ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company’s financial condition and results of operations. It is intended to complement the consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Annual Report on Form 10-K and should be read in conjunction therewith. The detailed discussion in the sections below focuses on the results of operations for the year ended December 31, 2022, compared to
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the year ended December 2021, and the financial condition as of December 31, 2022 compared to the financial condition as of December 31, 2021. For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, see “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” Discussion of Results of Operations included in our 2021 Form 10-K, filed with the SEC on March 29, 2022. The information in this section has been derived from the audited financial statements, which appear beginning on page F-1 of this Annual Report on Form 10-K.
Business Strategy
Our goal is to provide long-term value to our stockholders, customers and employees and the communities we serve by executing a safe and sound business strategy that produces increasing earnings. We believe there is a significant opportunity for a community-focused bank to provide a full range of financial services to commercial and retail customers in our market area.
Our current business strategy consists of the following:
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Grow our balance sheet and improve profitability. Given our attractive market area, we believe we are well-positioned to increase the size of our balance sheet without a proportional increase in overhead expense or operating risk. Accordingly, we intend to increase, on a disciplined basis, our assets and liabilities, particularly loans and deposits. As we grow our assets, particularly higher-yielding commercial loans, while controlling our expenses, we anticipate improving our earnings.
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Grow our loan portfolio prudently and on a managed basis with a focus on diversifying the portfolio, particularly in commercial real estate and commercial lending. Our principal business activity historically has been the origination of residential mortgage loans, supplemented with commercial real estate loans (which includes non-owner occupied commercial real estate, multi-family, owner occupied commercial real estate and one- to four-family non-owner-occupied loans). We intend to retain our presence as a mortgage lender in our market area and continue to increase our origination of commercial real estate and commercial loans (which includes commercial and industrial loans) including increasing our loan exposure in participations purchased. Over the last several years, we have incrementally increased the amount of some of our commercial real estate and commercial loan originations to preferred borrowers, and we intend to continue to originate similarly-sized loans within our present underwriting standards.
Increasing the number of larger commercial real estate loans and commercial business loan originations involves risk, as described in “Risk Factors—We have a substantial amount of commercial real estate and commercial loans, and intend to continue to increase originations of these types of loans both directly and through participations. These loans involve credit risks that could adversely affect our financial condition and results of operations” and “Our portfolio of loans with a higher risk of loss has and is expected to increase, which may lead to additional provisions for loan losses or charge-offs, which would reduce our profits or cause losses.”
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Continue to increase core deposits, with an emphasis on low-cost demand deposits. We seek core deposits to provide a stable source of funds to support loan growth at costs consistent with improving our net interest rate spread and margin. Core deposits also help us maintain loan-to-deposit ratios at levels consistent with regulatory expectations. We consider our core deposits to include checking accounts, money market accounts and statement savings. In particular, our Treasury Management unit focuses on generating and retaining business deposits, which assists in generating fee income. Core deposits increased to $308.2 million at December 31, 2022, from $303.9 million at December 31, 2021.
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Manage credit risk to maintain a low level of non-performing assets. We believe strong asset quality is a key to our long-term financial success. Our strategy for credit risk management focuses on having an experienced team of credit professionals, well-defined policies and procedures, appropriate loan underwriting criteria and active credit monitoring. In recent years we have conducted an extensive review of, and have enhanced, our credit, underwriting and loan processing policies and procedures. Our non-performing assets to total assets ratio was 0.14% at December 31, 2022, compared to 0.19% at December 31, 2021. At December 31, 2022, the majority of our non-performing assets were related to residential real estate.
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Continue to grow organically while being aware of acquisition opportunities. In addition to organic growth, we will also consider acquisition opportunities that we believe would enhance the value of our franchise and yield potential financial benefits for our stockholders. Although we believe opportunities exist to increase our market share in our historical markets, we expect to continue to expand into nearby markets in Wisconsin. We will consider expanding our branch network by establishing new (“de novo”) branches and/or through acquisitions, although we have no current acquisitions or new branches planned.
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Continue to provide value to our community. Our goal is to provide long-term value to our customers, employees and the communities we serve by executing a safe and sound service-oriented business strategy that produces increasing earnings. We believe there is a significant opportunity for a community-focused bank to provide a full range of financial services to commercial and retail customers in our market area.
Critical Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be critical accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our critical accounting policies:
Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical accounting policies.
Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.
The analysis has two components, specific and general allowances. The specific allowance is for unconfirmed losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral, adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge is recorded for the difference. The general allowance, which is for loans reviewed collectively, is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes historical loss percentages and qualitative factors that are applied to the loan groups to determine the amount of the allowance for loan losses necessary for loans that are reviewed collectively. The qualitative component is critical in determining the allowance for loan losses as certain trends may indicate the need for changes to the allowance for loan losses based on factors beyond the historical loss history. Not incorporating a qualitative component could misstate the allowance for loan losses. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.
Fair Value Measurements. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. We estimate the fair value of a financial instrument and any related asset impairment using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and any imprecision in estimating these factors can impact the amount of gain or loss recorded. A more detailed description of the fair values measured at each level of the fair value hierarchy and the methodology utilized by us can be found in Note 15 of the notes to our audited consolidated financial statements titled “Fair Value.”
Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
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amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income including consideration of applicable tax planning strategies. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, weigh all positive and negative evidence and are reviewed on a regular basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Comparison of Financial Condition at December 31, 2022 and December 31, 2021
Total Assets. Total assets were $543.0 million at December 31, 2022, an increase of $3.4 million, or 0.6%, when compared to total assets of $539.6 million at December 31, 2021. The increase was primarily due to a $35.8 million increase in net loans, a $5.1 million increase in other assets and a $2.1 million increase in available-for-sale securities. This increase was partially offset by a $38.5 million decrease in cash and cash equivalents.
Cash and Cash Equivalents. Cash and cash equivalents decreased $38.5 million, or 57.6%, to $28.3 million at December 31, 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, a $36.3 million increase in loans, the origination of $21.9 million in mortgage loans held for sale and $21.0 million in principal payments on FHLB advances. These decreases in cash and cash equivalents were partially offset by $37.0 million in proceeds from FHLB advances, $23.6 million from the sale of mortgage loans held for sale and $19.0 million from maturities and payments on available-for-sale securities.
