of June 30, 20222023 and December 31, 2021,2022, respectively.

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

 

Three Months Ended June 30, 2023

 

 

Three Months Ended June 30, 2022

 

 

Six Months Ended June 30, 2023

 

 

Six Months Ended June 30, 2022

 

 

(in thousands)

 

 

(in thousands)

 

Mortgage servicing rights beginning balance

 

$

1,824

 

 

$

1,988

 

 

$

1,860

 

 

$

2,036

 

Additions

 

 

8

 

 

 

20

 

 

 

17

 

 

 

47

 

Amortization

 

 

(55

)

 

 

(69

)

 

 

(100

)

 

 

(144

)

Mortgage servicing rights ending balance

 

$

1,777

 

 

$

1,939

 

 

$

1,777

 

 

$

1,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value at beginning of period

 

$

3,488

 

 

$

2,811

 

 

$

3,376

 

 

$

2,477

 

Fair value at end of period

 

$

3,317

 

 

$

3,273

 

 

$

3,317

 

 

$

3,273

 

   
Three Months
Ended June 30,
2022
   
Three Months
Ended June 30,
2021
   
Six Months
Ended June 30,
2022
   
Six Months
Ended June 30,
2021
 
                 
   
(in thousands)
   
(in thousands)
 
Mortgage servicing rights beginning balance
  $1,988   $2,147   $2,036   $1,806 
Additions
   20    117    47    320 
Amortization
   (69)    (155)    (144)    (386) 
Decrease in valuation allowance
   —      —      —      369 
   
 
 
   
 
 
   
 
 
   
 
 
 
Mortgage servicing rights ending balance
  $1,939   $2,109   $1,939   $2,109 
   
 
 
   
 
 
   
 
 
   
 
 
 
Fair value at beginning of period
  $2,811   $2,153   $2,477   $1,806 
Fair value at end of period
  $3,273   $2,361   $3,273   $2,361 
16
Table of Contents
NOTE 5 – MORTGAGE SERVICING RIGHTS (continued)

The estimated fair value of mortgage servicing rights was determined using a valuation model that calculates the present value of expected future servicing and ancillary income, net of expected servicing costs. The model incorporates various assumptions such as discount rates, prepayment speeds and ancillary income and servicing costs. As of June 30, 2022,2023, the model used discount rates ranging from 9.5%10.0% to 13%13.0%, and prepayment speeds ranging from 11.3%6.9% to 26.8%34.5%, respectively, both of which were based on market data from independent organizations. As of June 30, 2021 2022the model used discount rates ranging from 10%9.5% to 13.5%13.0%, and prepayment speeds ranging from 12.8%11.3% to 35.8%, respectively, both of which were based on market data from independent organizations.

26.8%.

The following table summarizes the estimated future amortization expense for mortgage servicing rights for the annual periods indicated. The projections of amortization expense are based on existing asset balances as of June 30, 2022.2023. 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 June 30, 2023:

 

(in thousands)

 

2023

 

$

89

 

2024

 

 

203

 

2025

 

 

187

 

2026

 

 

167

 

2027

 

 

148

 

Thereafter

 

 

983

 

Total

 

$

1,777

 

23

   
(in thousands)
 
Estimated future amortization as of June 30, 2022:
     
2022
  $127 
2023
   234 
2024
   208 
2025
   186 
2026
   164 
Thereafter
   1,020 
   
 
 
 
Total
  $1,939 
   
 
 
 

NOTE 6 – DEPOSITS

The composition of deposits is summarized below:

 

June 30,
2023

 

 

December 31, 2022

 

 

(in thousands)

 

Non-interest bearing checking

 

$

74,825

 

 

$

92,465

 

Interest bearing checking

 

 

30,002

 

 

 

32,514

 

Money market

 

 

96,673

 

 

 

121,215

 

Statement savings

 

 

50,785

 

 

 

61,969

 

Certificates of deposit

 

 

118,905

 

 

 

79,558

 

Total

 

$

371,190

 

 

$

387,721

 

   
June 30,
2022
   
December 31,
2021
 
         
   
(in thousands)
 
Non-interest
bearing checking
  $102,998   $106,664 
Interest bearing checking
   34,016    37,467 
Money market
   95,878    94,823 
Statement savings
   67,456    64,954 
Certificates of deposit
   82,714    80,593 
   
 
 
   
 
 
 
Total
  $383,062   $384,501 
   
 
 
   
 
 
 
The Company held $8.4 million and $10.0 million in certificates

Certificates of deposit whichthat met or exceeded the FDIC insurance limit of $250,000$250,000 totaled $22.2 million and $8.9 million as of June 30, 20222023 and December 31, 2021,2022, respectively. The Company did 0tnot hold any brokered deposits as of June 30, 2022 and2023 or December 31, 2021.

2022.

As of June 30, 2022,2023, the scheduled maturities of certificates of deposit for the annual periods are presented below:

 

(in thousands)

 

2023

 

$

40,361

 

2024

 

 

57,372

 

2025

 

 

8,844

 

2026

 

 

11,967

 

2027

 

 

302

 

Thereafter

 

 

59

 

Total

 

$

118,905

 

24

   
(in thousands)
 
2022
  $38,552 
2023
   33,484 
2024
   1,209 
2025
   8,823 
2026
   347 
Thereafter
   299 
   
 
 
 
Total
  $82,714 
   
 
 
 
17
Table of Contents

NOTE 7 – FEDERAL HOME LOAN BANK ADVANCES

A summary ofFederal Home Loan Bank advances consist of the following:follows:

 

June 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

 

 

 

2.96

%

 

 

5,000

 

Putable advance, maturing January 2028, first option date July 2023

 

 

3.34

%

 

 

2,500

 

 

 

—

 

 

 

—

 

Putable advance, maturing January 2028, first option date July 2023

 

 

3.22

%

 

 

2,500

 

 

 

—

 

 

 

—

 

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

 

 

3.37

%

 

 

2,500

 

 

 

—

 

 

 

—

 

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

%

 

 

6,946

 

 

 

1.05

%

 

 

7,435

 

Advance structured note, payments due monthly, maturing May 2030

 

 

1.19

%

 

 

7,042

 

 

 

1.19

%

 

 

7,529

 

SOFR Floater advance, maturing October 2023

 

 

5.30

%

 

 

5,000

 

 

 

4.54

%

 

 

5,000

 

SOFR Floater advance, maturing October 2024

 

 

5.35

%

 

 

5,000

 

 

 

4.59

%

 

 

5,000

 

Total

 

 

 

 

$

91,488

 

 

 

 

 

$

71,464

 

   
June 30, 2022
   
December 31, 2021
 
   
Rate
  
Amount
   
Rate
  
Amount
 
               
   
(dollars in thousands)
 
Fixed rate, fixed term advance, maturing Feb 2022
   N/A  $—    1.62%  $6,500 
Fixed rate, fixed term advance, maturing Feb 2023
   1.62%   6,500    1.62%   6,500 
Putable advance, maturing Oct 2029 first put option date Nov 2020
   1.03%   10,000    1.03%   10,000 
Putable advance, maturing Feb 2030 first put option date Feb 2023
   0.98%   5,000    0.98%   5,000 
Putable advance, maturing Mar 2030 first put option date Mar 2025
   0.89%   10,000    0.89%   10,000 
Putable advance, maturing Mar 2032 first put option date Mar 2027
   1.74%   10,000    —     —   
Advance structured note, payments due monthly, maturing Feb 2030
   —     —      7.47%   542 
Advance structured note, payments due monthly, maturing April 2030
   1.05%   7,922    1.05%   8,405 
Advance structured note, payments due monthly, maturing May 2030
   1.19%   8,013    1.19%   8,495 
       
 
 
       
 
 
 
Total
      $57,435       $55,442 
       
 
 
       
 
 
 

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

 

June 30, 2023

 

 

Weighted Average Rate

 

 

Amount

 

 

(dollars in thousands)

 

 2023

 

 

4.61

%

 

$

5,981

 

 2024

 

 

4.15

%

 

 

6,979

 

 2025

 

 

1.12

%

 

 

2,002

 

 2026

 

 

2.67

%

 

 

4,524

 

 2027

 

 

2.38

%

 

 

7,047

 

Thereafter

 

 

2.58

%

 

 

64,955

 

Total

 

 

2.79

%

 

$

91,488

 

   
June 30, 2022
 
   
Weighted
Average Rate
  
Amount
 
        
   
(dollars in thousands)
 
2022
   1.12%  $971 
2023
   1.50%   8,457 
2024
   1.12%   1,979 
2025
   1.12%   2,002 
2026
   1.12%   2,024 
Thereafter
   1.17%   42,002 
       
 
 
 
Total
      $57,435 
       
 
 
 

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

The Company maintains a master contract agreement with the Federal Home Loan Bank,FHLB, which provides for borrowing up to the lesser of 22.22 times the value of the Federal Home Loan BankFHLB stock owned, a determined percentage of the book value of the Company’s qualifying real estate loans, or a determined percentage of the Company’s assets. The Federal Home Loan BankFHLB 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. Federal Home Loan BankFHLB 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 $232.5approximately $165.7 million and $232.7 million as collateral for Federal Home Loan Bank advances as ofat June 30, 20222023 and $172.4 million at December 31, 2021, respectively. Collateral values to borrow against2022. FHLB advances were approximately $158.8 million and $147.5 million as of June 30, 2022 and December 31, 2021, respectively. Federal Home Loan Bank advances are also secured by approximately $3.0$4.9 million and $3.4 million of Federal Home Loan BankFHLB stock held by the Company as of June 30, 20222023 and December 31, 2021.2022, respectively. The Company’s available and unused portion of this borrowing agreement totaled $85.4$73.2 million and $90.9$100.0 million as of June 30, 20222023 and December 31, 2021,2022, respectively. Additional borrowing would require additional stock purchase.

Additionally, at June 30, 2022 the Company2023 we had a $15.0$15.0 million federal funds rate line of credit with the BMO Harris Bank, none of which was drawn at June 30, 2022.2023. The Company also had a $10.4an $8.9 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.3$11.6 million at June 30, 2022.2023. The Company had 0tnot drawn on the Federal Reserve line as of June 30, 2022.2023. We also have the ability to participate in the Federal Reserve's new Bank Term Funding Program as needed.

25

18
Table of Contents

NOTE 8 – INCOME TAXES

Income tax (benefit) expense was ($133,000)273,000) and ($58,000)133,000) for the three months ended June 30, 20222023 and 2021,2022, respectively, and ($192,000)424,000) and $102,000($192,000) for the six months ended June 30, 2023 and 2022, and 2021, respectively.

Deferred tax assets are deferred tax consequences attributable to deductible temporary differences and carryforwards. After the deferred tax asset has been measured using the applicable enacted tax rate and provisions of the enacted tax law, it is then necessary to assess the need for a valuation allowance. A valuation allowance is needed when, based on the weight of the available evidence, it is more likely than not that some portion of the deferred asset will not be realized. As required by generally accepted accounting principles, available evidence is weighted heavily on cumulative losses, with less weight placed on future projected profitability. The realization of deferred tax assets is dependent on the existence of taxable income of the appropriate character (e.g., ordinary or capital) within the carry-back and carry-forward periods available under tax law, which would consider future reversals of existing taxable temporary differences and available tax planning strategies. As of June 30, 2022,2023, and December 31, 2021,2022, the deferred tax valuation allowance was $934,000,$934,000, reducing our net deferred tax asset to $7.2$8.9 million and $3.8$8.3 million at each respective date.

Due to recent changes in market conditions and current events related to
COVID-19,
the

The board and management continue to assess theirthe deferred tax assets includingin 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 June 30, 2022.

