Company Quick10K Filing
FFBW
Price10.99 EPS0
Shares7 P/E72
MCap72 P/FCF37
Net Debt-4 EBIT3
TEV68 TEV/EBIT20
TTM 2019-09-30, in MM, except price, ratios
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FFBW 10Q Quarterly Report

Part I. – Financial Information
Item 1. Financial Statements
Note 1 – Basis of Presentation
Note 2 - Summary of Significant Accounting Policies
Note 3 – Earnings per Share
Note 4 – Available for Sale Securities
Note 5 - Loans
Note 6 - Deposits
Note 7– Fhlb Advances
Note 8 – Employee Stock Ownership Plan
Note 9 - Share - Based Compensation Plans
Note 10 – Equity and Regulatory Matters
Note 11 – Fair Value
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ffbw-20200331ex3116fd327.htm
EX-31.2 ffbw-20200331ex312a693a7.htm
EX-32 ffbw-20200331xex32.htm

FFBW Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 ffbw-20200331x10q.htm 10-Q ffbw_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

 

 

For the quarterly period ended March 31, 2020.

 

 

OR

 

 

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

 

 

 

For the transition period from                                to                           .

 

Commission file number: 001‑39182

 

FFBW, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

    

37-1962248

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

1360 South Moorland Road

 

53005

Brookfield, Wisconsin

 

 

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (262) 542‑4448

 

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

 

Common stock, par value $0.01 per share

    

The NASDAQ Stock Market, LLC

(Title of each class to be registered)

 

(Name of each exchange on which each class is to be registered)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

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 filing requirements for the past 90 days. YES      NO

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES      NO

 

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

 

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 Act). YES      NO

 

As of May 8, 2020, there were 7,704,875 issued and outstanding shares of the Registrant’s Common Stock.

 

 

 

 

 

FFBW, Inc.

Form 10‑Q

Index

 

 

 

 

 

Page

Part I. Financial Information 

3

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

Statements of Income for the Three Months Ended March 31, 2020 and 2019 (unaudited)

4

 

 

 

 

Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019 (unaudited)

5

 

 

 

 

Statements of Changes in Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited)

6

 

 

 

 

Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited)

7

 

 

 

 

Notes to Financial Statements (unaudited)

8

 

 

 

Item 2. 

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

31

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4. 

Controls and Procedures

38

 

 

 

Part II. Other Information 

39

 

 

 

Item 1. 

Legal Proceedings

39

 

 

 

Item 1A. 

Risk Factors

39

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3. 

Defaults upon Senior Securities

39

 

 

 

Item 4. 

Mine Safety Disclosures

39

 

 

 

Item 5. 

Other Information

39

 

 

 

Item 6. 

Exhibits

40

 

 

 

 

Signature Page

41

 

 

 

 

 

 

2

Part I. – Financial Information

Item 1.    Financial Statements

FFBW, Inc.

Balance Sheets

March 31, 2020 (Unaudited) and December 31, 2019

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

2020

 

2019

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

11,018

 

$

4,101

Fed funds sold

 

 

3,839

 

 

35,276

 Cash and cash equivalents

 

 

14,857

 

 

39,377

Available for sale securities, stated at fair value

 

 

55,063

 

 

48,179

Loans held for sale

 

 

543

 

 

200

Loans, net of allowance for loan and lease losses of $2,307 and $2,264, respectively

 

 

192,916

 

 

189,291

Premises and equipment, net

 

 

4,744

 

 

4,807

Foreclosed assets

 

 

347

 

 

84

Other equity investments

 

 

780

 

 

780

Accrued interest receivable

 

 

816

 

 

725

Cash value of life insurance

 

 

7,117

 

 

7,068

Other assets

 

 

797

 

 

1,707

TOTAL ASSETS

 

$

277,980

 

$

292,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

  

 

 

  

 

 

 

 

 

 

 

Deposits

 

$

163,394

 

$

217,252

Advance payments by borrowers for taxes and insurance

 

 

380

 

 

46

FHLB advances

 

 

11,500

 

 

11,500

Accrued interest payable

 

 

259

 

 

51

Other liabilities

 

 

1,439

 

 

1,499

Total liabilities

 

$

176,972

 

$

230,348

Preferred stock ($0.01 par value, 1,000,000 authorized, no shares issued or outstanding as of  December 31, 2019 and 2018, respectively)