Available-for-Sale Securities. Available-for-sale securities increased $2.1 million, or 1.9%, to $114.5 million at December 31, 2022, from $112.4 million at December 31, 2021. The increase was primarily due to purchases of securities totaling $37.1 million, offset by maturities, prepayments and calls of securities totaling $19.0 million and a $15.9 million increase in the unrealized loss on securities held within the portfolio. The increase in securities purchases was the result of management’s strategy, implemented in the fourth quarter of 2021 and substantially concluded in the first quarter of 2022, 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. During the remainder of 2022, the purchase of additional securities significantly decreased and the maturity, payments and calls of securities were primarily used to partially fund the growth of the loan portfolio. From December 31, 2021 to December 31, 2022, U.S. Treasury notes increased $7.1 million and government-sponsored mortgage-backed securities increased $118,000, while obligations of states and political subdivisions decreased $3.1 million and asset-backed securities decreased $2.0 million.
Loans Held for Sale. Loans held for sale decreased $1.1 million, or 89.6%, to $125,000 at December 31, 2022, from $1.2 million at December 31, 2021. This decrease was due primarily to a decrease in the volume of first mortgage residential real estate loan originations to be sold into the secondary market as a result of the changing interest rate environment. Originations of mortgage loans held for sale decreased $99.7 million, from $121.6 million in 2021 to $21.9 million in 2022.
Net loans. Net loans increased $35.8 million, or 11.1%, to $359.6 million at December 31, 2022, from $323.8 million at December 31, 2021. The increase was primarily due to a $25.6 million net increase in commercial real estate loans, a $5.5 million net increase in commercial loans and a $4.8 million net increase in first mortgage residential real estate loans. The increase in commercial real estate and commercial loans is a result of the Company's strategy to diversify its loan portfolio into these types of loans.
Included in the loan totals above are loans purchased from other financial institutions. As of December 31, 2022 loan participations purchased totaled $31.6 million, an increase of $29.5 million from the $2.1 million of loans purchased as of December 31, 2021. In addition, the amount available for future draws on these loans totaled $41.2 million at December 31, 2022. Loans purchased during the years ended December 31, 2022 and 2021 were commercial real estate and other commercial loans. While PyraMax Bank’s primary strategy is to grow the loan portfolio organically, the purchase of loan participations was a significant source of our loan growth during 2022 and we will likely continue to consider and evaluate the purchase of additional loan participations from other financial institutions in the future.
During the year ended December 31, 2022, volumes of loan originations were as follows: $158.7 million in commercial real estate and other commercial loans, an increase of $30.2 million from the $128.5 million in originations of these loan types during the year ended December 31, 2021; $38.7 million in total residential real estate loans, a decrease of $118.8 million from the $157.5 million in originations of these loan types during the year ended December 31, 2021; and $14.5 million in total consumer and consumer real estate loans, an increase of $3.4 million from the $11.1 million in originations of these loan types during the year ended December 31, 2021.
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Other Assets. Other assets increased $5.1 million, or 83.6%, to $11.2 million at December 31, 2022, from $6.1 million at December 31, 2021. This increase was primarily due to a $4.5 million increase in deferred tax assets, which was primarily the result of the increase in unrealized losses on available-for-sale securities. Other assets also increased as a result of a $452,000 increase in right-of-use lease assets as a result of the adoption of ASU 2016-02 in the first quarter of 2022.
Deposits. Deposits increased $3.2 million, or 0.8%, to $387.7 million at December 31, 2022, from $384.5 million at December 31, 2021. This increase was primarily due to a $26.4 million increase in money market deposits partially offset by a $14.2 decrease in non-interest bearing checking deposits, a $5.0 million decrease in interest bearing checking deposits, a $3.0 million decrease in statement savings deposits and a $1.0 million reduction in certificates of deposit.
During the second half of 2022, market rates of interest began to rise significantly. This increase was due to a number of factors, including the increase in the current and expected rates of inflation. As market rates increased, we also increased the rates paid on our interest-bearing deposits in order to remain competitive with deposit products at other financial institutions and treasury securities. The most significant increase in our deposit rates were made to our money market accounts and certificates of deposit. As a result of the increase in the rate on our money market accounts, a number of depositors transferred their monies from noninterest bearing checking accounts and lower rate interest-bearing checking and savings accounts to money market accounts.
FHLB Advances. Borrowings, consisting entirely of FHLB advances, increased $16.1 million, or 29.1%, to $71.5 million at December 31, 2022, from $55.4 million at December 31, 2021. The increase was primarily due to the use of FHLB advances to partially fund the growth of the loan portfolio. During 2022, the Company borrowed an additional $37.0 million in FHLB advances, which were offset by $20.9 million in maturities of and principal payments on outstanding FHLB advances.
Total Equity. Total equity decreased $15.5 million, or 17.1%, to $75.4 million at December 31, 2022, from $90.9 million at December 31, 2021. The decrease was primarily due to an $11.6 million decrease in accumulated other comprehensive income, which was primarily the result of the increase in the unrealized loss on available-for-sale securities, net of tax. In addition, the repurchase and retirement of shares under the Company's stock repurchase plan resulted in a $3.2 million decrease in total equity and the purchase of shares of stock by the Company's ESOP resulted in a $1.1 million decrease in total equity.
Comparison of Operating Results for the Years Ended December 31, 2022 and December 31, 2021
Net Income. We recorded a net loss of ($148,000) for the year ended December 31, 2022, which represented a decrease of $233,000 from the net income of $85,000 recorded for the year ended December 31, 2021. This decrease was primarily the result of a $2.6 million decrease in noninterest income, partially offset by a $1.7 million increase in net interest income and a $640,000 decrease in noninterest expense.
Interest and Dividend Income. Interest and dividend income increased $2.2 million, or 15.5%, to $16.4 million for the year ended December 31, 2022, from $14.2 million for the year ended December 31, 2021. The increase was due primarily to a $990,000 increase in interest income on loans, which increased from $12.6 million in 2021 to $13.6 million in 2021 and a $944,000 increase in interest income on taxable securities, which increased from $1.4 million in 2021 to $2.3 million in 2022. The increase in interest income on loans was primarily due to a $13.9 million increase in the average amount of loans outstanding, from $332.0 million in 2021 to $346.0 million in 2022, and a 14 basis point increase in the yield earned on loans, from 3.79% in 2021 to 3.93% in 2022. The increase in the yield earned on loans was primarily due to the increase in market rates. Also contributing to the increase in the yield on loans was the receipt of $466,000 as the result of loan prepayment fees and the collection of interest on a previously charged off loan during 2022. The increase in loans is consistent with the Company's strategy to grow the loan portfolio. The increase in interest income on taxable securities was primarily due to the Company's strategy to deploy excess liquidity into securities, which resulted in a $42.5 million increase in the average amount securities outstanding, from $83.0 million in 2021 to $125.5 million in 2022. Also contributing to the increase in interest earned on taxable securities was a 19 basis point increase in the yield earned on securities, from 1.68% in 2021 to 1.87% in 2022, which was primarily due to the increase in market rates.