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 June 30, 2023, the allowance for credit losses for unfunded commitments was $798,000 and there was $45.6 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:

 

June 30, 2023

 

 

Fixed Rate

 

 

Variable Rate

 

 

Total

 

 

(in thousands)

 

Commitments to extend credit

 

$

3,424

 

 

$

89,090

 

 

$

92,514

 

Standby letters of credit

 

 

—

 

 

 

150

 

 

 

150

 

Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program

 

 

937

 

 

 

—

 

 

 

937

 

Commitments to sell loans

 

 

817

 

 

 

—

 

 

 

817

 

Overdraft protection program commitments

 

 

3,809

 

 

 

—

 

 

 

3,809

 

 

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

 

   
June 30, 2022
 
   
Fixed Rate
   
Variable Rate
   
Total
 
             
   
(in thousands)
 
Commitments to extend credit
  $16,740   $62,575   $79,315 
Standby letters of credit
   —      150    150 
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program
   1,309    —      1,309 
Commitments to sell loans
   3,012    —      3,012 
Overdraft protection program commitments
   3,932    —      3,932 
   
December 31, 2021
 
   
Fixed Rate
   
Variable Rate
   
Total
 
             
   
(in thousands)
 
Commitments to extend credit
  $21,586   $56,921   $78,507 
Standby letters of credit
   —      175    175 
Credit enhancement under the FHLB of Chicago Mortgage Partnership Finance Program
   1,214    —      1,214 
Commitments to sell loans
   5,410    —      5,410 
Overdraft protection program commitments
   3,993    —      3,993 
19

27

Table of Contents

NOTE 9

– COMMITMENTS AND CONTINGENCIES (continued)

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

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

The Company participates in the Federal Home Loan Bank of Chicago Mortgage Partnership Finance Program (the “Program”). In addition to entering into forward commitments to sell mortgage loans to a secondary market agency, the Company enters into firm commitments to deliver loans to the Federal Home Loan Bank of Chicago through the Program. Under the Program, loans are funded by the Federal Home Loan Bank of Chicago, and the Company receives an agency fee reported as a component of gain on sale of loans. The Company had $2.2 million ofno commitments to deliver loans through the Program as of June 30, 2022.2023. 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 June 30, 2022,2023, and December 31, 2021,2022, the Company had 0no 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, effective January 1, 2019, in connectionconjunction with the mutual holding company reorganization and organization of Old 1895 Bancorp.reorganization. Eligible employees become 20%20% vested in their accounts after 1 year of service, 40%40% vested after 2 years of service, 60%60% vested after 3 years of service, 80%80% vested after 4 years of service, and 100%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(231,047 shares adjusted for the conversion) of the Company’s common stock, which was funded by a loan from Old 1895 Bancorp. Unreleased ESOP shares collateralize the loan payable, and the cost of the shares is recorded as contra-equity account in the stockholders’ equity of the Company. Shares are to be released as debt payments are made by the ESOP to the loan. The ESOP’s sources of repayment of the loan can include dividends, if any, on the unallocated stock held by the ESOP, and discretionary contributions from the Company to the ESOP and earnings thereon.

As part of the

mutual-to-stock
conversion and stock offering completed on July 14, 2021, the ESOP refinanced the aforementioned loan with New 1895 Bancorp, enabling the ESOP to purchase an aggregate of 283,360 additional shares of common stock. DuringThe ESOP completed the six months ended June 30, 2022,purchase of all the ESOP purchased 96,446 additional283,360 shares at an average price of $10.95. As$10.90 in the second quarter of June 30, 2022, the ESOP had purchased 283,360 of the additional shares at an average price of $10.90.
20
Table of Contents
NOTE 10 – EMPLOYEE STOCK OWNERSHIP PLAN (continued)
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 $51,000$30,000 and $30,000$51,000 in compensation expense for the three months ended June 30, 20222023 and June 30, 2021,2022, respectively, and $101,000$77,000 and $51,000$101,000 in compensation expense for the six months ended June 30, 2023 and 2022, and June 30, 2021, respectively.

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

 

June 30,
2023

 

 

December 31,
2022

 

 

(dollars in thousands)

 

Shares committed to be released

 

 

9,782

 

 

 

19,730

 

Total allocated shares

 

 

55,900

 

 

 

36,170

 

Total unallocated shares

 

 

444,010

 

 

 

453,792

 

Total ESOP shares

 

 

509,692

 

 

 

509,692

 

Fair value of unallocated shares (based on $7.51 and $10.00 share
   price as of June 30, 2023 and December 31, 2022, respectively)

 

$

3,335

 

 

$

4,538

 

29

   
June 30, 2022
   
December 31, 2021
 
         
   
(dollars in thousands)
 
Shares committed to be released
   9,865    22,401 
Total allocated shares
   37,640    15,239 
Total unallocated shares
   463,658    377,077 
   
 
 
   
 
 
 
Total ESOP shares
   511,163    414,717 
   
 
 
   
 
 
 
Fair value of unallocated shares (based on $10.25 and $10.99 share price as of June 30, 2022 and December 31, 2021, respectively)
  $4,752   $4,144 
   
 
 
   
 
 
 

NOTE 11 – RELATED PARTY TRANSACTIONS

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

 

June 30,
2023

 

 

December 31, 2022

 

 

(in thousands)

 

Beginning balance

 

$

1,015

 

 

$

932

 

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

 

 

—

 

 

 

—

 

New loans

 

 

218

 

 

 

169

 

Repayments

 

 

(37

)

 

 

(86

)

Ending balance

 

$

1,196

 

 

$

1,015

 

   
June 30,

2022
   
December 31,

2021
 
         
   
(in thousands)
 
Beginning balance
  $932   $1,034 
Adjustments due to changes in directors, executive officers, and/or principal stockholders
   —      202 
New loans
   4    53 
Repayments
   (56)    (357) 
   
 
 
   
 
 
 
Ending balance
  $880   $932 
   
 
 
   
 
 
 

Deposits from directors, executive officers, and their affiliates totaled $1.1 million$672,000 and $583,000 at June 30, 20222023 and December 31, 2021,2022, 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 six months ended June 30, 2023 and 2022, and 2021, respectively.

NOTE 12 – FAIR VALUE MEASUREMENTS

ASC Topic 820,

Fair Value Measurements and Disclosures
defines fair values, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing an asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
21
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NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

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

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

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

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

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

Some assets and liabilities, such as securities

available-for-sale,
are measured at fair value on a recurring basis under GAAP. Other assets and liabilities, such as impairedcollateral 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.
Impaired

Collateral dependent loans

– The Company does not record loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and isindividually 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. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and are not considered fair value measurements.

Rate lock commitments

– Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in other assets or liabilities, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements for fixed-rate commitments and also considers the difference between current levels of interest rates and the committed rates. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of operations, within mortgage banking income.
22
Table of Contents
NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

Mortgage servicing rights

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

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

 

 

 

 

Recurring Fair Value Measurements Using

 

 

June 30,
2023

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable equity securities

 

$

3,416

 

 

$

3,416

 

 

$

—

 

 

$

—

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury notes

 

 

26,726

 

 

 

—

 

 

 

26,726

 

 

 

—

 

Obligations of states and political subdivisions

 

 

16,537

 

 

 

—

 

 

 

16,537

 

 

 

—

 

Government-sponsored mortgage-backed securities

 

 

59,465

 

 

 

—

 

 

 

59,465

 

 

 

—

 

Asset-backed securities

 

 

3,942

 

 

 

—

 

 

 

3,942

 

 

 

—

 

Certificates of deposit

 

 

961

 

 

 

—

 

 

 

961

 

 

 

—

 

Total

 

$

111,047

 

 

$

3,416

 

 

$

107,631

 

 

$

—

 

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

 

 

$

—

 

                                                                                                         
       
Recurring Fair Value Measurements Using
 
   
June 30, 2022
   
Level 1
   
Level 2
   
Level 3
 
                 
   
(in thousands)
 
Marketable equity securities
  $2,867   $2,867   $—     $—   
Securities
available-for-sale:
                    
U.S. Treasury notes
   27,328    —      27,328    —   
Obligations of states and political subdivisions
   18,546    —      18,546    —   
Government-sponsored mortgage-backed securities
   73,701    —      73,701    —   
Asset-backed securities
   5,652    —      5,652    —   
Certificates of deposit
   1,449    —      1,449    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $129,543   $2,867   $126,676   $—   
   
 
 
   
 
 
   
 
 
   
 
 
 
                                                                                                 
       
Recurring Fair Value Measurements Using
 
   
December 31, 2021
   
Level 1
   
Level 2
   
Level 3
 
                 
   
(in thousands)
 
Marketable equity securities
  $3,544   $3,544   $—     $—   
Securities
available-for-sale:
                    
U.S. Treasury notes
   19,484    —      19,484    —   
Obligations of states and political subdivisions
   20,760    —      20,760    —   
Government-sponsored mortgage-backed securities
   64,149    —      64,149    —   
Asset-backed securities
   6,523    —      6,523    —   
Certificates of deposit
   1,524    —      1,524    —   
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $115,984   $3,544   $112,440   $—   
   
 
 
   
 
 
   
 
 
   
 
 
 
Impaired

Individually evaluated collateral dependent loans are measured at fair value on a

non-recurring
basis. There were 0no individually evaluated collateral dependent loans that were considered impaired with a specific valuation allowance as of June 30, 20222023 and December 31, 2021.
2022.

Mortgage servicing rights are measured at fair value on a

non-recurring
basis. There was 0impairmentno impairment on mortgage servicing rights as of June 30, 20222023 and December 31, 2021.
2022.

23
Table of Contents
NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

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

 

June 30, 2023

 

 

Carrying Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,795

 

 

$

22,795

 

 

$

—

 

 

$

—

 

Available-for-sale securities

 

 

107,631

 

 

 

—

 

 

 

107,631

 

 

 

—

 

Marketable equity securities

 

 

3,416

 

 

 

3,416

 

 

 

—

 

 

 

—

 

Loans, net

 

 

380,516

 

 

 

—

 

 

 

—

 

 

 

354,272

 

Rate lock commitments

 

 

4

 

 

 

—

 

 

 

—

 

 

 

4

 

Accrued interest receivable

 

 

1,266

 

 

 

1,266

 

 

 

—

 

 

 

—

 

Federal Home Loan Bank Stock

 

 

4,870

 

 

 

—

 

 

 

—

 

 

 

4,870

 

Cash value of life insurance

 

 

13,813

 

 

 

—

 

 

 

—

 

 

 

13,813

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

371,190

 

 

 

252,285

 

 

 

—

 

 

 

117,062

 

Advance payments by borrowers for taxes and insurance

 

 

8,141

 

 

 

8,141

 

 

 

—

 

 

 

—

 

Federal Home Loan Bank advances

 

 

91,488

 

 

 

—

 

 

 

—

 

 

 

87,303

 

Accrued interest payable

 

 

698

 

 

 

698

 

 

 

—

 

 

 

—

 

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

 

 

 

—

 

 

 

—

 

   
June 30, 2022
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
                 
   
(in thousands)
 
Financial assets:
                    
Cash and cash equivalents
  $20,221   $20,221   $—     $—   
Available-for-sale
securities
   126,676    —      126,676    —   
Marketable equity securities
   2,867    2,867    —      —   
Loans held for sale
   262    —      262    —   
Loans
   349,619    —      —      331,153 
Rate lock commitments
   17    —      —      17 
Accrued interest receivable
   1,027    1,027    —      —   
Federal Home Loan Bank stock
   3,032    —      —      3,032 
Cash value of life insurance
   14,101    —      —      14,101 
Financial liabilities:
                    
Deposits
   383,062    300,347    —      81,348 
Advance payments by borrowers for taxes and insurance
   7,739    7,739    —      —   
Federal Home Loan Bank advances
   57,435    —      —      54,130 
Accrued interest payable
   128    128    —      —   
   
December 31, 2021
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
                 
   
(in thousands)
 
Financial assets:
                    
Cash and cash equivalents
  $66,803   $66,803   $—     $—   
Available-for-sale
securities
   112,440    —      112,440    —   
Marketable equity securities
   3,544    3,544    —      —   
Loans held for sale
   1,183    —      1,183    —   
Loans
   323,789    —      —      323,182 
Rate lock commitments
   30    —      —      30 
Accrued interest receivable
   948    948    —      —   
Federal Home Loan Bank Stock
   3,032    —      —      3,032 
Cash value of life insurance
   13,892    —      —      13,892 
Financial liabilities:
                    
Deposits
   384,501    303,908    —      80,473 
Advance payments by borrowers for taxes and insurance
   1,860    1,860    —      —   
Federal Home Loan Bank advances
   55,442    —      —      55,981 
Accrued interest payable
   109    109    —      —   

The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing

on-
and
off-balance-sheet
financial instruments without attempting to estimate the value of anticipated future business.
24
Table of Contents
NOTE 12 – FAIR VALUE MEASUREMENTS (continued)

Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts, nor is it recorded as an intangible assetsasset 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, PyraMaxthe 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$3 billion.