 

$

 —

 

$

 —

Common stock ($0.01 par value, 19,000,000 shares authorized, 7,704,875 and 7,867,008 shares issued, 7,704,875 and 7,702,478 shares outstanding as of March 31, 2020 and December 31, 2019, respectively)

 

 

77

 

 

67

Additional paid in capital

 

 

68,943

 

 

28,672

Unallocated common stock of Employee Stock Ownership Plan ("ESOP") (604,100 and 270,192 shares at March 31, 2020 and December 31, 2019, respectively)

 

 

(6,041)

 

 

(2,303)

Retained earnings

 

 

36,958

 

 

36,551

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

 

 

1,071

 

 

344

Less treasury stock, 0 and 164,530 shares at cost, at March 31, 2020 and December 31, 2019, respectively

 

 

 —

 

 

(1,461)

Total equity

 

$

101,008

 

$

61,870

TOTAL LIABILITIES AND EQUITY

 

$

277,980

 

$

292,218

(1)

Share and per share amounts related to periods prior to the date of the completion of the Conversion (January 16, 2020) have been restated to give retroactive recognition to the exchange ratio applied to the Conversion (1.1730 to one).

See accompanying notes to financial statements.

3

FFBW, Inc.

Statements of Income

Three Months Ended March 31, 2020 and 2019 (Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

    

Three months ended

    

 

 

March 31, 

 

 

 

2020

    

2019

 

Interest and dividend income:

 

 

  

 

 

  

 

Loans, including fees

 

$

2,435

 

$

2,448

 

Securities

 

 

 

 

 

  

 

Taxable

 

 

284

 

 

275

 

Tax-exempt

 

 

 4

 

 

 2

 

Other

 

 

84

 

 

25

 

 

 

 

 

 

 

 

 

Total interest and dividend income

 

 

2,807

 

 

2,750

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

  

 

 

  

 

Interest-bearing deposits

 

 

483

 

 

599

 

Borrowed funds

 

 

61

 

 

88

 

 

 

 

 

 

 

 

 

Total interest expense

 

 

544

 

 

687

 

 

 

 

 

 

 

 

 

Net interest income

 

 

2,263

 

 

2,063

 

Provision for loan losses

 

 

40

 

 

70

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

2,223

 

 

1,993

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

  

 

 

  

 

Service charges and other fees

 

 

55

 

 

35

 

Net gain on sale of loans

 

 

35

 

 

41

 

Net loss on sale of securities

 

 

 —

 

 

(8)

 

Increase in cash surrender value of insurance

 

 

49

 

 

47

 

Other noninterest income

 

 

24

 

 

25

 

 

 

 

 

 

 

 

 

Total noninterest income

 

 

163

 

 

140

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

  

 

 

  

 

Salaries and employee benefits

 

 

1,132

 

 

1,097

 

Occupancy and equipment

 

 

244

 

 

242

 

Data processing

 

 

206

 

 

175

 

Technology

 

 

60

 

 

78

 

Foreclosed assets, net

 

 

(16)

 

 

 1

 

Professional fees

 

 

108

 

 

112

 

Other noninterest expense

 

 

110

 

 

103

 

 

 

 

 

 

 

 

 

Total noninterest expense

 

 

1,844

 

 

1,808

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

542

 

 

325

 

Provision for income taxes

 

 

135

 

 

76

 

 

 

 

 

 

 

 

 

Net income

 

$

407

 

$

249

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

0.03

 

Diluted

 

$

0.06

 

$

0.03

 

 

See accompanying notes to financial statements.

4

 

FFBW, Inc.

Statement of Comprehensive Income (Loss)

Three Months Ended March 31, 2020 and 2019, (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

    

Three months ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Net income

 

$

407

 

$

249

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

Unrealized holding gains (losses) arising during the period

 

 

997

 

 

592

 

Reclassification adjustment for losses realized in net income

 

 

 —

 

 

 8

 

Other comprehensive income (loss) before tax effect

 

 

997

 

 

600

 

Tax effect of other comprehensive income (loss) items

 

 

(270)

 

 

(163)

 

Other comprehensive income (loss), net of tax

 

 

727

 

 

437

 

Comprehensive income

 

$

1,134

 

$

686

 

 

See accompanying notes to financial statements.

5

FFBW, Inc.