Average interest-earning assets increased $1.2 million, or 0.2%, to $502.1 million for the year ended December 31, 2022, from $500.9 million for the year ended December 31, 2021. The weighted average yield on interest-earning assets increased 43 basis points, to 3.27% for 2022, from 2.84% for 2021.
Interest Expense. Interest expense increased $455,000, or 29.6%, to $2.0 million for the year ended December 31, 2022, from $1.5 million for the year ended December 31, 2021. Interest expense on deposits increased $332,000, or 42.4%, from $784,000 in 2021 to $1.1 million in 2022. The increase in interest expense on deposits was primarily due to an increase in the average cost of deposits which increased 12 basis points, from 0.28% in 2021 to 0.40% in 2022. Interest expense on money market accounts made up the majority of the increase in interest expense on deposits and increased $304,000, from $261,000 in 2021 to $565,000 in 2022.
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Interest expense on other borrowings, which consists primarily of FHLB advances, increased $114,000, or 15.2%, from $752,000 in 2021 to $866,000 in 2022. The increase in our cost of deposits and other borrowings was primarily due to the increase in market rates.
Net Interest Income. Net interest income increased $1.7 million, or 13.4%, to $14.4 million for the year ended December 31, 2022, from $12.7 million for the year ended December 31, 2021. The increase was the result of a $2.2 million increase in interest income, partially offset by $455,000 increase in interest expense. Our net interest spread increased 29 basis points from 2.40% in 2021 to 2.69% in 2022. Our net interest margin increased 34 basis points from 2.54% in 2021 to 2.88% in 2022.
Provision for Loan Losses. We recorded $222,000 in provision for loan losses for the year ended December 31, 2022, compared to $30,000 for the year ended December 31, 2021. The increase in the provision expense was primarily due to the growth in the loan portfolio during the year and the establishment of loan loss reserves related to these loans. The allowance for loan losses was $3.2 million, or 0.89% of total loans, at December 31, 2022, compared to $2.9 million, or 0.88% of total loans, at December 31, 2021. Nonaccrual loans constituted 0.21% of total gross loans at December 31, 2022 and 0.32% of gross loans at December 31, 2021. Net recoveries for the year ended December 31, 2022 were $123,000 compared to net recoveries of $125,000 for the year ended December 31, 2021.
Noninterest Income. Noninterest income decreased $2.6 million, or 60.5%, from $4.3 million for the year ended December 31, 2021 to $1.7 million for the year ended December 31, 2022. The decrease was due primarily to a $1.2 million decrease in net gain on sale of loans, a $936,000 decline in income associated with changes in the market value of marketable equity securities and a $462,000 decrease in loan servicing fees. The decrease in net gain on sale of loans was primarily the result of a decrease in the sale of mortgage loans, which decreased $100.8 million, or 81.0% from $124.4 million in 2021 to $23.6 million in 2022. The decline in sales was due primarily to higher mortgage rates and lower housing inventory. The decrease in loan servicing fees was also primarily due to the decrease in loan sales and originations, which resulted in a $28.7 million decrease in the outstanding amount of loans serviced by the Company. The decrease in the market value of marketable equity securities was due to a decrease in the market value of mutual funds held in our deferred compensation plans. We record an offsetting amount for the changes in the market value of equity funds in noninterest expense.
Noninterest Expense. Noninterest expense decreased $640,000, or 3.8%, to $16.3 million for the year ended December 31, 2022 from $16.9 million for the year ended December 31, 2021. This decrease was due primarily to a $647,000 decrease in salaries and employee benefits. The decrease in salaries and benefits was primarily due to a $936,000 decline in the market value of marketable equity securities held in our deferred compensation plan. We record an offsetting amount for the changes in the market value of equity funds in noninterest income. This decrease was partially offset by a $131,000 increase in incentive bonuses and a $122,000 increase in stock compensation expense.
Income Taxes. Income tax benefit was ($171,000) for the year ended December 31, 2022, compared to income tax benefit of ($64,000) for the year ended December 31, 2021.
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 positive and negative evidence, if 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. Realization of the deferred tax asset is dependent on whether there will be sufficient future taxable income, including available tax strategies, of the appropriate character in the period during which deductible temporary differences reverse or within the carryforward periods available under tax law.
Due to recent changes in market conditions and events related to COVID-19, the board and management continue to assess our deferred tax assets including forecasted future projected income and future reversals of existing temporary differences. As such, there may be additional deferred tax asset impairment in subsequent periods.
We had federal loss carryforwards of $10.5 million as of December 31, 2022. Of this amount, $2.5 million represents a tax loss carryforward from the 2019 and 2022 tax years which has an indefinite carryforward period due to the Tax Cuts and Jobs Act of 2017. The remaining $8.0 million of losses begin to expire in 2030. We also had $473,000 of charitable contribution carryforwards at December 31, 2022 that may be applied against future taxable income and begin to expire in 2024.
We had Wisconsin net operating loss carryforwards of $20.7 million as of December 31, 2022, that may be applied against future state taxable income and which begin to expire in 2024. We also had $476,000 of Wisconsin charitable contribution carryforwards at December 31, 2022 that may be applied against future state taxable income and begin to expire in 2024.
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As a result of our reorganization and conversion from the two-tier mutual holding company structure to a fully converted stock holding company and contemporaneous stock offering, the Company incurred an “ownership change” under Section 382 of the Internal Revenue Code (“Section 382”) for both federal and Wisconsin state tax purposes. In general, if a company incurs an ownership change under Section 382, the company’s ability to utilize its net operating loss carryforward to offset its taxable income becomes limited to a certain amount per year. This limitation is generally computed by multiplying the fair market value of the company immediately before the ownership change by an IRS published rate equal to the long-term tax-exempt rate for the month in which the ownership change occurs. If we are unable to offset our taxable income to the maximum permitted amount, we may incur additional income tax liability, which would adversely affect our results of operations. At this time, we do not expect the Section 382 change in ownership to have a material impact on the results of operations.