Quantitative measures established by regulation to ensure capital adequacy require PyraMaxthe 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. PyraMaxThe Bank met all applicable capital adequacy requirements as of June 30, 20222023 and December 31, 2021, respectively.

2022.

As of June 30, 2022, and December 31, 2021, PyraMax2023, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, PyraMaxthe Bank must maintain minimum regulatory capital ratios as set forth in the table below. PyraMaxThere are no conditions or events since June 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:

 

June 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)

 

$

64,508

 

 

 

11.7

%

 

$

22,010

 

 

 

4.0

%

 

$

27,513

 

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-based:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1

 

 

64,508

 

 

 

15.7

%

 

 

18,515

 

 

 

4.5

%

 

 

26,744

 

 

 

6.5

%

Tier 1

 

 

64,508

 

 

 

15.7

%

 

 

24,687

 

 

 

6.0

%

 

 

32,916

 

 

 

8.0

%

Total

 

 

68,949

 

 

 

16.8

%

 

 

32,916

 

 

 

8.0

%

 

 

41,145

 

 

 

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

%

   
June 30, 2022
 
   
Actual
  
For Capital Adequacy
Purposes
  
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
  
Amount
   
Ratio
  
Amount
   
Ratio
 
                       
   
(dollars in thousands)
 
PyraMax Bank
     
Leverage (Tier 1)
  $64,385    11.8%  $21,897    4.0%  $27,371    5.0% 
Risk-based:
                            
Common Equity Tier 1
   64,385    17.0%   17,017    4.5%   24,579    6.5% 
Tier 1
   64,385    17.0%   22,689    6.0%   30,252    8.0% 
Total
   67,516    17.9%   30,252    8.0%   37,814    10.0% 
   
December 31, 2021
 
   
Actual
  
For Capital Adequacy
Purposes
  
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
  
Amount
   
Ratio
  
Amount
   
Ratio
 
                       
   
(dollars in thousands)
 
PyraMax Bank
     
Leverage (Tier 1)
  $65,179    11.9%  $21,838    4.0%  $27,298    5.0% 
Risk-based:
                            
Common Equity Tier 1
   65,179    19.4%   15,124    4.5%   21,846    6.5% 
Tier 1
   65,179    19.4%   20,166    6.0%   26,888    8.0% 
Total
   68,037    20.2%   26,888    8.0%   33,610    10.0% 
25
Table

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 ContentsChicago ("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 Federal Reserve Bank of Chicago ("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 June 30, 2023, the Company had repurchased 4,455 shares for a total purchase price of $34,000.

34

NOTE 14 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding, adjusted for weighted average unallocated ESOP shares, during the applicable period, excluding outstanding participating securities. Participating securities include

non-vested
restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive
non-forfeitable
dividends or dividend equivalents at the same rate as holders of the Company’s common stock.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 six months ended June 30, 2022, 169,1672023, 130,155 and 179,938 average11,314 shares, respectively were excluded, based on average share price, from the computation of diluted EPS because the effect would be antidilutive. For the three and six months ended June 30, 2021, 149,0202022, 169,167 and 11,436 (196,155 and 15,053179,938 average shares, adjusted for conversion) average sharesrespectively, were excluded from the computation of diluted EPS because the effect would be antidilutive.

Earnings (loss) per common share for the three and six months ended June 30, 20222023 and 20212022 are presented in the following table.tables.

 

Three months ended June 30,

 

2023

 

 

2022

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net (loss)

 

$

(508

)

 

$

(241

)

 

 

 

 

 

 

 

 

 

Weighted shares outstanding for basic EPS

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,991,777

 

 

 

6,289,572

 

 

Less: Weighted average unallocated ESOP shares

 

 

446,442

 

 

 

446,468

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic EPS

 

 

5,545,335

 

 

 

5,843,104

 

 

Additional dilutive shares(1)

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for dilutive EPS

 

 

5,545,335

 

 

 

5,843,104

 

 

 

 

 

 

 

 

 

 

Basic (loss) per share

 

$

(0.09

)

 

$

(0.04

)

 

Diluted (loss) per share(1)

 

$

(0.09

)

 

$

(0.04

)

 

 

Six months ended June 30,

 

2023

 

 

2022

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(869

)

 

$

(296

)

 

 

 

 

 

 

 

 

 

Weighted shares outstanding for basic EPS

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

5,997,436

 

 

 

6,282,749

 

 

Less: Weighted average unallocated ESOP shares

 

 

448,874

 

 

 

424,300

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for basic EPS

 

 

5,548,562

 

 

 

5,858,449

 

 

Additional dilutive shares (1)

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding for dilutive EPS

 

 

5,548,562

 

 

 

5,858,449

 

 

 

 

 

 

 

 

 

 

Basic (loss) income per share

 

$

(0.16

)

 

$

(0.05

)

 

Diluted (loss) income per share (1)

 

$

(0.16

)

 

$

(0.05

)

 

(1) For the three and six months ended June 30, 2023 and June 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

   
Three months ended June 30,
 
   
2022
   
2021
(1)
   
2021
(2)
 
             
   
(In thousands, except per share amounts)
 
Net (loss) income
  $(241)   $(51)   $(51) 
   
 
 
   
 
 
   
 
 
 
Weighted shares outstanding for basic EPS
               
Weighted average shares outstanding
   6,289    4,759    6,264 
Less: Weighted average unallocated ESOP shares
   446    159    209 
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding for basic EPS
   5,843    4,600    6,065 
Additional dilutive shares
   —      —      —   
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding for dilutive EPS
   5,843    4,600    6,065 
   
 
 
   
 
 
   
 
 
 
Basic (loss) income per share
  $(0.04)   $(0.01)   $(0.01) 
   
 
 
   
 
 
   
 
 
 
Diluted (loss) income per share
  $(0.04)   $(0.01)   $(0.01) 
   
 
 
   
 
 
   
 
 
 
   
Six months ended June 30,
 
   
2022
   
2021
(1)
   
2021
(2)
 
             
   
(In thousands, except per share amounts)
 
Net (loss) income
  $(296)   $470   $470 
   
 
 
   
 
 
   
 
 
 
Weighted shares outstanding for basic EPS
               
Weighted average shares outstanding
   6,282    4,754    6,247 
Less: Weighted average unallocated ESOP shares
   424    160    210 
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding for basic EPS
   5,858    4,594    6,047 
Additional dilutive shares
   —      62    81 
   
 
 
   
 
 
   
 
 
 
Weighted average shares outstanding for dilutive EPS
   5,858    4,656    6,128 
   
 
 
   
 
 
   
 
 
 
Basic (loss) income per share
  $(0.05)   $0.10   $0.08 
   
 
 
   
 
 
   
 
 
 
Diluted (loss) income per share
  $(0.05)   $0.10   $0.08 
   
 
 
   
 
 
   
 
 
 
(1) 
Amounts related to periods prior to the date of Conversion (July 2021) have not been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1).
(2) 
Amounts related to periods prior to the date of Conversion (July 2021) have been restated to give the retroactive recognition to the exchange ratio applied in the Conversion (1.3163) (See Note 1)
26
Table of Contents

NOTE 15 – STOCK BASED COMPENSATION

Stock-Based Compensation Plan

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 (313,894 stock options adjusted for the conversion) stock options and 95,387 (125,557 (125,557 shares adjusted for the conversion) restricted shares were approved for award. As of June 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 June 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. The following assumptions were used in estimating the fair value of options granted during the six months ended June 30, 2022 and June 30, 2021:

   
For the Six Months Ended
 
   
June 30,

2022
  
June 30,
2021
 
Dividend yield
   0.00%   0.00% 
Risk-free interest rate
   3.06%   0.96% 
Expected volatility
   24.64%   24.64% 
Weighted average expected life
   6.5   6.5 
Weighted average per share value of options
  $3.25  $2.76 

Assumptions are used in estimating the fair value of stock options granted. The weighted average expected life of the stock options represent the period of time that the options are expected to be outstanding and is based on the historical results from the previous awards. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the actual volatility of 1895 Bancorp of Wisconsin, Inc. stock for the weighted average life time period prior to issuance date.

27
TableThe following assumptions were used in estimating the fair value of Contentsoptions granted during the six months ended June 30, 2023 and June 30, 2022, respectively:

 

For the Six Months Ended

 

 

June 30,
2023

 

 

June 30,
2022

 

 

 

 

 

 

 

 

Dividend yield

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

3.59

%

 

 

3.06

%

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 six months ended June 30, 20222023 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

 

 

 

—

 

Exercised

 

 

—

 

 

 

—

 

 

N/A

 

 

N/A

 

Forfeited

 

43,489

 

 

 

8.70

 

 

N/A

 

 

N/A

 

Outstanding June 30, 2023

 

 

615,641

 

 

 

8.24

 

 

8.02

 

 

379,761

 

Options exercisable at June 30, 2023

 

174,786

 

 

 

6.21

 

 

6.37

 

 

237,372

 

Stock Options
  
Shares
   
Weighted
Average
Exercise Price
   
Weighted
Average
Remaining in
Contractual
Term (Years)
   
Aggregate
Intrinsic
Value
 
Outstanding December 31, 2021
   300,720   $6.19    8.40   $1,443,067 
Granted
   18,955    10.00    6.50    —   
Exercised
   —      —      —      —   
Forfeited
   —      —      —      —   
   
 
 
             
 
 
 
Outstanding June 30, 2022
   319,675    6.42    8.03   $1,209,321 
   
 
 
             
 
 
 
Options exercisable at June 30, 2022
   112,824    6.09    7.86   $463,999 
   
 
 
             
 
 
 

The following table summarizes information about the Company’s nonvested stock option activity for the six months ended June 30, 2022:2023:

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)

 

 

(61,962

)

 

 

1.67

 

Forfeited

 

 

(43,489

)

 

 

8.70

 

Nonvested at June 30, 2023

 

 

440,855

 

 

 

2.99

 

(1)
Includes 2,106 shares vested under a nonqualified stock option inducement award to the Company’s President and Chief Operating Officer.
Stock Options
  
Shares
   
Weighted Average
Grant Date Fair
Value
 
Nonvested at December 31, 2021
   248,043   $1.58 
Granted
   18,955    3.25 
Vested
(1)
   (60,147)    1.56 
Forfeited
   —      —   
   
 
 
   
 
 
 
Nonvested at June 30, 2022
   206,851   $1.74 
   
 
 
   
 
 
 
(1)
Includes 2,105 shares vested under a nonqualified stock option inducement award to the Company’s President and Chief Operating Officer.

The Company amortizes the expense related to stock options as compensation expense over the vesting period. The Company recognized $24,000$65,000 and $26,000$24,000 in stock option expense during the three months ended June 30, 2023 and 2022, respectively and 2021. Additionally, the Company recognized $47,000$149,000 and $48,000$47,000 in stock option expense during the six months ended June 30, 2023 and 2022, and 2021, respectively.

At June 30, 2022,2023, the Company had $337,000$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 3.334.0 years.