Statement of Changes in Equity

For the Three Months Ended March 31, 2020 and 2019, (Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Unallocated 

    

 

 

    

Accumulated 

 

 

    

 

 

 

 

 

 

Number

 

 

 

 

Additional 

 

Common 

 

 

 

 

Other 

 

 

 

 

 

 

 

 

 

 of 

 

Common 

 

Paid-In 

 

Stock of 

 

Retained 

 

Comprehensive

 

Treasury

 

 

 

 

 

 

Shares

 

Stock

 

Capital

 

ESOP

 

Earnings

 

Income (Loss)

    

Stock

    

Total

 

Balance at December 31, 2018

 

6,696,742

 

$

67

 

$

28,326

 

$

(2,433)

 

$

34,995

 

$

(593)

 

$

 —

 

$

60,362

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

249

 

 

 —

 

 

 —

 

 

249

 

ESOP shares committed to be released (3,801 shares)

 

 —

 

 

 —

 

 

 3

 

 

32

 

 

 —

 

 

 —

 

 

 —

 

 

35

 

Stock based compensation expense

 

 —

 

 

 —

 

 

77

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

77

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

437

 

 

 —

 

 

437

 

Repurchase of common stock

 

(29,436)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(319)

 

 

(319)

 

Balance at March 31, 2019

 

6,667,306

 

$

67

 

$

28,406

 

$

(2,401)

 

$

35,244

 

$

(156)

 

$

(319)

 

$

60,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

7,702,478

 

$

67

 

$

28,672

 

$

(2,303)

 

$

36,551

 

$

344

 

$

(1,461)

 

$

61,870

 

Corporate Reorganization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Conversion of FFBW, Inc. (net of costs of $1.2 million)

 

2,397

 

 

10

 

 

41,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,571

 

 Purchase of 341,485 shares of ESOP

 

 

 

 

 

 

 

 

 

 

(3,814)

 

 

 

 

 

 

 

 

 

 

 

(3,814)

 

 Treasury stock retired

 

 

 

 

 

 

 

(1,461)

 

 

 

 

 

 

 

 

 

 

 

1,461

 

 

 —

 

 Contribution of FFBW, MHC

 

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

407

 

 

 

 

 

 

 

 

407

 

ESOP shares committed to be released (7,647 shares)

 

 

 

 

 

 

 

(15)

 

 

76

 

 

 

 

 

 

 

 

 

 

 

61

 

Stock based compensation expense

 

 

 

 

 

 

 

87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

727

 

 

 

 

 

727

 

Balance at March 31, 2020

 

7,704,875

 

$

77

 

$

68,943

 

$

(6,041)

 

$

36,958

 

$

1,071

 

$

 —

 

$

101,008

 

 

See accompanying notes to financial statements.

6

FFBW, Inc.

Statements of Cash Flows

For the Three Months Ended March 31, 2020 and 2019 (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

    

Three months ended

 

 

March 31,

 

 

2020

    

2019

Increase (decrease) in cash and cash equivalents:

 

 

  

 

 

  

Cash flows from operating activities:

 

 

  

 

 

  

Net income

 

$

407

 

$

249

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

Provision for loan losses

 

 

40

 

 

70

Depreciation

 

 

79

 

 

84

Net accretion of loan portfolio discount and deposit premium

 

 

 —

 

 

(34)

Net amortization on securities available for sale

 

 

81

 

 

103

(Gain) loss on sales and impairments of foreclosed assets

 

 

(11)

 

 

 —

Loss on sale of available for sale securities

 

 

 —

 

 

 8

Increase in cash surrender value of life insurance

 

 

(49)

 

 

(47)

ESOP compensation

 

 

61

 

 

35

Stock based compensation

 

 

87

 

 

77

Changes in operating assets and liabilities:

 

 

  

 

 

 

Accrued interest receivable

 

 

(91)

 

 

(88)

Loans held for sale

 

 

(343)

 

 

679

Other assets

 

 

641

 

 

99

Accrued interest payable

 

 

208

 

 

294

Other liabilities

 

 

(60)

 

 

(24)

Net cash provided by operating activities

 

$

1,050

 

$

1,505

Cash flows from investing activities:

 

 

  

 

 

  

Proceeds from sales of available for sale securities

 

$

 —

 

$

2,133

Maturities, calls, paydowns on available for sale securities

 

 

2,655

 

 

1,147

Purchases of available for sale securities

 

 

(8,624)