Under the Tax Cuts and Jobs Act of 2017, for federal losses originating in tax years after January 1, 2018, we are allowed an indefinite carryforward period limited to 80% of each subsequent year’s net income. The CARES Act temporarily repealed this 80% limitation for the calendar year ended December 31, 2020.
Wisconsin law generally allows financial institutions to carry forward a Wisconsin net operating loss to the succeeding 20 taxable years.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit realization of the existing deferred tax assets. Such objective historical evidence limits the ability to consider projections for future growth as subjective evidence.
On the basis of this evaluation, as of December 31, 2022 and 2021, a valuation allowance of $934,000 has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence is no longer present and additional weight is given to subjective evidence such as our projections for growth.
The Company believes that it is more likely than not that the benefit from certain federal charitable contribution carryforwards, state net operating loss carryforwards, and state charitable contribution carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $934,000 on the deferred tax assets related to these carryforwards in 2022 and 2021.
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Average Balances and Yields. The following tables sets forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
(Dollars in thousands)
Interest-earning assets:
Interest-earning liabilities:
Other interest-bearing liabilities 7,404 9 0.12 % 8,573 — — %
Other non-interest-bearing liabilities 6,620 6,096
Total liabilities and stockholders’ equity $ 537,603 $ 534,164
Interest rate spread (2) 2.69 % 2.40 %
Net interest margin (3) 2.88 % 2.54 %
(1)
Includes loan fees of $434,000 for 2022 and $750,000 for 2021.
(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.
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Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in average rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior period average rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume. There were no out-of-period items or adjustments included within the following table.
Increase (Decrease) Due to
Volume Rate TotalIncrease(Decrease)
(Dollars in thousands)
Interest-earning assets:
Other interest-earning assets (40 ) 306 266
Interest-bearing liabilities:
Negotiable order of withdrawal accounts (1 ) (39 ) (40 )
Money market accounts 2 (306 ) (304 )
Savings accounts (1 ) 3 2
Certificates of deposit 5 5 10
Total interest-bearing deposits 5 (337 ) (332 )
Other — (9 ) (9 )
Total interest-bearing liabilities 28 (483 ) (455 )
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors.
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings. Among the techniques we use to manage interest rate risk are:
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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;
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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
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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. The committee meets 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
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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 material 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 December 31, 2022, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the U.S. Treasury yield curve
(Dollars in thousands)
(1)
Assumes an immediate uniform change in interest rates at all maturities.
Economic Value of Equity. We 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 December 31, 2022, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
Estimated Increase (Decrease) in EVE
Basis Point Change in Interest Rates (1) Estimated EVE (2) Amount Percent
(Dollars in thousands)
(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.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE requires 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
48
measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results.
EVE calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the Federal Home Loan Bank of Chicago. At December 31, 2022, we had $71.5 million outstanding in advances from the Federal Home Loan Bank of Chicago. At December 31, 2022, we had $100.0 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at December 31, 2022, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at December 31, 2022. We also had a $9.1 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $11.9 million at December 31, 2022. We had not drawn on the Federal Reserve line as of December 31, 2022.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and cash equivalents and available-for-sale investment securities. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was approximately $2.6 million and $2.8 million for the years ended December 31, 2022 and December 31, 2021, respectively. Net cash used in investing activities was $55.1 million and $50.5 million for the years ended December 31, 2022 and December 31, 2021, respectively. Net cash used in investment activities during 2022, was primarily due to the purchase of $37.1 million of available-for-sale securities and a $36.3 million increase in net loans, partially offset by proceeds from the sale and maturity of available-for-sale securities of $19.0 million. Net cash used in investing activities during 2021, was primarily due to the purchase of $68.8 million of available-for-sale securities, partially offset by proceeds from the sale and maturity of available-for-sale securities of $12.4 million and a $5.3 million decrease in net loans. Net cash provided by financing activities was $14.1 million for the year ended December 31, 2022. This increase was primarily due to $37.0 million of proceeds from FHLB advances and a $3.2 million increase in deposits, partially offset by $21.0 million in principal payments on FHLB advances and $3.2 million paid for the repurchase of common stock under the stock repurchase plan. Net cash provided by financing activities was $22.0 million for the year ended December 31, 2021, consisting primarily of $35.4 million in gross proceeds from the July 2021 stock offering and a $4.7 million increase in deposits, partially offset by $13.0 million in principal payments on FHLB advances, $2.0 million for the purchase of ESOP shares and $2.0 million in stock offering costs.
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 and the continued use of Federal Home Loan Bank of Chicago advances as well as brokered certificates of deposit as needed, we believe we will have the capacity to fund loan growth as well as maintain a strong liquidity position.
At December 31, 2022, PyraMax Bank exceeded all regulatory capital requirements with total risk-based capital of $68.7 million, or 17.5% of adjusted total assets, which is above the well-capitalized required level of $39.4 million, or 10%; and tier 1 capital of $65.5 million, or 16.6% of risk-weighted assets, which is above the well-capitalized required level of $31.5 million, or 8%. There are no conditions or events since December 31, 2022 that management believes have changed our regulatory capital classification of well-capitalized.
Off-Balance Sheet Arrangements and Contractual Obligations
Commitments.As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 11 of the notes to the financial statements.
49
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.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the notes to our financial statements.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP 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.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
For information regarding market risk, see “Item 7. Management’s Discussion and Analysis.”
ITEM 8. Financial Statements and Supplementary Data
The Company’s Consolidated Financial Statements are presented in this Annual Report on Form 10-K beginning at page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
(a) 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 December 31, 2022. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
(b) The Bank’s management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Bank conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Bank’s system on internal control over financial reporting was effective and met the criteria of the “Internal Control — Integrated Framework (2013)” as of December 31, 2022.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2022, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15-d15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B. Other Information
None.
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
50
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on the Company’s website at www.pyramaxbank.com under “Investor Relations – Governance Documents.”
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
ITEM 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)
Securities Authorized for Issuance under Stock-Based Compensation Plans
Set forth below is information as of December 31, 2022 regarding the Company’s equity compensation plans that have been approved by shareholders. The Company has no equity-based benefit plans, other than its employee stock ownership plan, that were not approved by shareholders.