The following table summarizes information about the Company’s restricted stock activity for the six months ended June 30, 2022:2023:

Restricted Stock

 

Shares

 

 

Weighted Average Grant Date Fair Value

 

Nonvested at December 31, 2022

 

 

211,349

 

 

$

8.71

 

Granted

 

 

—

 

 

 

—

 

Vested(1)(2)

 

 

(24,606

)

 

 

6.43

 

Forfeited

 

 

(13,910

)

 

 

8.86

 

Nonvested at June 30, 2023

 

 

172,833

 

 

$

9.02

 

(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.
Restricted Stock
  
Shares
   
Weighted Average
Grant Date Fair
Value
 
Nonvested at December 31, 2021
   97,128   $6.25 
Granted
   7,371    10.00 
Vested
(1)(2)
   (23,532)    6.20 
Forfeited
   —      —   
   
 
 
   
 
 
 
Nonvested at June 30, 2022
   80,967   $6.60 
   
 
 
   
 
 
 
(1) 
Includes 263 shares vested under a restricted stock inducement award to the Company’s President and Chief Operating Officer.
(2) 
Includes 7,238 shares surrendered by employees to cover payroll tax costs related to the vested shares.

The Company amortizes the expense related to restricted stock awards as compensation expense over the vesting period. The Company recognized $36,000$84,000 and $39,000$36,000 in restricted stock expense during the three months ended June 30, 2023 and 2022, respectively and 2021, respectively. Additionally, the Company recognized $72,000$188,000 and $75,000$72,000 in restricted stock shares expense during the six months ended June 30, 20222023 and 2021,2022, respectively. At June 30, 2022,2023, the Company had $500,000$1.4 million of unrecognized compensation expense related to restricted stock shares that is expected to be recognized over a weighted average period of 3.263.8 years.

28

37

Table

Item 2. Management’s Discussion and Analysis of Contents

NOTE 16 – LEASES
The Company has operating leases consisting primarilyFinancial Condition and Results of real estate leases. The Company leases real estate property for bank branches and office space with terms extending through 2028. As of June 30, 2022, the Company reported $490,000 of
right-of-use
asset and $490,000 lease liability in its consolidated balance sheet under other assets and other liabilities, respectively. The Company’s average remaining maturity for its leases is 5.75 years and its average discount rate is 1.79%.
At June 30, 2022, the Company was obligated under noncancelable operating leases for office space and other commitments. Rent expense under operating leases, included in net occupancy and equipment expense, was $19,000 and $38,000 for the three and six months ended June 30, 2022, respectively, and $21,000 and $41,000 for the three and six months ended June 30, 2021, respectively.
Rent commitments were as follows as of June 30, 2022:
   
(in thousands)
 
2022
  $43 
2023
   87 
2024
   89 
2025
   91 
2026
   93 
Thereafter
   112 
   
 
 
 
Amounts representing interest
   (25) 
   
 
 
 
Total
  $490 
   
 
 
 
29
Table of Contents
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operations

General

Management’s discussion and analysis of financial condition and results of operations at June 30, 20222023 and for the three and six months ended June 30, 20222023 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:

•
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 loancredit losses;
the actual or anticipated impacts of military conflict, terrorism or other geopolitical events;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
•
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments, 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 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, and capital requirements including as a result of Basel III;
and insurance premiums;
the impact of the Dodd-Frank Act and the implementing regulations;
•
changes in the quality or composition of our loan or investment portfolios;
•
technological changes that may be more difficult or expensive than expected;
•
the inability of third-party providers to perform as expected;
•
a failure in or breach of our operational or security systems or infrastructure, including cyberattacks;
•
the inabilityactual or anticipated impacts of third-party providers to perform as expected;military conflict, terrorism or other geopolitical events;

38

30
Table of Contents
our ability to manage market risk, credit risk and operational risk in the current economic environment;
•
our ability to enter new markets successfully and capitalize on growth opportunities;
•
our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we 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;
Board, including the effects of our adoption of the Current Expected Credit Loss ("CECL") accounting standard, which we implemented on January 1, 2023;
our ability to retain key employees;
•
our compensation expense associated with equity allocated or awarded to our employees; and
•
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.
Additionally, the outbreak of
COVID-19
will continue to adversely impact a broad range of industries in which the Company’s customers operate and will continue to impair their ability to fulfill their financial obligations to the Company.
Notwithstanding any actions by national, state and local governments to mitigate the impact of
COVID-19
or by the Company to address the adverse impacts of
COVID-19,
there can be no assurance that any of the foregoing activities will be successful in mitigating or preventing significant adverse effects on the Company. Government action in response to the
COVID-19
pandemic, including restrictions on individual and business activities and vaccination mandates, may affect our business and operations, including our workforce, human capital resources and infrastructure. The Company may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition and results of operations. While it is not possible to know the full universe or extent

Because of these impacts as of the date of this filing, we are disclosing potentially material items of which we are aware.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of
COVID-19,
certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to continue to have a material impact on our operations.
The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19
made between March 1, 2020 and the earlier of (i) December 31, 2021 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of June 30, 2022, the Company had 1 to 3 month deferrals of approximately $251,000 in interest, escrow, and principal payments on $5.7 million in outstanding loans.
The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans. The Company is actively participating in assisting our customers with applications for resources through the program. PPP loans will have: (a) an interest rate of 1.0%, (b)
two-year
and five-year loan terms to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP. As part of the first round of this program, the Bank had funded 246 PPP loans totaling $30.3 million, with no outstanding balance remaining as of June 30, 2022.
On December 27, 2020, the Relief Act became law and provided an additional $284 billion for the PPP, as well as extending the PPP through June 30, 2021. As of June 30, 2022, we had funded 143 second round PPP loans totaling $10.5 million, of which $10.2 million had been forgiven as of June 30, 2022.
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Table of Contents
Because of the above and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Additional factors that may affect our results are discussed under the heading "Risk Factors" in our most recent Annual Report on Form
10-K
under (fiscal year ended December 31, 2022) filed with the heading “Risk Factors.”
Securities and Exchange Commission (“SEC”) on March 30, 2023, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 12, 2023. 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 loancredit 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 (fiscal year ended December 31, 2021)2022) filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022.
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 June 30, 20222023 and December 31, 2021

2022

Total Assets.

Total assets decreased $4.0increased $10.4 million, or 0.7%1.9%, to $535.6$553.4 million at June 30, 20222023 from $539.6$543.0 million at December 31, 2021.2022. This increase was primarily due to a $21.4 million net increase in loans, partially offset by a $6.9 million decrease in available-for-sale securities and a $5.5 million decrease in cash and cash equivalents.

Cash and Cash Equivalents. Cash and cash equivalents decreased $5.5 million, or 19.4%, to $22.8 million at June 30, 2023 from $28.3 million at December 31, 2022. This decrease was primarily due to $79.5 million in principal payments on FHLB advances, a $46.6$16.5 million decrease in cash and cash equivalents, partially offset bydeposits, a $25.8$21.4 million net increase in loans held for investment, a $14.2 million increase in

available-for-sale
investment securities and a $4.1 million increase in other assets.
Cash and Cash Equivalents.
Cash and cash equivalents decreased $46.6 million, or 69.7%, to $20.2 million at June 30, 2022 from $66.8 million at December 31, 2021. This decrease was primarily due to the purchase of $37.1 million in
available-for-sale
securities, $26.0 million of net loan growth, $13.8$4.0 million in originations of loans held for sale and $8.0 million in principal payments on FHLB advances.sale. These decreases were partially offset by $10.0$99.5 million of additional FHLB advances, $7.2 million from the issuancematurities, payments and calls of an FHLB

39

available-for-sale securities, a $7.1 million net increase in advance $14.9payments by borrowers for taxes and insurance and $4.2 million from the sale of mortgage loans held for sale, $10.9 million from maturities, prepayments and calls of

available-for-sale
sale.

Available-for-Sale Securities. Available-for-sale securities and a $5.9 million increase in advance payments by borrowers for taxes and insurance.

Available-for-Sale
Securities.
 Available-for-sale
securities increased $14.2decreased $6.9 million, or 12.7%6.0%, to $126.7$107.6 million at June 30, 2022,2023, from $112.4$114.5 million at December 31, 2021. The increase2022. This decrease was primarily due to purchases of securities totaling $37.1 million during the six months ended June 30, 2022, partially offset by maturities, prepaymentspayments and calls of securities totaling $10.9$7.2 million, andpartially offset by a $0.4 million reduction in the net unrealized gainlosses on securities held within the portfolio of $11.9 million, resulting in anportfolio. The net unrealized loss of $11.7was $15.4 million at June 30, 2022. The increase in securities purchases was the result of management’s strategy, implemented in the fourth quarter of 2021, to invest a significant portion of the Company’s liquidity that was held in cash and cash equivalents into securities with higher yields to increase future earnings, while maintaining a high degree of liquidity.
2023.

Loans Held for Sale.

Loans held for sale decreased $921,000, or 77.9%,$125,000, to $262,000zero at June 30, 2022, from $1.2 million at December 31, 2021.2023. This decrease was due primarily to a decrease in the volume of first mortgage residential real estate loan originations to be sold into the secondary market as a result of the changing interest rate environment.environment and lower inventory of housing available in our market. Mortgage loan originations and sales were $13.8$4.0 million and $14.9$4.2 million, respectively, during the first six months of 20222023 compared to $68.0$13.8 million and $70.0$14.9 million, respectively, for the same period in 2021.
Net 2022.

Loans.

 Net loans Loans held for investment, net of deferred costs, increased $25.8$21.4 million, or 8.0%5.9%, to $349.6$384.2 million at June 30, 2022,2023, from $323.8$362.8 million at December 31, 2021.2022. The majority of this growth was in commercial real estate loans which increased $11.4 million during the six months ended June 30, 2023 to $222.3 million. Also contributing to this growth was an increase in non-real estate commercial loans which grew $3.4 million during this period to $47.1 million. The growth in these types of loans is consistent with the Company’s long-term loan growth strategy.
Other Assets.
Other assetsstrategy to increase the level of commercial and commercial real estate loans within our portfolio. First mortgage residential real estate loans also increased $4.1$7.3 million during the six months ended June 30, 2023 to $92.8 million.

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 $4.4 million at June 30, 2023.

The ACL for loans was $3.6 million, or 66.9%0.95%, of loans, net of deferred costs, at June 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 $17,000 provision for credit losses and $10,000 in net recoveries. The ACL for unfunded loan commitments was $798,000 at June 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 $133,000 provision for credit losses. Nonaccrual loans represented 0.19% of total loans at June 30, 2023, compared to 0.21% of total loans at December 31, 2022. Net recoveries for the six months ended June 30, 2023 were $10,000 compared to net recoveries of $64,000 for the six months ended June 30, 2022.

FHLB Stock. FHLB stock increased $1.5 million, or 44.1%, from $6.1$3.4 million at December 31, 20212022 to $10.2$4.9 million at June 30, 2022.2023. This increase was primarily due to a $3.4 millionthe net increase in deferred tax assets, which was primarilyFHLB advances and the result of the increase in unrealized losses on available for sale securities. Other assets also increased as a result of a $490,000 increase in right of use lease assetsrequirement by FHLB to hold additional stock as a result of the adoptionincreased level of ASU

2016-02
in the first quarter of 2022, and a $312,000 increase in prepaid expenses, which was primarily due to the payment of annual insurance premiums in the first quarter of 2022.
32
Table of Contents
advances.

Deposits.