 

 

(3,209)

Net (increase) decrease in loans

 

 

(4,012)

 

 

572

Purchases of premises and equipment

 

 

(16)

 

 

(2)

Proceeds from redemption of FHLB stock

 

 

 —

 

 

130

Proceeds from sale of foreclosed assets

 

 

95

 

 

 —

Cash received in MHC merger

 

 

99

 

 

 —

Net cash provided by (used in) investing activities

 

$

(9,803)

 

$

771

Cash flows from financing activities:

 

 

  

 

 

  

Net decrease in deposits

 

$

(53,858)

 

$

(2,267)

Net increase in advance payments by borrowers for taxes and insurance

 

 

334

 

 

375

Repayments of FHLB advances

 

 

 —

 

 

(2,000)

Proceeds from FHLB advances

 

 

 —

 

 

 —

Repurchase of common stock

 

 

 —

 

 

(319)

Purchase of shares of ESOP

 

 

(3,814)

 

 

 —

Net proceeds from issuance of common stock

 

 

41,571

 

 

 —

Net cash used in financing activities

 

$

(15,767)

 

$

(4,211)

Net increase (decrease) in cash and cash equivalents

 

$

(24,520)

 

$

(1,935)

Cash and cash equivalents at beginning

 

 

39,377

 

 

4,488

Cash and cash equivalents at end

 

$

14,857

 

$

2,553

 

 

 

 

 

 

 

Supplemental Cash Flow Disclosures:

 

 

  

 

 

  

Cash paid for interest

 

$

336

 

$

364

Loans transferred to foreclosed assets

 

 

347

 

 

 —

 

See accompanying notes to financial statements

 

7

FFBW, Inc.

Form 10-Q

Notes to Financial Statements (Unaudited – In thousands, except share data)

NOTE 1 – Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included. The results of operations for the three month periods ended March 31, 2020 are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the Financial Statements and notes thereto for the year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (“SEC”) as part of FFBW, Inc.’s Annual Report on Form 10‑K for the year ended December 31, 2019.

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

 

NOTE 2 - Summary of Significant Accounting Policies

Organization

From October 2017 until January 2020, as discussed below, we operated in a two-tier mutual holding company structure. FFBW, Inc. (the Company) was a federal corporation that was the publicly traded stock holding company of First Federal Bank of Wisconsin (the Bank). At December 31, 2019, the Company had 7,702,478 shares of common stock outstanding, of which 3,436,424 shares, or 44.6%, were owned by the public, including 29,325 shares owned by FFBW Community Foundation, and the remaining 4,266,054 shares were held by FFBW, MHC (the MHC), a federally chartered mutual holding company and former parent company of the Company.

 

At December 31, 2019, the significant assets of the Company consisted of the capital stock of the Bank. The liabilities of the Company were insignificant. The Company was subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company was subject to regulation and examination by the Board of Governors of the Federal Reserve System (the Federal Reserve Board).

 

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

 

8

FFBW, Inc. (“New FFBW”), a Maryland corporation that was organized in September 2019, is a savings and loan holding company headquartered in Waukesha, Wisconsin. New FFBW was formed to be the successor to the Company upon completion of the second step mutual-to-stock conversion (the “Conversion”) of the MHC. Prior to completion of the Conversion, approximately 55.4% of the shares of common stock of the Company were owned by the MHC. In conjunction with the Conversion, the MHC and the Company merged into New FFBW. The Conversion was completed on January 16, 2020. In the Conversion, New FFBW sold 4,268,570 shares of common stock at $10.00 per share, for net proceeds of approximately $37.9 million (including purchase of 341,485 ESOP shares), and issued 3,436,430 shares of common stock in exchange for the shares of common stock of FFBW, Inc. a federal corporation, (“Old FFBW”) owned by stockholders of Old FFBW, other than FFBW, MHC, as of the effective date of the conversion.  As a result of the conversion, FFBW, MHC and Old FFBW have ceased to exist.

 

The Conversion was conducted pursuant to the MHC’s Plan of Conversion. The Plan of Conversion provided for the establishment, upon the completion of the Conversion, of special “liquidation accounts” for the benefit of certain depositors of the Bank in an amount equal to the MHC’s ownership interest in the stockholders’ equity of the Company as of the date of the latest balance sheet contained in the prospectus plus the MHC’s net assets (excluding its ownership of the Company). Following the completion of the Conversion, the Company and the Bank are not permitted to pay dividends on their capital stock if the shareholders' equity of New FFBW, or the shareholder's equity of the Bank, would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation accounts. Direct costs of the conversion and public offering, totaling approximately $1.2 million, have been applied against the proceeds from the shares sold in the public offering.