Equity compensation plans approved by shareholders 855,902 $ 8.27 29,043
(1)
No further grants will be made under the 2020 Equity Incentive Plan, which remains in existence solely for the purpose of administering outstanding grants thereunder. On December 31, 2022, 645,603 options were outstanding with a weighted average exercise price of $8.27 of which 110,719 were exercisable as of that date. On December 31, 2022, 210,299 restricted stock awards were nonvested with a weighted average grant date fair value of $8.72.
(b)
Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
(c)
Security Ownership of Management
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
(d)
Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
51
ITEM 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the Proxy Statement to be filed for the Annual Meeting of Stockholders to be held on May 19, 2023.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The documents filed as a part of this Form 10-K are:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Balance Sheets as of December 31, 2022 and 2021
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
52
(a)(3) Exhibits
21 Subsidiaries
23 Consent of Wipfli LLP (U.S. PCAOB Auditor Firm ID 344)
53
* Furnished, not filed
ITEM 16. Form 10-K Summary
None.
54
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
1895 Bancorp of Wisconsin, Inc.
Date: March 30, 2023 By: /s/ David R. Ball
David R. BallChief Executive Officer(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ David R. Ball President, Chief Executive Officer and Director March 30, 2023
David R. Ball (Principal Executive Officer)
Steven T. Klitzing
/s/ Darrell Francis Chairman of the Board March 30, 2023
Darrell Francis
Monica Baker
/s/ Joseph Murphy Director March 30, 2023
Joseph Murphy
/s/ James Spiegelberg Director March 30, 2023
James Spiegelberg
/s/ John Talsky Director March 30, 2023
John Talsky
/s/ Gary Zenobi Director March 30, 2023
Gary Zenobi
55
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of 1895 Bancorp of Wisconsin, Inc.
Greenfield, Wisconsin
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of 1895 Bancorp of Wisconsin, Inc. and Subsidiary (the "Company") as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity, and cash flows, for each of the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Wipfli LLP
Wipfli LLP
We have served as the Company’s auditor since 2011.
Eau Claire, Wisconsin
March 30, 2023
F-1
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
Assets
Marketable equity securities, stated at fair value 2,924 3,544
Available-for-sale securities, stated at fair value 114,492 112,440
Mortgage servicing rights, net 1,860 2,036
Federal Home Loan Bank (FHLB) stock, at cost 3,429 3,032
Accrued interest receivable 1,257 948
Liabilities and Stockholders' Equity
Advance payments by borrowers for taxes and insurance 1,029 1,860
Accrued interest payable 291 109
Accumulated other comprehensive (loss) income, net of income taxes (11,491 ) 142
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 543,016 $ 539,639
See accompanying notes to the consolidated financial statements.
F-2
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share per share data)
Years ended December 31,
Interest and dividend income:
Interest expense:
Other interest-bearing funds 9 —
Provision for loan losses 222 30
Net interest income after provision for loan losses 14,225 12,672
Noninterest income:
Service charges and other fees 962 964
Net gain on sale of securities 0 12
Increase in cash surrender value of insurance 424 407
Unrealized (loss) gain on marketable equity securities (714 ) 222
Noninterest expense:
Advertising and promotions 184 111
(Loss) income before income taxes (319 ) 21
Income tax (benefit) (171 ) (64 )
Net (loss) income $ (148 ) $ 85
(Loss) earnings per share:
Average common shares outstanding:
See accompanying notes to the consolidated financial statements.
(1) Diluted loss per share and average shares outstanding excludes all common shares if their effect is anti-dilutive.
F-3
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Years ended December 31,
Net (loss) income $ (148 ) $ 85
Other comprehensive (loss) income:
Other comprehensive (loss) income before tax effect (15,935 ) (1,364 )
Tax effect of other comprehensive (loss) income items 4,302 368
Other comprehensive (loss) income, net of tax (11,633 ) (996 )
Comprehensive (loss) income $ (11,781 ) $ (911 )
See accompanying notes to the consolidated financial statements.
F-4
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Net income — — — — 85 — 85
Other comprehensive loss — — — — — (996 ) (996 )
Purchase of treasury stock by Rabbi Trust — — (136 ) — — — (136 )
Sales of treasury stock by Rabbi Trust — — 10 — — — 10
Repurchase of common stock — (15 ) — — — — (15 )
Contribution from 1895 Bancorp of Wisconsin, MHC — 100 — — — — 100
Stock offering costs — (1,988 ) — — — — (1,988 )
Retirement of treasury shares from stock offering — (1,053 ) 1,053 — — — —
ESOP shares committed to be released (22,401 shares) — 22 — 224 — — 246
Retirement of common stock — (69 ) — — — — (69 )
Stock options exercised — 30 — — — — 30
Stock compensation expense — 241 — — — — 241
Net loss — — — — (148 ) — (148 )
Other comprehensive loss — — — — — (11,633 ) (11,633 )
Reimbursement of stock offering costs — 2 — — — — 2
ESOP shares committed to be released (19,730 shares) — 13 — 187 — — 200
Retirement of common stock — (81 ) — — — — (81 )
Restricted stock award grants 1 (1 ) — — — — 0
Stock compensation expense — 363 — — — — 363
Transactional rounding — — — — 1 — 1
See accompanying notes to the consolidated financial statements.