Deposits decreased $1.4$16.5 million, or 0.4%4.3%, to $383.1$371.2 million at June 30, 2022,2023, from $384.5$387.7 million at December 31, 2021.2022. This decrease was primarily due to a $3.7$24.5 million decrease in money market accounts, a $17.6 million decrease in noninterest bearing checking accounts and a $3.5an $11.2 million decrease in interest bearing checkingsavings accounts. These decreases were partially offset by a $2.5 million increase in statement savings accounts, a $2.1$39.3 million increase in certificates of deposit. The decrease in deposits was partially due to customers transferring some or all of their deposits to higher rate investment alternatives, including treasury securities and higher rate deposit accounts at other financial institutions, as a result of the rising interest rate environment. As market rates have increased, we have also seen a shift in our deposit mix from noninterest bearing checking accounts and a $1.1 million increase inlower interest NOW and savings accounts into money market accounts.
accounts and certificates of deposits. Based on the relatively higher rates of interest being offered by other financial institutions in our market and the higher cost of other funding alternatives, the Company determined that it was more cost effective to replace a portion of these deposits, many of which were with customers that had no other banking relationships with the Company, with FHLB advances. The Company continues to build upon its banking relationships with its core customers, including deposits, and in attracting new relationships. The decrease in deposits was also partially due to the use of noninterest and lower rate deposit funds by our commercial customers to fund their operations, as their borrowing cost has increased during the current interest rate environment.

Advance Payments by Borrowers for Taxes and Insurance.

Advance payments by borrowers for taxes and insurance increased $5.9$7.1 million to $7.7$8.1 million at June 30, 20222023 from $1.8$1.0 million at December 31, 2021.2022. The increase was due to normal seasonal activity.
Borrowings.
Borrowings, consisting entirely of

40

FHLB Advances. FHLB advances increased $2.0$20.0 million, or 3.6%28.0%, to $57.4$91.5 million at June 30, 2022,2023, from $55.4$71.5 million at December 31, 2021.2022. The increase in FHLB advances was dueprimarily used to an advance of $10.0 million borrowed duringpartially fund outgoing cash flows from the quarter ended June 30, 2022, partially offset by maturitiesdecrease in deposits and principal repayments on existing advances of $8.0 million.

the increase in net loans.

Total Stockholders’ Equity.

Total stockholders’ equity decreased $9.9$1.3 million to $81.0$74.1 million at June 30, 2022,2023, from $90.9$75.4 million at December 31, 2021.2022. The decrease was primarily due to an $11.9a $1.7 million increasedecrease in retained earnings. The decrease in retained earnings was primarily the result of a net loss of $869,000 for the six months ended June 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 27,303 shares of its common stock during the six months ended June 30, 2023 under its stock repurchase plan which resulted in a $232,000 reduction in stockholders' equity. This decrease was partially offset by a $0.4 million decrease in net unrealized losses on
available-for-sale
securities, which net of taxes, resulted in a $8.7$0.3 million decreaseincrease in stockholders’ equity. The increasedecrease in net unrealized losses on available-for-sale securities resulted primarily fromwas the result of changes in market interest rates.
33
Table of Contents

Average Balances and Yields

The following table presentstables 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.costs for the three and six months ended June 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 June 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)

 

$

378,797

 

 

$

4,238

 

 

 

4.49

%

 

$

339,448

 

 

$

3,009

 

 

 

3.56

%

Securities available-for-sale

 

 

110,718

 

 

 

588

 

 

 

2.13

%

 

 

128,204

 

 

 

566

 

 

 

1.77

%

Other interest-earning assets

 

 

12,427

 

 

 

191

 

 

 

6.18

%

 

 

36,623

 

 

 

92

 

 

 

1.00

%

Total interest-earning
   assets

 

 

501,942

 

 

 

5,017

 

 

 

4.01

%

 

 

504,275

 

 

 

3,667

 

 

 

2.92

%

Non-interest-earning assets

 

 

36,636

 

 

 

 

 

 

 

 

 

35,778

 

 

 

 

 

 

 

Total assets

 

$

538,578

 

 

 

 

 

 

 

 

$

540,053

 

 

 

 

 

 

 

Interest-earning liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

31,370

 

 

$

59

 

 

 

0.76

%

 

$

36,367

 

 

$

9

 

 

 

0.10

%

Money market accounts

 

 

102,230

 

 

 

530

 

 

 

2.08

%

 

 

96,782

 

 

 

73

 

 

 

0.30

%

Savings accounts

 

 

53,323

 

 

 

7

 

 

 

0.05

%

 

 

67,690

 

 

 

8

 

 

 

0.05

%

Certificates of deposit

 

 

96,829

 

 

 

700

 

 

 

2.90

%

 

 

84,240

 

 

 

97

 

 

 

0.46

%

Total interest-bearing deposits

 

 

283,752

 

 

 

1,296

 

 

 

1.83

%

 

 

285,079

 

 

 

187

 

 

 

0.26

%

Federal Home Loan Bank advances

 

 

90,974

 

 

 

654

 

 

 

2.88

%

 

 

57,802

 

 

 

181

 

 

 

1.25

%

Other interest-bearing liabilities

 

 

6,872

 

 

 

1

 

 

 

0.08

%

 

 

7,314

 

 

 

2

 

 

 

0.12

%

Total interest-bearing
   liabilities

 

 

381,598

 

 

 

1,951

 

 

 

2.05

%

 

 

350,195

 

 

 

370

 

 

 

0.42

%

Non-interest-bearing deposits

 

 

77,138

 

 

 

 

 

 

 

 

 

103,148

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

7,550

 

 

 

 

 

 

 

 

 

6,493

 

 

 

 

 

 

 

Total liabilities

 

 

466,286

 

 

 

 

 

 

 

 

 

459,836

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

72,292

 

 

 

 

 

 

 

 

 

80,217

 

 

 

 

 

 

 

Total liabilities and
   stockholders’ equity

 

$

538,578

 

 

 

 

 

 

 

 

$

540,053

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

3,066

 

 

 

 

 

 

 

 

$

3,297

 

 

 

 

Net interest-earning assets

 

$

120,344

 

 

 

 

 

 

 

 

$

154,080

 

 

 

 

 

 

 

Interest rate spread(2)

 

 

 

 

 

 

 

 

1.96

%

 

 

 

 

 

 

 

 

2.50

%

Net interest margin(3)

 

 

 

 

 

 

 

 

2.45

%

 

 

 

 

 

 

 

 

2.62

%

Average interest-earning assets to
   average interest-bearing
   liabilities

 

 

131.54

%

 

 

 

 

 

 

 

 

144.00

%

 

 

 

 

 

 

(1)
Includes loan (expense) fees of ($35,000) and $20,000 for the three months ended June 30, 2023 and 2022, respectively.
   
Three Months Ended June 30,
 
   
2022
  
2021
 
   
Average
Outstanding
Balance
  
Interest and
Dividends
   
Yield/Cost
Rate
  
Average
Outstanding
Balance
  
Interest and
Dividends
   
Yield/Cost
Rate
 
                      
   
(Dollars in thousands)
 
Interest-earning assets:
         
Loans
(1)
  $339,448  $3,009    3.59%  $336,634  $3,125    3.76% 
Securities
available-for-sale
   128,204   566    1.79%   79,527   335    1.71% 
Other interest-earning assets
   36,623   92    1.02%   76,263   51    0.27% 
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-earning assets
   504,275   3,667    2.95%   492,424   3,511    2.89% 
Non-interest-earning
assets
   35,778      34,658    
  
 
 
     
 
 
    
Total assets
  $540,053     $527,082    
  
 
 
     
 
 
    
Interest-earning liabilities:
         
NOW accounts
  $36,367  $9    0.10%  $33,596  $10    0.12% 
Money market accounts
   96,782   73    0.31%   98,513   61    0.25% 
Savings accounts
   67,690   8    0.05%   65,042   8    0.05% 
Certificates of deposit
   84,240   97    0.47%   81,329   114    0.57% 
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-bearing deposits
   285,079   187    0.27%   278,480   193    0.28% 
Federal Home Loan Bank advances
   57,802   181    1.27%   65,009   200    1.25% 
Other interest-bearing liabilities
   7,144   2    0.12%   7,733   —      —   
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-bearing liabilities
   350,025   370    0.43%   351,222   393    0.45% 
Non-interest-bearing
deposits
   103,148      90,099    
Other
non-interest-bearing
liabilities
   6,142      7,733    
  
 
 
     
 
 
    
Total liabilities
   459,315      449,054    
Total stockholders’ equity
   80,738      78,028    
  
 
 
     
 
 
    
Total liabilities and stockholders’ equity
  $540,053     $527,082    
  
 
 
     
 
 
    
Net interest income
   $3,297     $3,118   
   
 
 
     
 
 
   
Net interest-earning assets
  $154,250     $141,202    
  
 
 
     
 
 
    
Interest rate spread
(2)
      2.52%      2.44% 
Net interest margin
(3)
      2.65%      2.57% 
Average interest-earning assets to average interest-bearing liabilities
   144.07%      140.20%    
(1) 
Includes loan fees (expense) of $20,000 and ($8,000) for the three months ended June 30, 2022 and 2021, respectively.
(2) 
(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.
(3)
34Net interest margin represents net interest income divided by average total interest-earning assets.

41

 

Six Months Ended June 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)

 

$

371,562

 

 

$

8,064

 

 

 

4.38

%

 

$

334,612

 

 

$

6,299

 

 

 

3.80

%

Securities available-for-sale

 

 

112,291

 

 

 

1,191

 

 

 

2.14

%

 

 

131,090

 

 

 

1,114

 

 

 

1.71

%

Other interest-earning assets

 

 

16,022

 

 

 

476

 

 

 

5.99

%

 

 

38,656

 

 

 

139

 

 

 

0.73

%

Total interest-earning
   assets

 

 

499,875

 

 

 

9,731

 

 

 

3.93

%

 

 

504,358

 

 

 

7,552

 

 

 

3.02

%

Non-interest-earning assets

 

 

36,801

 

 

 

 

 

 

 

 

 

34,700

 

 

 

 

 

 

 

Total assets

 

$

536,676

 

 

 

 

 

 

 

 

$

539,058

 

 

 

 

 

 

 

Interest-earning liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

31,399

 

 

$

111

 

 

 

0.72

%

 

$

36,430

 

 

$

16

 

 

 

0.09

%

Money market accounts

 

 

108,779

 

 

 

1,072

 

 

 

1.99

%

 

 

96,746

 

 

 

144

 

 

 

0.30

%

Savings accounts

 

 

56,064

 

 

 

14

 

 

 

0.05

%

 

 

67,049

 

 

 

17

 

 

 

0.05

%

Certificates of deposit

 

 

89,854

 

 

 

1,081

 

 

 

2.43

%

 

 

82,614

 

 

 

179

 

 

 

0.44

%

Total interest-bearing deposits

 

 

286,096

 

 

 

2,278

 

 

 

1.61

%

 

 

282,839

 

 

 

356

 

 

 

0.25

%

Federal Home Loan Bank advances

 

 

85,385

 

 

 

1,148

 

 

 

2.71

%

 

 

56,293

 

 

 

350

 

 

 

1.25

%

Other interest-bearing liabilities

 

 

5,024

 

 

 

3

 

 

 

0.11

%

 

 

5,424

 

 

 

4

 

 

 

0.17

%

Total interest-bearing
   liabilities

 

 

376,505

 

 

 

3,429

 

 

 

1.84

%

 

 

344,556

 

 

 

710

 

 

 

0.42

%

Non-interest-bearing deposits

 

 

79,836

 

 

 

 

 

 

 

 

 

104,585

 

 

 

 

 

 

 

Other non-interest-bearing
   liabilities

 

 

7,019

 

 

 

 

 

 

 

 

 

6,474

 

 

 

 

 

 

 

Total liabilities

 

 

463,360

 

 

 

 

 

 

 

 

 

455,615

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

73,316

 

 

 

 

 

 

 

 

 

83,443

 

 

 

 

 

 

 

Total liabilities and
   stockholders’ equity

 

$

536,676

 

 

 

 

 

 

 

 

$

539,058

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

6,302

 

 

 

 

 

 

 

 

$

6,842

 

 

 

 

Net interest-earning assets

 

$

123,370

 

 

 

 

 

 

 

 

$

159,802

 

 

 

 

 

 

 

Interest rate spread(2)

 

 

 

 

 

 

 

 

2.09

%

 