 

Use of Estimates

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

Revenue Recognition

 

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

 

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

 

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

9

the accounting treatment for these fees under the new revenue standards. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

 

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

 

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from banks, non-maturity deposits in the Federal Home Loan Bank of Chicago (FHLB), and fed funds sold. The Company has not experienced any losses in such accounts.

 

Available for Sale Securities

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

 

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

 

Loans Acquired in a Transfer

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

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

At each reporting date, the Company continues to estimate cash flows expected to be collected for each loan or pool. If expected cash flows have decreased from the acquisition date estimate, the Company recognizes an allowance for loan

10

losses. If expected cash flows have increased from the acquisition date estimate, the Company increases the amount of accretable yield to be recognized as interest income over the remaining life of the loan or pool.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are sold with the mortgage servicing rights released by the Company. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loan sold.

Loans

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

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

Allowance for Loan Losses

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

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

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

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

11

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

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

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

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

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

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

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

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

12

Troubled Debt Restructurings

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

Foreclosed Assets

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

Premises and Equipment

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

Other Equity Investments

 

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

Income Taxes

 

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

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

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

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

13

Transfers of Financial Assets

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

Advertising

Advertising costs are expensed as incurred.

Other Comprehensive Income (Loss)

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

Off-Balance Sheet Financial Instruments

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

Life Insurance

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

Subsequent Events

Subsequent events have been evaluated through May 8, 2020, which is the date the financial statements are available to be issued.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company.  The World Health Organization has declared Covid-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.

 

The spread of the outbreak will likely cause disruptions in the U.S. economy and is highly likely to disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company. 

 

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  If the global response to contain COVID-19 escalates or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. 

14

Recent Accounting Pronouncements

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

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

 

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

 

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

 

The following ASUs have been issued by the FASB and may impact the Company's financial statements in future reporting periods:

 

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

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

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

 

ASU 2016-13 requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently assessing the impact of adopting ASU 2016-13 on its financial statements.

 

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

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

ASU No. 2018-11, "Targeted Improvements"

 

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

 

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

 

15

The new standard is effective for the Company on January 1, 2021, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) the new standard's effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company expects to adopt the new standard on January 1, 2021 using the effective date as its date of initial application. The Company is evaluating what impact this standard will have on its consolidated financial statements.

 

NOTE 3 – Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding, adjusted for weighted average unallocated ESOP shares, during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. Antidilutive options are disregarded in earnings per share calculations.

 

The following table presents the earnings per share calculations for the three months ended March 31:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Net income

 

$

407

 

$

249

 

Basic potential common shares

 

 

  

 

 

  

 

Weighted average shares outstanding

 

 

7,704,875

 

 

7,850,247

 

Weighted average unallocated Employee Stock Ownership Plan Shares

 

 

(607,924)

 

 

(284,085)

 

Basic weighted average shares outstanding

 

 

7,096,951

 

 

7,566,162

 

Dilutive potential common shares

 

 

 —

 

 

258

 

Dilutive weighted average shares outstanding

 

 

7,096,951

 

 

7,566,420

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.06

 

$

0.03

 

Diluted earnings per share

 

$

0.06

 

$

0.03

 

 

16

NOTE 4 – Available for Sale Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross 

    

Gross 

    

Estimated 

 

 

Amortized

 

Unrealized 

 

Unrealized 

 

Fair 

 

 

 Cost

 

Gains

 

Losses

 

Value

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of the US government and US government sponsored agencies

 

$

866

 

$

22

 

$

 —

 

$

888

Obligations of states and political subdivisions

 

 

10,957

 

 

205

 

 

(28)

 

 

11,134

Mortgage-backed securities

 

 

39,222

 

 

1,312

 

 

(60)

 

 

40,474

Certificates of deposit

 

 

750

 

 

25

 

 

 —

 

 

775

Corporate debt securities

 

 

1,801

 

 

10

 

 

(19)

 

 

1,792

Total available for sale securities

 

$

53,596

 

$

1,574

 

$

(107)

 

$

55,063

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019