F-5
1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
Cash flows from operating activities
Net (loss) income $ (148 ) $ 85
Net amortization of investment securities 145 221
Provision for loan losses 222 30
Net change in fair value of marketable equity securities 714 (222 )
Net gain on sale of available-for-sale securities — (12 )
Stock compensation expense 363 241
Adjustment to mortgage servicing rights valuation — (369 )
(Benefit from) deferred income tax (171 ) (64 )
Originations of mortgage loans held for sale (21,941 ) (121,562 )
Proceeds from sales of mortgage loans held for sale 23,634 124,366
Net gain on sale of mortgage loans held for sale (310 ) (1,503 )
Net change in cash value of life insurance (424 ) (407 )
Changes in operating assets and liabilities:
Net change in mortgage servicing rights 176 139
Accrued interest receivable and other assets (520 ) (174 )
Accrued interest payable and other liabilities 45 1,108
Net cash provided by operating activities 2,585 2,777
Cash flows from investing activities
Proceeds from sales of available-for-sale securities — 1,018
Maturities, prepayments and calls of available-for-sale securities 19,006 12,442
Purchase of available-for-sale securities (37,138 ) (68,770 )
Purchase of marketable equity securities (94 ) (330 )
Net (increase) decrease in loans (36,331 ) 5,254
Net capital expenditures for premises and equipment (187 ) (243 )
Net increase in Federal Home Loan Bank stock (397 ) —
Cash received in MHC merger — 100
Net cash used in investing activities (55,141 ) (50,529 )
Cash flows from financing activities
Proceeds from the issuance of Federal Home Loan Bank advances 37,000 —
Principal payments on Federal Home Loan Bank advances (20,978 ) (12,956 )
Gross proceeds from stock offering — 35,418
Stock offering costs — (1,988 )
Reimbursement of stock offering costs 2 —
Repurchase of common stock for cancellation (3,173 ) —
Purchase of treasury stock — (151 )
Purchases of ESOP shares (1,062 ) (2,041 )
Retirement of common stock (81 ) (69 )
Sale of treasury stock by Rabbi Trust — 10
Stock options exercised — 30
Net cash provided by financing activities 14,097 22,029
Net (decrease) in cash and cash equivalents (38,459 ) (25,723 )
Cash and cash equivalents at beginning of year 66,803 92,526
Cash and cash equivalents at end of year $ 28,344 $ 66,803
Supplemental cash flow information:
Cash paid during the year for interest $ 1,809 $ 1,610
Cash received during the year for income taxes $ — $ (196 )
Noncash activities:
Loans transferred to loans held for sale 325 10,322
Lease liabilities arising from obtaining right-of-use assets 528 —
Issuance of treasury stock – stock compensation plans — 15
Retirement of treasury stock — 1,053
See accompanying notes to the consolidated financial statements.
F-6
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE 1 — Summary of Significant Accounting Policies
Organization
1895 Bancorp of Wisconsin, Inc., a Maryland corporation (the “Company”, “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. The shares of Old 1895 Bancorp common stock owned by 1895 Bancorp of Wisconsin, MHC were canceled at that time. The conversion and offering were completed on July 14, 2021, and New 1895 Bancorp was organized as a fully public stock holding company, with 100% of the common stock being held by the public. The audited consolidated financial statements and other financial information contained in these consolidated financial statements are for New 1895 Bancorp.
The cost of the reorganization and the issuing of the common stock totaling $2.0 million were deferred and deducted from the sales proceeds of the offering.
PyraMax Bank is a stock savings bank headquartered in Greenfield, Wisconsin. PyraMax Bank operates as a full-service financial institution, providing a full range of financial services, including the granting of commercial, residential, and consumer loans and acceptance of deposits from individual customers and small businesses in the metropolitan Milwaukee, Wisconsin, area. PyraMax Bank is subject to competition from other financial and nonfinancial institutions providing financial products. In addition, PyraMax Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.
Jumpstart Our Business Startups Act
The Jumpstart Our Business Startups Act (the JOBS Act), which was signed into law on April 5, 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an “emerging growth company” and believes that it will continue to qualify as an “emerging growth company” until five years from the completion of the stock offering.
As an “emerging growth company,” the Company has elected 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. Accordingly, the financial statements may not be comparable to the financial statements of companies that comply with such new or revised accounting standards.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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. 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, mortgage servicing rights, the fair values of financial instruments, and the valuation of deferred income tax assets.
Revenue Recognition
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (Topic 606), established 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 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 Topic 606, including 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 Topic 606. Elements of noninterest income that are within Topic 606 are as follows:
Fee income on deposit accounts – Revenue from fees charged on deposit accounts is earned through deposit-related services; as well as account maintenance and management, overdraft, non-sufficient funds and other deposit-related fees. Revenue is recognized
F-7
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
either over time, corresponding with the deposit accounts’ monthly cycle, or at a point in time when transactional based fees and services occur. The review of service charges assessed on deposit accounts included the amount of variable consideration that is a part of the monthly charges.
Sale of foreclosed assets – Revenue from the sale of foreclosed assets is recognized at a point in time when control of the promised asset transfers to the buyer. The Company uses the following indicators to determine when control of a promised asset has been transferred: the seller has a present right to payment for the asset; the buyer has legal title of the asset; the seller has transferred physical possession of the asset; the buyer has the significant risks and rewards of ownership of the asset; or the buyer has accepted the asset.
Merchant card arrangement fees – Customers use a Bank-issued debit or credit card to purchase goods and services, and the Company earns interchange fees on these transactions, typically a percentage of the sale amount of the transaction. The Company records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. There are no contingent debit or credit card interchange fees recorded by the Company that could be subject to a clawback in future periods.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, interest-bearing and non-interest-bearing accounts in other financial institutions, and federal funds sold, all of which have original maturities of three months or less.
Marketable Equity Securities
The Company holds marketable equity securities, which have a readily determinable fair value, and consist of mutual fund investments and common equity. These securities are recorded at fair value with unrealized gains and losses, due to change in fair value, reflected in noninterest income. Gains and losses on the sale of marketable equity securities are recorded on the trade date and determined using the specific-identification method. The portion of unrealized gains (losses) for the period related to marketable equity securities still held as of December 31, 2022 and 2021 was ($714) and $222, respectively.
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 (loss), 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. Interest and dividends on available securities are recognized as income when earned. Amortization of premiums and accretion of discounts for noncallable securities are recognized in interest income using the interest method over the estimated lives of the securities. The estimated lives of callable securities are calculated using the first call date.
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 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. 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 non-accrual 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.
F-8
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 real estate: These loans are dependent on the industries tied to these loans. Commercial real estate loans are secured primarily by office and industrial buildings, warehouses, small retail shopping facilities, and various special-purpose properties, including hotels and restaurants. Financial information is obtained from borrowers and/or the individual project to evaluate cash flow sufficiency to service debt and is periodically updated during the life of the loan. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market, such as geographic location and/or property type,
Land development: These loans are secured by vacant land and/or property that are in the process of improvement, including (a) land development preparatory to erecting vertical improvements or (b) the on-site construction of industrial, commercial, residential, or farm buildings. 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. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that necessary approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs.
Commercial Other: This loan category is comprised of commercial and industrial loans. 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.
Residential real estate: 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. Underwriting standards for residential real estate 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.
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. Also included in this category are junior liens on 1-4 family residential properties. 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.