 

 

 

 

 

 

 

2.60

%

Net interest margin(3)

 

 

 

 

 

 

 

 

2.54

%

 

 

 

 

 

 

 

 

2.74

%

Average interest-earning
   assets to average interest-bearing
   liabilities

 

 

132.77

%

 

 

 

 

 

 

 

 

146.38

%

 

 

 

 

 

 

(1)
Includes loan (expense) fees of ($54,000) and $124,000 for the six months ended June 30, 2023 and 2022, respectively.
(2)
TableInterest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of Contents
   
Six Months Ended June 30,
 
   
2022
  
2021
 
   
Average
Outstanding
Balance
  
Interest and
Dividends
   
Yield/Cost
Rate
  
Average
Outstanding
Balance
  
Interest and
Dividends
   
Yield/Cost
Rate
 
                      
   
(Dollars in thousands)
 
Interest-earning assets:
         
Loans
(1)
  $334,612  $6,299    3.80%  $334,682  $6,418    3.87% 
Securities
available-for-sale
   131,090   1,114    1.71%   69,905   603    1.74% 
Other interest-earning assets
   38,656   139    0.73%   81,634   107    0.26% 
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-earning assets
   504,358   7,552    3.02%   486,221   7,128    2.96% 
Non-interest-earning
assets
   34,700      33,537    
  
 
 
     
 
 
    
Total assets
  $539,058     $519,758    
  
 
 
     
 
 
    
Interest-earning liabilities:
         
NOW accounts
  $36,430  $16    0.09%  $32,720  $19    0.11% 
Money market accounts
   96,746   144    0.30%   100,285   140    0.28% 
Savings accounts
   67,049   17    0.05%   63,532   18    0.06% 
Certificates of deposit
   82,614   179    0.44%   82,809   272    0.66% 
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-bearing deposits
   282,839   356    0.25%   279,346   449    0.32% 
Federal Home Loan Bank advances
   56,293   350    1.25%   66,544   400    1.21% 
Other interest-bearing liabilities
   5,424   4    0.17%   6,480   —      —   
  
 
 
  
 
 
    
 
 
  
 
 
   
Total interest-bearing liabilities
   344,556   710    0.42%   352,370   849    0.49% 
Non-interest-bearing
deposits
   104,585      76,819    
Other
non-interest-bearing
liabilities
   6,474      5,436    
  
 
 
     
 
 
    
Total liabilities
   455,615      434,625    
Total stockholders’ equity
   83,443      85,133    
  
 
 
     
 
 
    
Total liabilities and stockholders’ equity
  $539,058     $519,758    
  
 
 
     
 
 
    
Net interest income
   $6,842     $6,279   
   
 
 
     
 
 
   
Net interest-earning assets
  $159,802     $133,851    
  
 
 
     
 
 
    
Interest rate spread
(2)
      2.60%      2.47% 
Net interest margin
(3)
      2.74%      2.60% 
Average interest-earning assets to average interest-bearing liabilities
   146.38%      137.99%    
(1) 
Includes loan fees (expense) of $124,000 and ($49,000) for the six months ended June 30, 2022 and 2021, respectively.
(2) 
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(3) 
Net interest margin represents net interest income divided by average total interest-earning assets.
(3)
35Net interest margin represents net interest income divided by average total interest-earning assets.

42

Table of Contents

Rate/Volume Analysis

The following table presentstables 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.
36

 

Three Months Ended June 30,
2023 vs. 2022

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

 

Rate

 

 

Total
Increase
(Decrease)

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Loans

 

$

377

 

 

$

852

 

 

$

1,229

 

Securities

 

 

(45

)

 

 

67

 

 

 

22

 

Other

 

 

(15

)

 

 

114

 

 

 

99

 

Total interest-earning assets

 

 

317

 

 

 

1,033

 

 

 

1,350

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

NOW

 

 

1

 

 

 

(51

)

 

 

(50

)

Money market deposits

 

 

(4

)

 

 

(453

)

 

 

(457

)

Savings

 

 

1

 

 

 

—

 

 

 

1

 

Certificates of deposit

 

 

(17

)

 

 

(586

)

 

 

(603

)

Total interest-bearing deposits

 

 

(19

)

 

 

(1,090

)

 

 

(1,109

)

Borrowings

 

 

(145

)

 

 

(328

)

 

 

(473

)

Other

 

 

—

 

 

 

1

 

 

 

1

 

Total interest-bearing liabilities

 

 

(164

)

 

 

(1,417

)

 

 

(1,581

)

Change in net interest income

 

$

153

 

 

$

(384

)

 

$

(231

)

 

Six Months Ended June 30,
2023 vs. 2022

 

 

Increase (Decrease) Due to

 

 

 

 

 

Volume

 

 

Rate

 

 

Total
Increase
(Decrease)

 

 

(Dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

Loans

 

$

740

 

 

$

1,025

 

 

$

1,765

 

Securities

 

 

(105

)

 

 

182

 

 

 

77

 

Other

 

 

(30

)

 

 

367

 

 

 

337

 

Total interest-earning assets

 

 

605

 

 

 

1,574

 

 

 

2,179

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

NOW

 

 

2

 

 

 

(97

)

 

 

(95

)

Money market deposits

 

 

(20

)

 

 

(908

)

 

 

(928

)

Savings

 

 

3

 

 

 

—

 

 

 

3

 

Certificates of deposit

 

 

(17

)

 

 

(885

)

 

 

(902

)

Total interest-bearing deposits

 

 

(32

)

 

 

(1,890

)

 

 

(1,922

)

Borrowings

 

 

(246

)

 

 

(552

)

 

 

(798

)

Other

 

 

—

 

 

 

1

 

 

 

1

 

Total interest-bearing liabilities

 

 

(278

)

 

 

(2,441

)

 

 

(2,719

)

Change in net interest income

 

$

327

 

 

$

(867

)

 

$

(540

)

43

Table of Contents
   
Three Months Ended June 30,
2022 vs. 2021
 
   
Increase (Decrease) Due to
   
Total
Increase
(Decrease)
 
   
Volume
   
Rate
 
             
   
(Dollars in thousands)
 
Interest-earning assets:
      
Loans
  $26   $(142)   $(116) 
Securities
   214    17    231 
Other
   (10)    51    41 
  
 
 
   
 
 
   
 
 
 
Total interest-earning assets
   230    (74)    156 
  
 
 
   
 
 
   
 
 
 
Interest-bearing liabilities:
      
NOW
   (1)    2    1 
Money market deposits
   1    (13)    (12) 
Savings
   —      —      —   
Certificates of deposit
   (4)    21    17 
  
 
 
   
 
 
   
 
 
 
Total interest-bearing deposits
   (4)    10    6 
Borrowings
   23    (4)    19 
Other
   —      (2)    (2) 
  
 
 
   
 
 
   
 
 
 
Total interest-bearing liabilities
   19    4    23 
  
 
 
   
 
 
   
 
 
 
Change in net interest income
  $249    (70)    179 
  
 
 
   
 
 
   
 
 
 
   
Six Months Ended June 30,
2022 vs. 2021
 
   
Increase (Decrease) Due to
   
Total
Increase
(Decrease)
 
   
Volume
   
Rate
 
             
   
(Dollars in thousands)
 
Interest-earning assets:
      
Loans
  $(1)   $(118)   $(119) 
Securities
   520    (9)    511 
Other
   (14)    46    32 
  
 
 
   
 
 
   
 
 
 
Total interest-earning assets
   505    (81)    424 
  
 
 
   
 
 
   
 
 
 
Interest-bearing liabilities:
      
NOW
   (3)    6    3 
Money market deposits
   5    (9)    (4) 
Savings
   (1)    2    1 
Certificates of deposit
   1    92    93 
  
 
 
   
 
 
   
 
 
 
Total interest-bearing deposits
   2    91    93 
Borrowings
   64    (14)    50 
Other
   —      (4)    (4) 
  
 
 
   
 
 
   
 
 
 
Total interest-bearing liabilities
   66    73    139 
  
 
 
   
 
 
   
 
 
 
Change in net interest income
  $571   $(8)   $563 
  
 
 
   
 
 
   
 
 
 

Comparison of Operating Results for the Three Months Ended June 30, 20222023 and 2021

2022

Net Loss.

Income (Loss). We recorded a net loss of $508,000 for the three months ended June 30, 2023, compared to a net loss of $241,000 for the three months ended June 30, 2022,2022. The increased loss was primarily due to a $201,000 decrease in net interest income after provision for credit losses and a $1.0 million increase in noninterest expense, partially offset by an $802,000 increase of $190,000 fromin noninterest income and a net loss of $51,000 recorded$140,000 increase in income tax benefit.

Interest and Dividend Income. Interest and dividend income increased $1.3 million, or 35.1%, to $5.0 million for the three months ended June 30, 2021. This increase was primarily due to a $1.0 million decrease in

non-interest
income, which was partially offset by a $678,000 decrease in noninterest expense, a $74,000 increase in net interest income after provision for loan losses and a $75,000 increase in income tax benefit.
37
Table of Contents
Interest and Dividend Income.
Interest and dividend income increased $156,000, or 4.4%, to2023, from $3.7 million for the three months ended June 30, 2022. The increase was due primarily to a $1.2 million increase in interest and fees on loans. The increase in interest and fees earned on loans was primarily due to a $39.4 million increase in the average amount of loans outstanding, from $339.4 million in the second quarter of 2022 to $378.8 million in the second quarter of 2023, and a 93 basis point increase in the yield earned on loans, from $3.53.56% for the second quarter of 2022 to 4.49% in the second quarter of 2023. The increase in the yield earned on loans during the second quarter of 2023 was primarily due to increases in market rates. The increase in loans was consistent with the Company's strategy to grow the loan portfolio.

Interest Expense. Interest expense increased $1.6 million, or 432.4%, to $2.0 million for the three months ended June 30, 2021. The increase was due primarily to an increase in interest earned on taxable securities, which increased $231,000, or 69.0%2023, from $335,000 in the second quarter of 2021 to $566,000 in the second quarter of 2022. This increase was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $48.7 million, or 61.3%, from $79.5 million for the second quarter of 2021 to $128.2 million for the second quarter of 2022. Offsetting the increase in interest earned on taxable securities, was a $116,000 decrease in interest and fees earned on loans. This decrease was primarily due to a decrease in the yield earned on loans, which decreased from 3.76% in the second quarter of 2021 to 3.59% in the second quarter of 2022. The decrease in the loan yield was primarily due to a decrease in fees collected on PPP loans between the two periods.

Interest Expense.
Interest expense decreased $23,000, or 5.9%, to $370,000 for the three months ended June 30, 2022. This increase was primarily due to a $1.1 million increase in interest expense on deposits and a $473,000 increase in interest expense on FHLB advances. The increase in interest expense on deposits was primarily due to a 157 basis point increase in the average rate paid on deposits, partially offset by a $1.3 million decrease in average deposits outstanding from the second quarter of 2022 to the second quarter 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 $393,000noninterest bearing checking accounts and low interest NOW and savings accounts into higher rate products, including money market accounts and certificates of deposit. The average balance of noninterest bearing checking accounts decreased $26.0 million, or 25.2%, while NOW and savings accounts decreased $5.0 million, or 13.7%, and $14.4 million, or 21.2%, respectively, from the first quarter of 2022 to the first quarter of 2023. During the same period, the average balance of money market accounts and certificates of deposits increased $5.4 million, or 5.6%, and $12.6 million, or 14.9%, respectively. Interest expense on money market accounts increased $457,000, or 626.0%, from the first quarter of 2022 to the first quarter of 2023 as a result of the increase in average balances outstanding and also a 178 basis point increase in the average rate paid on these accounts. Interest expense on certificates of deposit increased $603,000, or 621.6%, from the first quarter of 2022 to the first quarter of 2023 as a result of the increase in average balances outstanding and also a 244 basis point increase in the average rate paid on these accounts.

Interest expense on FHLB advances increased $473,000, or 261.3%, from $181,000 for the second quarter of 2022 to $654,000 for the second quarter of 2023. This increase was primarily due to a 163 basis point increase in the average rate paid on the advances from 1.25% in the second quarter of 2022 to 2.88% in the second quarter of 2023 and a $33.2 million, or 57.4%, increase in the average balance outstanding, from $57.8 million in the second quarter of 2022 to $91.0 million in the second quarter 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 $231,000, or 7.0%, to $3.1 million for the three months ended June 30, 2021. This decrease was primarily due to a decline in interest expense on FHLB advances, which declined $19,0002023, from $200,000 in the second quarter of 2021 to $181,000 in the second quarter of 2022. This decrease was primarily the result of a $7.2 million decrease in average FHLB advances outstanding.

Net Interest Income.
 Net interest income increased $179,000, or 5.7%, to $3.3 million for the three months ended June 30, 2022, from $3.12022. This decrease was primarily due to a $1.6 million increase in interest expense partially offset by a $1.3 million increase in interest and dividend income. Our net interest rate spread decreased 54 basis points to 1.96% for the three months ended June 30, 2021. This increase was due to a $156,000 increase in interest income and a $23,000 decrease in interest expense. Our net interest rate spread increased 8 basis points to 2.52%2023, from 2.50% for the three months ended June 30, 2022,2022. Our net interest margin decreased 17 basis points to 2.45%, from 2.44%2.62% over the same period.

Provision for Credit Losses. The provision for credit losses was $75,000 for the three months ended June 30, 2021. Our net interest margin also increased 8 basis points to 2.65% from 2.57% over the same period.

Provision for Loan Losses.
Provision for loan losses for the three months ended June 30, 2022 was $105,0002023, compared to noa $105,000 provision for the three months ended June 30, 2021. The allowance for loan losses was $3.1 million,2022.

Noninterest Income. Noninterest income increased $802,000, or 0.89%679.7%, of total loans (and 0.89% excluding PPP loans), at June 30, 2022, compared to $2.9 million, or 0.88% of total loans (and 0.89% excluding PPP loans), at December 31, 2021. Nonaccrual loans constituted 0.23% of total gross loans (and 0.23% excluding PPP loans) at June 30, 2022, compared to 0.31% of gross loans at December 31, 2021 (and 0.32% excluding PPP loans). Net recoveries$920,000 for the three months ended June 30, 2022 were $10,000 compared to net charge-offs of $33,000 for the three months ended June 30, 2021. The increase in provision was primarily due to the increase in loans outstanding.

Non-interest
Income
.
 Non-interest
income decreased $1.0 million, or 89.6%, to2023, from $118,000 for the three months ended June 30, 2022, from $1.1 million for the three months ended June 30, 2021.2022. The decreaseincrease was primarily the result of a $763,000 decline$747,000 increase in income associated with changes in the market value of marketable equity securities and a $241,000$157,000 gain from the collection of benefits from a bank owned life insurance policy. These increases were partially offset by a $76,000 decrease in net gain on sale of loans. The decreaseincrease in the market value of marketable equity securities was due to a decreasean increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the $747,000 change in the market of equity securities in noninterest expense. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $21.6$6.2 million, from $29.6 million in the second quarter of 2021 to $8.0 million in the second quarter of 2022.
Non-interest
2022 to $1.8 million in the second quarter of 2023. This decrease was primarily the result of the changing interest rate environment and lower inventory of housing available in our market.

Noninterest Expense.

Non-interest
Noninterest expense decreased $677,000,increased $1.0 million, or 15.5%27.0%, to $4.7 million for the three months ended June 30, 2023 from $3.7 million for the three months ended June 30, 2022 from $4.4 million for the three months ended June 30, 2021.2022. This decreaseincrease was primarily due to a $664,000 decrease in salaries and employee benefits. The decrease $1.0 million increase

44

in salaries and benefits expense. The increase in salaries and benefits expense was primarily due primarily to a $763,000 decrease$747,000 increase in the market value of mutual funds held in our deferred compensation plan, offsetplan. We record an offsetting amount for the change in part by a $94,000the market of equity securities in noninterest income. Also contributing to the increase in salaries.

salaries and benefits expense were $418,000 in severance and employment agreement costs related to the reduction-in-force ("RIF") that was implemented in April 2023 and an $89,000 increase in stock based compensation expense. 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 to the RIF, the Company has continued its cost savings initiative to review all open positions prior to rehiring. During the second quarter of 2023, three open positions were eliminated, which will result in a $376,000 reduction in annual salaries and benefits expense. 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 increase in stock based compensation expense was primarily related to the issuance of stock options and awards under the 2022 Equity Incentive Plan.

Income Tax Benefit.

(Benefit) Expense. We recorded an income tax benefit of $273,000 for the three months ended June 30, 2023, compared to an income tax benefit of $133,000 for the three months ended June 30, 2022, compared to an income tax benefit of $58,000 for the three months ended June 30, 2021.2022. The increase in income tax benefit was primarily due to a decreasean increase in incomethe loss before taxes during the three months ended June 30, 20222023 as compared to the three months ended June 30, 2021.
2022.

Comparison of Operating Results for the Six Months Ended June 30, 20222023 and 2021

2022

Net Income (Loss) Income.

. We recorded a net loss of $869,000 for the six months ended June 30, 2023, compared to a net loss of $296,000 for the six months endingended June 30, 2022, compared to net income of $470,000 recorded for the six months ending June 30, 2021. This decrease2022. The increased loss was primarily due to a $2.2 million$480,000 decrease in
non-interest
income, which was partially offset by an $822,000 decrease in noninterest expense, a $353,000 increase in net interest income after provision for loancredit losses and a $294,000 decrease$1.5 million increase in noninterest expense, partially offset by a $1.2 million increase in noninterest income and a $232,000 increase in income tax expense.
38
Table of Contents
benefit.

Interest and Dividend Income.

Interest and dividend income increased $424,000,$2.2 million, or 5.9%29.3%, to $7.6$9.7 million for the six months endingended June 30, 2022,2023, from $7.1$7.5 million for the six months endingended June 30, 2021.2022. The increase was due primarily to ana $1.8 million increase in interest earned on taxable securities, which increased $511,000, or 84.7% from $603,000 in the first six months of 2021 to $1.1 million in the first six months of 2022. This increase was primarily due to the Company’s strategy to deploy excess liquidity into securities, which resulted in the average outstanding balance of securities increasing $61.2 million, or 87.5%, from $69.9 million for the first six months of 2021 to $131.1 million for the same period of 2022. This increase was partially offset by a $119,000 decrease in interest and fees on loans. This decreaseloans and a $337,000 increase in interest on other interest earning assets. The increase in interest and fees earned on loans was primarily due to a $37.0 million increase in the resultaverage amount of loans outstanding, from $334.6 million for the six months ended June 30, 2022 to $371.6 million for the six months ended June 30, 2023, and a 758 basis point reductionincrease in the yield earned on loans, from 3.87%3.80% for six months ended June 30, 2022 to 4.38% for the first six months ended June 30, 2023. The increase in the yield earned on loans during the six months ended June 30, 2023 was primarily due to increases in market rates. The increase in loans was consistent with the Company's strategy to grow the loan portfolio. The increase in interest earned on other interest earning assets, the majority of 2021which is comprised of fed funds sold and FHLB stock, was primarily due to 3.80%a 526 basis point increase in yield, from 0.73% for the same periodsix months ended June 30, 2022 to 5.99% for the six months ended June 30, 2023, partially offset by a $22.6 million decrease in 2022.
the average balance outstanding, from $38.6 million for the six months ended June 30, 2022 to $16.0 million for the six months ended June 30, 2023.

Interest Expense.

Interest expense decreased $139,000,increased $2.7 million, or 16.4%380.3%, to $3.4 million for the six months ended June 30, 2023, from $710,000 for the six months ended June 30, 2022. This increase was primarily due to a $1.9 million increase in interest expense on deposits and a $798,000 increase in interest expense on FHLB advances. The increase in interest expense on deposits reflected a 136 basis point increase in the average rate paid on deposits and a $3.3 million increase in average deposits outstanding from the first six months of 2022 to the first six 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 $849,000noninterest bearing checking accounts and low interest NOW and savings accounts into higher rate products, including money market accounts and certificates of deposit. The average balance of noninterest bearing checking accounts decreased $24.7 million, or 23.7%, while NOW and savings accounts decreased $5.0 million, or 13.8%, and $11.0 million, or 16.4%, respectively, from the first six months of 2022 to the first six months of 2023. During the same period, the average balance of money market accounts and certificates of deposits increased $12.0 million, or 12.4%, and $7.2 million, or 8.8%, respectively. Interest expense on money market accounts increased $928,000, or 644.4%, from the first six months of 2022 to the first six months of 2023 as a result of the increase in average balances outstanding and also a 169 basis point increase in the average rate paid on these accounts. Interest expense on certificates of deposit increased $902,000, or 503.9%, from the first six months of 2022 to the first six months of 2023 as a result of the increase in average balances outstanding and also a 199 basis point increase in the average rate paid on these accounts.

Interest expense on FHLB advances increased $798,000, or 228.0%, from $350,000 for the first six months of 2022 to $1.1 million for the first six months of 2023. This increase was primarily due to a 146 basis point increase in the average rate paid on the advances from 1.25% in the first six months of 2022 to 2.71% in the first six months of 2023 and a $29.1 million, or 51.7%, increase in the average balance outstanding, from $56.3 million in the first six months of 2022 to $85.4 million in the first six months of 2023. The increase in the average rate paid on FHLB advances was primarily due to the changes in market interest rates.

45

Net Interest Income. Net interest income decreased $540,000, or 7.9%, to $6.3 million for the six months ended June 30, 2021. This decrease was primarily due to a decline in the cost of our interest-bearing deposits, which decreased 7 basis points2023 and 2022, from 0.32% for the first six months of 2021 to 0.25% for the same period in 2022. This decline was primarily due to the low interest rate environment.

Net Interest Income.
 Net interest income increased $563,000, or 9.0%, to $6.8 million for the six months ended June 30, 20222022. This decrease was primarily due to a $2.7 million increase in interest expense partially offset by a $2.2 million increase in interest and dividend income. Our net interest rate spread decreased 51 basis points to 2.09% for the six months ended June 30, 2023, from $6.32.60% for the six months ended June 30, 2022. Our net interest margin decreased 20 basis points to 2.54%, from 2.74% over the same period.

Provision for Credit Losses. The provision for credit losses was $150,000 for the six months ended June 30, 2023, compared to a $210,000 provision for the six months ended June 30, 2022.

Noninterest Income. Noninterest income increased $1.2 million, or 236.2%, to $1.7 million for the six months ended June 30, 2021. Our net interest rate spread increased 13 basis points to 2.60% for the six months ended June 30, 2022,2023, from 2.47% for the six months ended June 30, 2021 while our net interest margin increased 14 basis points to 2.74% from 2.60% over the same period.

Provision for Loan Losses.
Provision for loan losses for the six months ended June 30, 2022 was $210,000 compared to no provision for the six months ended June 30, 2021. Net recoveries for the six months ended June 30, 2022 were $64,000 compared to net recoveries of $29,000 for the six months ended June 30, 2021. The increase in provision was primarily due to the increase in loans outstanding.
Non-interest
Income
.
 Non-interest
income decreased $2.2 million, or 81.5%, to $508,000 for the six months ended June 30, 2022 from $2.72022. The increase was primarily the result of a $1.2 million for the six months ended June 30, 2021. This decrease was due primarily to a $1.1 million declineincrease in income associated with changes in the market value of marketable equity securities, partially offset by a $729,000$116,000 decrease in net gainsgain on the sale of loans and a $419,000 decrease in loan servicing fees.loans. The decreaseincrease in the market value of marketable equity securities was due to a decreasean increase in the market value of mutual funds held in our deferred compensation plan. We record an offsetting amount for the $1.2 million change in the market of equity securities in noninterest expense. The decrease in the net gain on sale of loans was primarily due to the decrease in the sale of mortgage loans held for sale, which decreased $55.1$10.7 million, from $70.0$14.9 million infor the first six months of 20212022 to $14.9$4.2 million in the same period of 2022. The decrease in loan servicing fees was primarily due to the reversal of a $369,000 impairment previously recorded against the value of mortgage servicing rights infor the first six months of 2021.2023. This decrease was primarily the result of the changing interest rate environment and lower inventory of housing available in our market.

Noninterest Expense. Noninterest expense increased $1.5 million, or 19.7%, to $9.1 million for the first six months of 2023 from $7.6 million for the first six months of 2022. This increase was primarily due to a $1.7 million increase in salaries and benefits expense, partially offset by $156,000 decrease in other noninterest expenses. The increase in salaries and benefits expense was primarily due to a $1.2 million increase in the market value of mortgage servicing rights increasedmutual funds held in our deferred compensation plan. We record an offsetting amount for the change in the market of equity securities in noninterest income. Also contributing to the increase in salaries and benefits expense was $418,000 in severance related cost as a result of anthe reduction-in-force ("RIF") that was implemented in April 2023 and a $218,000 increase in market interest rates.

Non-interest
Expense.
Non-interest
stock-based compensation expense. 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 to the RIF, the Company has continued its initiative to review all open positions prior to rehiring. During the first six months of 2023, we eliminated nine additional positions, which will result in a $718,000 reduction in annual salaries and benefits expense. As a result of these actions, we have decreased the number of full-time equivalent employees from 110 to 89 since June 2022, which has resulted in a $1.8 million reduction in salaries and benefits expense decreased $822,000, or 9.7%on an annual basis. In addition, we are significantly adjusting our bonus program for 2023 (to be paid in 2024), which is projected to $7.6 millionresult 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 increase in stock-based compensation expense was primarily related to the issuance of stock options and awards under the 2022 Equity Incentive Plan.

In addition to the actions taken to reduce salaries and benefits expense, the Company has also implemented additional cost savings initiatives that have resulted in a $156,000 decrease in other noninterest expenses for the six months ended June 30, 2022 from $8.5 million for the2023 as compared to six months ended June 30, 2021. This decrease was primarily due2022. The majority of these savings were related to an $835,000 decreasea $94,000 reduction in salaries and employee benefits. The decrease in salaries and employee benefits primarily resulted from a $1.1 million decline in the market value of marketable equity securities held in our deferred compensation plan, offset in part by a $135,000 increase in incentive bonus expenseprofessional services and a $69,000 increase$42,000 reduction in salaryadvertising and promotions expense.

Income Tax (Benefit) Expense.

We recorded an income tax benefit of $424,000 for the first six months of 2023, compared to an income tax benefit of $192,000 for the first six months ended June 30, 2022, compared to an income tax expense of $102,000 for the six months ended June 30, 2021.2022. The decreaseincrease in income tax expensebenefit was primarily due to a decreasean increase in incomethe loss before taxes during the first six months ended June 30, 2022of 2023 as compared to the first six months ended June 30, 2021.
of 2022.

Management of Market Risk

General

. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.
39
Table of Contents

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:

46

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

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

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

The table below sets forth, as of June 30, 2022,2023, 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

 

$

10,280

 

 

 

(12.67

)%

 +300

 

 

10,819

 

 

 

(8.08

)%

 +200

 

 

11,371

 

 

 

(3.39

)%

 +100

 

 

11,471

 

 

 

(2.54

)%

Level

 

 

11,770

 

 

 

—

%

 -100

 

 

11,663

 

 

 

(0.91

)%

 -200

 

 

11,265

 

 

 

(4.30

)%

 -300

 

 

10,891

 

 

 

(7.47

)%

 -400

 

 

10,424

 

 

 

(11.44

)%

(1)
Assumes an immediate uniform change in interest rates at all maturities.
Change in Interest
Rates (basis points)
(1)
  
Net Interest Income
Year 1 Forecast
   
Year 1 Change
from Level
 
   
(Dollars in thousands)
     
+400
  $13,815    4.48% 
+300
   13,637    3.14% 
+200
   13,472    1.88% 
+100
   13,328    0.79% 
Level
   13,223    —  % 
-100
   13,223    0.01% 
(1)
Assumes an immediate uniform change in interest rates at all maturities.

47

Economic Value of Equity

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

The table below sets forth, as of June 30, 2022,2023, 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

 

$

52,815

 

 

$

(17,675

)

 

 

(25.07

)%

+300

 

 

57,261

 

 

 

(13,229

)

 

 

(18.77

)%

+200

 

 

62,035

 

 

 

(8,455

)

 

 

(11.99

)%

+100

 

 

65,911

 

 

 

(4,579

)

 

 

(6.50

)%

Level

 

 

70,490

 

 

 

—

 

 

 

—

 

-100

 

 

74,347

 

 

 

3,857

 

 

 

5.47

%

-200

 

 

76,033

 

 

 

5,543

 

 

 

7.86

%

-300

 

 

75,458

 

 

 

4,968

 

 

 

7.05

%

-400

 

 

71,123

 

 

 

633

 

 

 

0.90

%

(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.
40
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Estimated Increase (Decrease) in EVE
 
Basis Point (“bp”) Change
in Interest Rates
(1)
  
Estimated EVE
(2)
   
Amount
   
Percent
 
             
   
(Dollars in thousands)
 
+400
  $61,629   $(9,188)    (12.97%) 
+300
   63,670    (7,147)    (10.09%) 
+200
   65,710    (5,107)    (7.21%) 
+100
   67,968    (2,849)    (4.02%) 
Level
   70,817    —      —  % 
-100
   70,850    33    0.05% 
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
EVE is the discounted present value of expected cash flows from assets, liabilities and
off-balance
sheet contracts.

The table above indicates that at June 30, 2022,2023, in the event of a

100-basis
point increase in interest rates, we would have experienced a 4.02%6.50% decrease in our EVE and in the event of a 100-basis point decrease in interest rates, we would have experienced a 5.47% increase in our EVE. In the event of a
200-basis
point increase in interest rates at June 30, 2022,2023, we would have experienced a 7.21%11.99% decrease in our EVE and in the event of a 200-basis point decrease in interest rates, we would have experienced a 7.86% increase in our EVE.

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

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. We also have the ability to borrow from the FHLB. At June 30, 2022,2023, we had $57.4$91.5 million outstanding in advances from the FHLB. At June 30, 2022,2023, we had $85.4$73.2 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago.Chicago, based on the level of qualifying real estate loans currently pledged to the FHLB. Additionally, at June 30, 2022,2023, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at June 30, 2022.2023. The Company also had a $10.4an $8.9 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.3$11.6 million at June 30, 2022.2023. The Company had not drawn on the Federal Reserve line as of June 30, 2022.

2023. We also have the ability to participate in the Federal Reserve's new Bank Term Funding Program as needed.

48

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and

available-for-sale
investment securities. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided byused in operating activities was $533,000$836,000 million for the six months ended June 30, 2022,2023, as compared to $611,000 net cash provided by operating activities of $523,000 for the six months ended June 30, 2021.2022. Net cash used in investing activities which consists primarily of disbursementswas $15.0 million for loan originations and the purchase of

available-for-sale
securities, offset by proceeds from maturing securities and pay downs on securities, wassix months ended June 30, 2023, as compared to $52.5 million for the six months ended June 30, 2022. Net cash used in investment activities during the six months ended June 30, 2023 consisted primarily of a $21.4 million net increase in loans and a $1.4 million increase in FHLB stock, partially offset by $7.2 million from maturities, calls and payments on available-for-sale securities. Net cash used in investment activities during the six months ended June 30, 2022 as compared to $35.0consisted primarily of the purchase of $37.1 million of available-for-sale securities and a $26.0 million net increase in loans, partially offset by $10.9 million from maturities, calls and payments on available-for-sale securities. Net cash provided by financing activities was $10.3 million for the six months ended June 30, 2021.2023, as compared to $5.3 million for the six months ended June 30, 2022. Net cash provided by financing activities consistingfor the first six months of 2023 primarily resulted from borrowings of increases$99.5 million of FHLB advances and a $7.1 million increase in borrowings and advance payments by borrowers for taxes and insurance, was $5.4partially offset by $79.5 million for the six months ended June 30, 2022, as compared to $87.8in principal payments on FHLB advances and a $16.5 million ofdecrease in deposits. Net cash provided by financing activities duringfor the first six months ended June 30, 2021. The primary source of the difference2022 primarily resulted from borrowings of $10.0 million of FHLB advances and a $5.9 million increase in cash providedadvance payments by financing activities was $94.8borrowers for taxes and insurance, partially offset by $8.0 million in initial subscriptions from the stock offeringprincipal payments on FHLB advances and a $1.4 million decrease in 2021, of which the Company retained $35.4 million.
41
Table of Contents
deposits.

We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments based on our current strategy to increase core deposits, along with the continued use of FHLB advances as well as brokered certificates of deposit as needed, to fund loan growth.

Capital

At June 30, 2022,2023, PyraMax Bank exceeded all of its regulatory capital requirements with a Tier 1 leverage capital level of $64.5 million, or 11.8%11.7% of adjusted total assets, which is above the well-capitalized required level of $27.4$27.5 million, or 5.0%. The Bank had total risk-based capital of $67.6$68.9 million, or 17.9%16.8% of risk-weighted assets, which is above the well-capitalized required level of $37.8$41.1 million, or 10.0%. Management is not aware of any conditions or events since the most recent notification that would change our category. For additional information, see Note 13 of the Notes to Financial Statements.

Off-Balance

Sheet Arrangements and Contractual Obligations

Commitments.

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

42

49

Table of Contents
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.
Controls and Procedures

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule

13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2022.2023. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended June 30, 2022, there have been

There were no changes in the Company’s internal controlscontrol 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 second 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

Item 1.
Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at June 30, 2022,2023, 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

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, 20212022 Annual Report on Form
10-K
and March 31, 2023 Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission. There are no material changes

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 June 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

 

 

 

 

 

 

 

 

 

 

April 1 to April 30, 2023

 

 

—

 

 

 

—

 

 

 

—

 

 

 

9,945

 

May 1 to May 31, 2023

 

 

9,282

 

 

$

6.84

 

 

 

9,282

 

 

 

663

 

June 1 to June 30, 2023

 

 

5,118

 

 

 

7.50

 

 

 

5,118

 

 

 

617,067

 

On July 29, 2022, the Company adopted a stock repurchase program. On August 26, 2022, the Company received a non-objection letter from the risk factors included inFederal Reserve Bank of Chicago ("FRB"), permitting the Annual ReportCompany 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 Form

10-K.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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 Federal Reserve Bank of Chicago ("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 June 30, 2023, the Company had repurchased 4,455 shares for a total purchase price of $34,000.

Item 3. Defaults Upon Senior Securities

None.

Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures

Item 4. Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

Item 5. Other Information

None.

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50

Table of Contents
Item 6.
Exhibits

Item 6. Exhibits

Exhibit
Number

Description

Number

Description

    3.1

3.1

CharterArticles 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

101.0

The following materials for the quarter ended June 30, 2022,2023, formatted in XBRL (ExtensibleiXBRL (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

104.0

The cover page of this Quarterly Report on Form

10-Q
for the quarterly period ended June 30, 2022,2023, formatted in XBRLiXBRL (contained in Exhibit 101.0) *

*
Furnished, not filed.

_____________

* Furnished, not filed.

51

SIGNATURES

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

1895 BANCORP OF WISCONSIN, INC.

Date: August 12, 202210, 2023

/s/ Richard B. Hurd

David R. Ball

Richard B. Hurd

David R. Ball

President and Chief Executive Officer

Date: August 12, 202210, 2023

/s/ Steven T. Klitzing

Steven T. Klitzing

Senior

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

52

44