F-9
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Provisions for depreciation are computed on straight-line method over the estimated useful lives of the assets.
Operating Leases
The Company accounts for its operating leases in accordance with ASC 842, Leases, which requires lessees to record all leases with a term longer than 12 months on the balance sheet as a right-of-use asset and lease liability for leases. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company's current lease agreement is classified as an operating lease. The operating lease right-of-use asset represents the right to use an underlying asset during the lease term (included in other assets on the consolidated balance sheets), while the operating lease liability represents the obligation to make lease payments arising from the lease (included in other liabilities on the consolidated balance sheets). The right-of-use asset and lease liability are recognized at lease commencement based on the present value of the remaining lease payments, considering a discount rate that represents the Company's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the lease term and is recognized in occupancy and equipment on the consolidated statements of operations. See Note 5 for additional information and disclosures on operating leases. The Company adopted ASC 842, Leases, on January 1, 2022.
Mortgage Servicing Rights
The Company sells residential mortgage loans in the secondary market and, on a selective basis, retains the right to service the loans sold. Upon sale, a mortgage servicing rights asset is capitalized, which represents the then current fair value of future net cash flows expected to be realized for performing servicing activities. Mortgage servicing rights, when purchased, are initially recorded at fair value. Mortgage servicing rights are amortized over the period of estimated net servicing income, and assessed for impairment at each reporting date. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization, or estimated fair value, and are included in other assets, net in the consolidated balance sheets. To the extent that the Company sells mortgage servicing rights, a gain is recognized for the amount of which sale proceeds exceed the remaining unamortized cost of the servicing rights that were sold. Recognized gains on sale of mortgage servicing rights are included in other noninterest income in the consolidated statements of operations.
The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate, the custodial earnings rate, ancillary income, default rates and losses, and prepayment speeds. The fair value of mortgage servicing rights may change because of changes in the discount rates, prepayment expectations, default rates, and other factors. Mortgage servicing rights are amortized into income in proportion to and over the period of the estimated future net servicing income of the underlying loans.
Mortgage servicing rights are evaluated for impairment at each reporting date and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation includes stratifying the mortgage servicing rights by predominant characteristics such as interest rates and terms and estimating fair value of each stratum. Impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the carrying amount for the stratum.
Federal Home Loan Bank Stock
The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. 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 pledged as collateral for outstanding FHLB advances. The stock is evaluated for impairment on an annual basis.
Foreclosed Assets
Assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value 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 foreclosed asset expense. There were no foreclosed assets as of December 31, 2022 and 2021, respectively.
F-10
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
There were no residential real estate loans in process of foreclosure at December 31, 2022 and $52 in process of foreclosure at December 31, 2021.
Cash value of life insurance
The Company purchased bank owned life insurance on the lives of certain employees. The Company is the beneficiary of the life insurance policies. The cash surrender value of life insurance is reported at the amount that would be received in cash if the policies were surrendered. Increases in the cash value of the policies and proceeds of death benefits received are recorded in noninterest income. The increase in cash value of life insurance is not subject to income taxes, as long as the Company has the intent and ability to hold the policies until the death benefits are received.
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. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income including consideration of applicable tax planning strategies. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, weigh all positive and negative evidence and are reviewed on a regular basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to increase the valuation allowance against our deferred tax assets.
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, and mortgage servicing rights. 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 consolidated 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 consolidated 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 consolidated 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.
Employee Benefit Plans
The Company has employee benefit plans for qualified employees. The Company’s policy is to fund contributions as accrued.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments including commitments to extend credit, unfunded commitments under lines of credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they become payable.
F-11
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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.
Rate Lock Commitments
The Company enters into commitments to originate loans, whereby the interest rate on the loan is determined prior to funding (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 and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.
Advertising
Advertising costs are expensed as incurred.
Other Comprehensive (Loss) Income
Other comprehensive (loss) income is shown on the statements of comprehensive (loss) income. The Company’s accumulated other comprehensive (loss) income is composed of the unrealized gain (loss) on securities available for sale, net of tax and is shown on the statements of changes in stockholders’ equity. Reclassification adjustments out of other comprehensive (loss) income for gains realized on sales of securities available for sale comprise the entire balance of “net gain on sale of securities” on the statements of operations. As part of this reclassification, income tax expense of approximately $0 and $3 was recognized for the years ended December 31, 2022 and 2021, respectively, in “income (benefit) tax expense” on the statements of operations.
Reclassifications
Certain reclassifications have been made to the 2021 consolidated financial statements to conform to the 2022 classifications.
Subsequent events
Management has reviewed the Company’s operations for potential disclosure or financial statement impacts related to events occurring after December 31, 2022, but prior to the release of these consolidated financial statements.
On March 12, 2023, the Board of Governors of the Federal Reserve System, Department of Treasury and the FDIC issued a joint statement outlining actions they had taken to protect the U.S. economy by strengthening public confidence in the banking system as a result of and in response to recently announced bank closures. Among other actions, the Federal Reserve Board announced that it would make available additional funding to eligible depository institutions through the creation of a new Bank Term Funding Program (BTFP). The BTFP will provide eligible depository institutions, including the Company's subsidiary bank, PyraMax Bank, an additional source of liquidity, which would be collateralized by various types of investment securities based on their par value. Although eligible, through the date of these financial statements, PyraMax Bank had not requested funding through the BTFP.
In response to these events, on March 13, 2023, the Company borrowed an additional $25 million in FHLB advances to increase our on-balance sheet liquidity. $20 million of these advances were scheduled to mature within one month of issuance and $10 million of these advances have been paid in full as of the date of the filing of these financial statements. The remaining $5 million advance is a putable fixed rate advance with a final maturity of March 13, 2028 and a one-time call date of March 13, 2024 at a rate of 3.47%.
There were no additional subsequent event disclosures or financial statement impacts related to events occurring after December 31, 2022 that warranted adjustment to or disclosure in these consolidated financial statements.
Recent Accounting Pronouncements
The following Accounting Standards Updates (ASU) have been issued by the Financial Accounting Standards Board (FASB) and may impact the Company’s consolidated 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. On November 15, 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit
F-12
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 those fiscal years. Management elected to defer adoption to the new effective date and adopted ASU 2016-13 as of January 1, 2023. The Company has been evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements and has engaged a third-party partner to assist it in the evaluation and implementation of this standard. Significant progress has been made working through the assumptions, drivers, documentation and other mechanics for the calculation of the Company’s allowance under ASU 2016-13. Management has begun running a calculation of its allowance under ASU 2016-13 parallel to its current modeling to assess the functioning of the ASU 2016-13 model while also documenting the controls that will be in place around the process as the Company implements this standard. The Company is estimating a 15-20% overall increase in its allowance for credit losses, which would result in a $480,000 to $640,000 increase in the allowance, as a result of the adoption of ASU 2016-13. In accordance with ASU 2016-13, this increase will be recognized as a cumulative effect adjustment to the January 1, 2023 retained earnings balance.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU provides guidance on eliminating the requirement for classification of and disclosures around troubled debt restructurings. The purpose of this guidance is to eliminate unnecessary and overly-complex disclosures of loans that are already incorporated into the allowance for credit losses and related disclosures. This ASU further requires the disclosure of current-period gross charge-offs by year of origination. The updated guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, for all entities which have implemented ASU 2016-13. The Company has historically had very few credit relationships classified as troubled debt restructurings, and as such does not anticipate that the elimination of accounting for and disclosure of these types of credit relationships will have a significant impact to its financial statements upon implementation of ASU 2016-13 beginning with the first quarter of 2023.
NOTE 2 — Cash and Due from Banks
Under Regulation D, savings institutions are generally required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based upon a percentage of deposits. Effective March 12, 2021, the Federal Reserve Board reduced reserve requirement ratios to zero percent, eliminating the requirement to maintain reserve balances in cash or on deposit with the Federal Reserve Bank. This reduction in reserve requirement ratios does not have a defined timeframe and may be revised by the Federal Reserve Board in the future.
In the normal course of business, the Company maintains cash and due from bank balances with correspondent banks. Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s insured limit of $250. Management believes these financial institutions have strong credit ratings and that the credit risk related to these deposits is minimal.
NOTE 3— Available for Sale Securities
Amortized costs and fair values of available for sale securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized
December 31, 2022 Cost Gains Losses Fair Value
Government-sponsored mortgage-backed securities 73,235 — (8,968 ) 64,267
Gross Gross
Amortized Unrealized Unrealized
December 31, 2021 Cost Gains Losses Fair Value
Fair values of securities are estimated based on financial models or prices paid for similar securities. It is possible interest rates could change considerably, resulting in a material change in estimated fair value.
F-13
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The Company’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by one of the following government enterprises: Fannie Mae, Freddie Mac or Ginnie Mae. Available for sale securities with an amortized cost basis of $3.9million and $1.8 million were pledged as collateral to secure customer deposit accounts at December 31, 2022 and December 31, 2021, respectively.
The following table presents the portion of the Company’s portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position:
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2022 Value Loss Value Loss Value Loss
Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2021 Value Loss Value Loss Value Loss
Asset-backed securities 808 (1 ) — — 808 (1 )
Certificates of deposit — — — — — —
At December 31, 2022, the Company had 92 debt securities with unrealized losses with aggregate depreciation of 12.1% from their amortized cost basis. At December 31, 2021, the Company had 24 debt securities with unrealized losses with aggregate depreciation of 1.1% from their amortized cost basis. These unrealized losses relate principally to the changes in interest rates and are not caused by changes in the financial condition of the issuer, 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. Since management has the ability to hold debt securities for the foreseeable future, no declines are deemed to be other than temporary.
The amortized cost and fair value of available for sale securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities in mortgage-backed securities since the anticipated maturities are not readily determinable. Therefore, these securities are not included in the maturity categories in the following maturity summary listed below:
Amortized Fair
Cost Value
Debt and other securities:
F-14
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
The following is a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for each of the periods listed below:
Years ended December 31,
(in thousands)
Proceeds from sales of securities available-for-sale $ — $ 1,018
Gross realized gains — 12
Gross realized losses — —
Net realized gains — 12
NOTE 4 — Loans
Major classifications of loans are as follows:
As of December 31,
Commercial:
Land development — 1,400
Residential real estate:
Consumer:
Net deferred loan costs 830 655
Allowance for loan losses (3,203 ) (2,858 )
Deposit accounts in an overdrawn position and reclassified as loans totaled $98and $106 at December 31, 2022 and 2021, respectively.
The Company provides several types of loans to its customers, including commercial, residential, construction and consumer loans. Significant loan concentrations are considered to exist 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 credit risks tend to be geographically concentrated in the Company’s metropolitan Milwaukee market area, and while a significant portion of the Company’s loan portfolio is secured by commercial and residential real estate, there are no significant concentrations whose primary sources of repayment are reliant upon an individual or group 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 December 31, 2022 and December 31, 2021, respectively, the Company had transferred $30.3 million and $32.1 million in participation loans which were eligible for sales treatment to other financial institutions, all of which were being serviced by the Company.
F-15
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
A summary of the activity in the allowance for loan losses by portfolio segment is as follows:
For the year ended December 31,2022 Commercial Residential Consumer Total
Allowance for loan losses
Provision for loan losses 222 — — 222
Loans charged-off — — (10 ) (10 )
For the year ended December 31,2021 Commercial Residential Consumer Total
Allowance for loan losses
Provision for loan losses 30 — — 30
Loans charged-off — — (19 ) (19 )
F-16
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Information about how loans were evaluated for impairment and the related allowance for loan losses follows:
December 31, 2022 Commercial Residential Consumer Total
Loans:
Allowance for loan losses:
Individually evaluated for impairment $ — $ — $ — $ —
December 31, 2021 Commercial Residential Consumer Total
Loans:
Allowance for loan losses:
Individually evaluated for impairment $ — $ — $ — $ —
Information regarding impaired loans follows:
Impaired loans with reserve:
Commercial:
Real estate $ — $ — $ — $ — $ —
Land development — — — — —
Other — — — — —
Residential real estate:
First mortgages — — — — —
Construction — — — — —
Consumer:
Home equity and lines of credit — — — — —
Other — — — — —
Total impaired loans with reserve $ — $ — $ — $ — $ —
Impaired loans with no reserve:
Commercial:
Land development — — NA — —
Residential real estate:
Construction — — NA — —
Consumer:
Home equity and lines of credit 55 60 NA 37 2
Other — — NA — —
F-17
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Information regarding impaired loans follows:
Impaired loans with reserve: