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, 2021, compared to the year ended December 2020, and the financial condition as of December 31, 2021 compared to the financial condition as of December 31, 2020. For a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, 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 2020 Form
10-K,
filed with the SEC on March 31, 2021. 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.
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Impact of
COVID-19
Outbreak
In 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as
COVID-19.
The
COVID-19
pandemic restricted economic activity in our markets. In response to the pandemic, governments have imposed restrictions on travel and business operations, advised or required individuals to limit or forego time outside of their homes, and ordered temporary closures of businesses. While these measures temporarily increased unemployment in the United States and our market, the unemployment rate has subsequently declined and was 2.8% in Wisconsin and 2.2% in the Milwaukee-Waukesha-West Allis, Wisconsin Metropolitan Statistical Area as of December 31, 2021, as compared to 4.0% and 4.6%, respectively, for December 2020. The government and private sector responses to the
COVID-19
pandemic also negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.
To address the economic impact of
COVID-19
in the United States, the CARES Act was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us. The CARES Act included an option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19
made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the
COVID-19
national emergency. The relief could only be applied to modifications for loans that were not more than 30 days past due as of December 31, 2019. We elected to adopt these provisions of the CARES Act, which expired on January 1, 2022. The CARES Act also established the PPP through the SBA, which provided a uniform system to expedite the ability for us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under the PPP, the borrower’s obligation to repay loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements. In the event of any such forgiveness or partial forgiveness, the amount forgiven is remitted to us by the SBA. As part of the first round of this program, at December 31, 2021, we had funded 246 PPP loans totaling $30.3 million, of which all but $1,000 had been forgiven as of December 31, 2021.
On December 27, 2020, the Relief Act became law and provided an additional $284 billion for the PPP, extending the PPP through March 31, 2021. As of December 31, 2021, we had funded 143 second round PPP loans totaling $10.5 million, of which $5.1 million had been forgiven as of December 31, 2021.
In addition, the Federal Reserve Board, took steps to bolster the economy by, among other things, reducing the federal funds rate and the discount-window borrowing rate to near zero.
In response to the pandemic, we implemented protocols and processes to help protect our employees, customers and communities. These measures include:
We implemented various consumer and commercial loan modification programs to provide our borrowers relief from the economic impacts of
COVID-19.
Based on guidance in the CARES Act,
COVID-19
related modifications to loans that were current as of December 31, 2019 are exempt from TDR classification under accounting principles generally accepted in the United States (“GAAP”). In addition, the bank regulatory agencies issued interagency guidance stating that
COVID-19
related short-term modifications (
i.e.
, six months or less) granted to loans that were current as of the loan modification program implementation date are not TDRs.
As of December 31, 2021, we had deferrals of $383,000 in interest, escrow and principal payments on $11.2 million in outstanding loans. We have not deferred our recognition of interest income with respect to loans subject to modifications. Given the continuously evolving economic effects and social impacts of the
COVID-19
pandemic, the future direct and indirect impact on our business, results of operations and financial condition remain uncertain. Should economic conditions deteriorate, we expect it would have an adverse effect on our business and results of operations, which could include, but not be limited to, decreased demand for our products and services, protracted periods of lower interest rates, increased
non-interest
expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs.
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For additional information, see “Risk Factors—Risks Related to the
COVID-19
Pandemic—The economic impact of the
COVID-19
outbreak could adversely affect our financial condition and results of operations.”
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:
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 loan 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 is increasing, which may lead to additional provisions for loan losses or charge-offs, which would reduce our profits or cause losses.”
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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 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.
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Comparison of Financial Condition at December 31, 2021 and December 31, 2020
Total Assets.
Total assets were $539.6 million at December 31, 2021, an increase of $22.9 million, or 4.4%, when compared to total assets of $516.8 million at December 31, 2020. The increase was primarily due to an increase in
available-for-sale
securities of $53.7 million. The increase was partially offset by a decrease in cash and cash equivalents of $25.7 million at December 31, 2021.
Cash and Cash Equivalents.
Cash and cash equivalents decreased $25.7 million, or 27.8%, to $66.8 million at December 31, 2021, from $92.5 million at December 31, 2020. This decrease was primarily due to the purchase of $68.7 million in
available-for-sale
securities and $13.0 in principal payments on FHLB advances partially offset by increases of $35.4 million of proceeds from the July 2021 capital raise, $12.4 million from maturities and payments on
available-for-sale
securities, $5.2 million due to a net decrease in loans and $4.7 million from an increase in deposits.
Available for Sale Securities.
Available for sale securities increased $53.7 million, or 91.5%, to $112.4 million at December 31, 2021, from $58.7 million at December 31, 2020. The increase was primarily due to purchases of securities totaling $68.7 million, offset by maturities, prepayments and calls of securities totaling $12.4 million, a $1.4 million reduction in the unrealized gain on securities held within the portfolio and $1.0 from securities sales. The increase in securities purchases was the result of management’s decision to invest a 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. The securities purchased primarily consisted of government-sponsored mortgage-backed securities, which increased $26.1 million, US Treasury notes, which increased $19.5 million, and obligations of states and political subdivisions, which increased $9.0 million.
Loans Held for Sale.
Loans held for sale decreased $1.3 million, or 52.4%, to $1.2 million at December 31, 2021, from $2.5 million at December 31, 2020. 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 $73.8 million, from $195.4 million in 2020 to $121.6 million in 2021.
Net loans.
Net loans decreased $5.3 million, or 1.6%, to $323.8 million at December 31, 2021, from $329.1 million at December 31, 2020. The decrease was due primarily to a $12.2 million decrease in commercial loans resulting from normal payment and refinancing activity and forgiveness of PPP loans. The decrease was also due to a decrease in consumer home equity and line of credit loans of $5.3 million. The decrease was partially offset by an increase in first mortgage residential real estate loans of $11.7 million as a larger percentage of these types of loans were retained within the portfolio, as an alternative to selling them into the secondary market. The decision to retain more of these loans was based on our liquidity position at the time and to increase earnings by investing a portion of our liquidity in higher yielding assets.
During the year ended December 31, 2021, volumes of loan originations were as follows: $128.5 million in commercial real estate and other commercial loans, a decrease of $32.2 million from the $160.7 million in originations of these loan types during the year ended December 31, 2020; $157.5 million in total residential real estate loans, a decrease of $75.0 million from the $232.5 million in originations of these loan types during the year ended December 31, 2020; and $11.1 million in total consumer and consumer real estate loans, an increase of $100,000 from the $11.0 million in originations of these loan types during the year ended December 31, 2020.
Loans purchased as of December 31, 2021 totaled $2.1 million, a decrease of $400,000, or 16.0%, from the $2.5 million of loans purchased as of December 31, 2020. Loans purchased during the years ended December 31, 2021 and 2020 were commercial real estate and other commercial loans. PyraMax Bank’s strategy is to primarily grow the loan portfolio organically, as opposed to regularly purchasing loans from other financial institutions.
Deposits.
Deposits increased $4.7 million, or 1.2%, to $384.5 million at December 31, 2021, from $379.8 million at December 31, 2020. This increase was primarily due to a $7.7 million increase in noninterest bearing checking accounts, a $6.8 million increase in interest bearing checking accounts and a $6.1 million increase in statement savings accounts. We believe that a significant factor underlying this increase is that our customers, including PPP borrowers, are maintaining greater than usual cash balances as a result of the
COVID-19
pandemic. These increases were offset by an $8.9 million decrease in money market accounts and a $7.0 million decrease in certificates of deposit. The decrease in certificates of deposits was primarily the result of a decrease in brokered certificates of deposits from $5.5 million at December 31, 2020 to $0 at December 31, 2021. The brokered deposits were not renewed as we had adequate levels of liquidity and were not in need of additional funds.
FHLB Advances.
Borrowings, consisting entirely of FHLB advances, decreased $13.0 million, or 18.9%, to $55.4 million at December 31, 2021, from $68.4 million at December 31, 2020. The decrease was due to the maturity and repayments of principal on existing advances. We did not borrow any additional monies from the FHLB during 2021 as we had adequate levels of liquidity and were not in need of additional funds.
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Total Equity.
Total equity increased $30.9 million, or 51.5%, to $90.9 million at December 31, 2021, from $60.0 million at December 31, 2020. The increase was primarily due to the July 2021 capital raise which generated $35.4 million of gross proceeds. This was partially offset by a $1.8 million decrease in the unallocated common stock of the ESOP plan, due to the expansion of the plan. Accumulated other comprehensive income also decreased $1.0 million, primarily as a result of the increase in the unrealized loss on
available-for-sale
securities. In addition, treasury stock declined $927,000 primarily as a result of the retirement of treasury shares during the July 2021 stock offering.
Comparison of Operating Results for the Years Ended December 31, 2021 and December 31, 2020
Net Income.
We recorded net income of $85,000 for the year ended December 31, 2021, which represented a decrease of $1.2 million from the net income of $1.3 million recorded for the year ended December 31, 2020. This decrease was primarily the result of a $2.5 million decrease in noninterest income and a $1.2 million increase in noninterest expense, offset by a $1.8 million decrease in income taxes, a $470,000 decrease in provision expense and a $248,000 increase in net interest income.
Interest and Dividend Income.
Interest and dividend income decreased $1.3 million, or 8.1%, to $14.2 million for the year ended December 31, 2021, from $15.5 million for the year ended December 31, 2020. The decrease was due primarily to a $1.4 million decrease in interest income on loans, which decreased from $14.0 million in 2020 to $12.6 million in 2021. The decrease in interest income on loans was primarily due to the continued low interest rate environment brought on by the
COVID-19
pandemic and its impact on the economy. As a result of the ongoing low interest rate environment, the yield on our loan portfolio decreased from 4.30% in 2020 to 3.79% in 2021, which resulted in a $1.7 million decrease in interest income from loans during 2021. The average balance of loans increased $7.2 million during 2021 to $332.0 million, from $324.8 million in 2020, resulting in a $317,000 increase in interest income on loans.
Average interest-earning assets increased $55.7 million, or 12.5%, to $500.9 million for the year ended December 31, 2021, from $445.2 million for the year ended December 31, 2020. The weighted average yield on interest-earning assets decreased 64 basis points, to 2.84% for 2021, from 3.48% for 2020.
Interest Expense.
Interest expense decreased $1.5 million, or 49.5%, to $1.5 million for the year ended December 31, 2021, from $3.0 million for the year ended December 31, 2020. The decrease in interest expense was primarily due to the continued low interest rate environment and resulted in the average cost of our interest-bearing liabilities decreasing from 0.91% for 2020 to 0.44% for 2021. The average cost of our deposits declined from 0.87% in 2020 to 0.28% in 2021 and was the biggest contributor to the decline in our cost of funds. The decrease in our cost of deposits resulted in a $1.4 million reduction in interest expense. Interest expense on certificates of deposit experienced the most significant decline during 2021 and decreased $1.3 million from 2020 to 2021. This decline was due to both a decrease in the average rate paid on and the average balance of our certificates of deposit. The average rate on certificates of deposit declined from 1.65% in 2020 to 0.55% in 2021 and resulted in a $966,000 decrease in interest expense. The decrease in the average cost of our certificates of deposits was the result of maturing deposits repricing at lower interest rates. The average balance of certificates of deposit decreased $25.7 million, or 24.0%, from $107.2 million in 2020 to $81.5 million in 2021. The decrease in the average balance of our certificates of deposit was partially due to management’s decision to reduce the amount we held in brokered deposits. The average balance of brokered certificates of deposit was $788,000 in 2021 compared to $13.6 million in 2020, a decrease of $12.8 million. There were no brokered certificates of deposit outstanding at December 31, 2021.
Net Interest Income.
Net interest income increased $248,000, or 2.0%, to $12.7 million for the year ended December 31, 2021, from $12.5 million for the year ended December 31, 2020. The increase was the result of a $1.5 million decrease in interest expense, offset by $1.3 million decrease in interest income.
Provision for Loan Losses.
We recorded $30,000 in provision for loan losses for the year ended December 31, 2021, compared to $500,000 for the year ended December 31, 2020. The allowance for loan losses was $2.9 million, or 0.88%, of total loans (and 0.89% excluding PPP loans), at December 31, 2021, compared to $2.7 million, or 0.82% of total loans (and 0.86% excluding PPP loans), at December 31, 2020. Nonaccrual loans constituted 0.31% of total gross loans (and 0.32% excluding PPP loans) at December 31, 2021 and 0.39% of gross loans (and 0.41% excluding PPP loans) at December 31, 2020. Net recoveries for the year ended December 31, 2021 were $125,000 compared to net recoveries of $203,000 for the year ended December 31, 2020.
Noninterest Income.
Noninterest income decreased $2.5 million, or 37.0%, from $6.8 million for the year ended December 31, 2020 to $4.3 million for the year ended December 31, 2021. The decrease was due primarily to a $2.0 million decrease in net gain on sale of loans and a $1.0 million decrease in net gains realized on the sale of securities. The decrease in net gain on sale of loans was the result of a decrease in the origination and sale of mortgage loans. Mortgage loan originations decreased $73.8 million, or 37.8%, from $195.4 million in 2020 to $121.6 million in 2021. Mortgage loan sales decreased $72.8 million, or 36.9% from $197.1 million in 2020 to $124.4 million in 2021. A portion of the decline in sales was due to a larger percentage of mortgage loans being retained within our portfolio rather than sold into the secondary market, based on our liquidity position. In addition, we recognized a $346,000 decrease in the unrealized gain on marketable equity securities held in our Rabbi trust accounts. Loan servicing fees increased $611,000.
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Noninterest Expense.
Noninterest expense increased $1.2 million, or 7.9%, to $16.9 million for the year ended December 31, 2021 from $15.7 million for the year ended December 31, 2020. The increase was due primarily to a $751,000 increase in salaries and employee benefits. The increase in salaries and benefits was due to a number of factors, including an increase in the number of full-time equivalent employees from 100 in 2020 to 107.5 in 2021, increases in general wages paid to employees, increases in the salary level of specific retail positions within the Company, promotions of existing staff and the corresponding increases in their salaries, signing bonuses paid to new employees and the temporary duplication of certain positions related to the retirement and replacement of key personnel. Other noninterest expenses also increased $344,000 from 2020 to 2021. The increase in other noninterest interest expense was primarily due to a $435,000 increase in insurance and bond expenses and a $85,000 increase in stock option expense. The increase in insurance and bond expense was the result of increasing policy limits as a result of the stock conversion and stock issuance. The increase in stock option expense was due to the granting of options and restricted share awards pursuant to the Company’s 2020 Equity Incentive Plan. These increases in noninterest interest expense were offset by a $221,000 reduction in accounting, tax and other professional fees.
Income Taxes.
Income tax benefit was ($64,000) for the year ended December 31, 2021, compared to income tax expense of $1.7 million for the year ended December 31, 2020. Included in the 2020 period amount was a $934,000 increase in our deferred tax valuation allowance. As of December 31, 2021, the deferred tax asset valuation allowance was $934,000, reducing our net deferred tax asset to $3.8 million at that date.
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 current 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 $9.7 million as of December 31, 2021. Of this amount, $1.8 million represents a tax loss carryforward from the 2019 tax year which has an indefinite carryforward period due to the Tax Cuts and Jobs Act of 2017. The remaining $7.9 million of losses begin to expire in 2030. We also had $416,000 of charitable contribution carryforwards at December 31, 2021 that may be applied against future taxable income and begin to expire in 2024.
We had Wisconsin loss carryforwards of $19.9 million as of December 31, 2021 which begin to expire in 2024. We also had $419,000 of Wisconsin charitable contribution carryforwards at December 31, 2021 that may be applied against future taxable income and begin to expire in 2024.
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.
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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, 2021 and 2020, 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.
We believe 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 2021 and 2020.
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 8,573 — — % 8,396 — — %
Other non-interest-bearing liabilities 6,096 4,300
Total liabilities and stockholders’ equity $ 534,164 $ 478,898
Interest rate spread (2) 2.40 % 2.57 %
Net interest margin (3) 2.54 % 2.80 %
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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 TotalIncrease(Decrease)
Volume Rate
(Dollars in thousands)
Interest-earning assets:
Securities available-for-sale 153 (103 ) 50
Other interest-earning assets 79 (21 ) 58
Interest-bearing liabilities:
Negotiable order of withdrawal accounts (18 ) 28 10
Borrowings (31 ) (31 )
Other — — —
Change in net interest income $ 663 (415 ) 248
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.
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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:
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 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, 2021, 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, 2021, the estimated changes in our EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
Estimated Increase (Decrease) in EVE
Basis Point (“bp”) Change in Interest Rates (1) Estimated EVE (2) Amount Percent
(Dollars in thousands)
(1) Assumes an instantaneous uniform change in interest rates at all maturities.
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The table above indicates that at December 31, 2021, in the event of a 100 basis point decrease in interest rates, we would have experienced a 6.8% decrease in our EVE. In the event of a 200 basis point increase in interest rates at December 31, 2021, we would have experienced a 1.2% decrease in our EVE.
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 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, 2021, we had $55.4 million outstanding in advances from the Federal Home Loan Bank of Chicago. At December 31, 2021, we had $90.9 million in additional borrowing capacity at the Federal Home Loan Bank of Chicago. Additionally, at December 31, 2021, we had a $15.0 million federal funds line of credit with the BMO Harris Bank, none of which was drawn at December 31, 2021. We also had a $8.1 million line of credit at the Federal Reserve based on pledged commercial real estate loans of approximately $13.7 million at December 31, 2021. We had not drawn on the Federal Reserve line as of December 31, 2021.
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 $2.4 million and $1.2 million for the years ended December 31, 2021 and December 31, 2020, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of investment securities, offset by principal collections on loans, and the sale of securities and proceeds from maturing securities and pay downs on securities, was $50.3 million for the year ended December 31, 2021. This increase in net cash used in investment activities was primarily due to purchases of available for sale securities of $68.7 million offset by proceeds from the sale and maturity of securities of $13.4 million and net decrease in loan originations of $5.3 million. Net cash used in investing activities was $6.4 million for the year ended December 31, 2020, primarily due to purchases of available for sale securities of $59.9 million and net loan originations of $18.9 million offset by proceeds from the sale and maturity of securities of $74.7 million. Net cash provided by financing activities was $22.2 million for the year ended December 31, 2021, consisting primarily of increases of $4.7 million in deposits and $35.4 million in gross proceeds from the July 2021 stock offering, offset by $13.0 million in principal payments on FHLB advances. Net cash provided by financing activities was $86.0 million for the year ended December 31, 2020, consisting primarily of increases of $35.3 million in deposits, and $52.0 million of proceeds from the issuance of FHLB advances.
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.
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At December 31, 2021, PyraMax Bank exceeded all regulatory capital requirements with total risk-based capital of $68.0 million, or 20.2% of adjusted total assets, which is above the well-capitalized required level of $33.6 million, or 10%; and tier 1 capital of $65.2 million, or 19.4% of risk-weighted assets, which is above the well-capitalized required level of $26.9 million, or 8%. There are no conditions or events since December 31, 2021 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.
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, 2021. 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, 2021.
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Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2021, 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.
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.”
Further information required under this Item 10 will be included in an amendment to this Annual Report on Form
10-K.
ITEM 11. Executive Compensation
The information required under this Item 11 will be included in an amendment to this Annual Report on Form
10-K.
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, 2021 regarding the Company’s equity compensation plan that has 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.
(b) Security Ownership of Certain Beneficial Owners
The information required under this Item 12(b) will be included in an amendment to this Annual Report on Form
10-K.
(c) Security Ownership of Management
The information required under this Item 12(c) will be included in an amendment to this Annual Report on Form
10-K.
(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.
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ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required under this Item 13 will be included in an amendment to this Annual Report on Form
10-K.
ITEM 14. Principal Accountant Fees and Services
The information required under this Item 14 will be included in an amendment to this Annual Report on Form
10-K.
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, 2021 and 2020
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Financial Statements.
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(a)(3) Exhibits
4.2 Description of the Company’s Securities
21 Subsidiaries
23 Consent of Wipfli LLP (U.S. PCAOB Auditor Firm ID 344)
* Furnished, not filed
ITEM 16. Form
10-K
Summary
None.
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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 28, 2022 By: /s/ Richard B. Hurd
Richard B. Hurd Chief 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/ Darrell Francis Chairman of the Board March 28, 2022
Darrell Francis
/s/ Monica Baker Senior Vice President and Director March 28, 2022
Monica Baker
/s/ Joseph Murphy Director March 28, 2022
Joseph Murphy
/s/ James Spiegelberg Director March 28, 2022
James Spiegelberg
/s/ John Talsky Director March 28, 2022
John Talsky
/s/ Gary Zenobi Director March 28, 2022
Gary Zenobi
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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, 2021 and 2020, 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, 2021 and 2020, 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 28, 2022
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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 3,544 2,992
Available for sale securities, stated at fair value 112,440 58,703
Mortgage servicing rights, net 2,036 1,806
Federal Home Loan Bank (FHLB) stock, at cost 3,032 3,032
Accrued interest receivable 948 912
Liabilities and Stockholders’ Equity
Advance payments by borrowers for taxes and insurance 1,860 2,737
Accrued interest payable 109 183
Common stock (par value $0.01 per share) 64 49
Accumulated other comprehensive income, net of income taxes 142 1,138
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 539,639 $ 516,757
See accompanying notes to the consolidated financial statements.
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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:
Provision for loan losses 30 500
Net interest income after provision for loan losses 12,672 11,954
Noninterest income:
Service charges and other fees 964 814
Net gain on sale of securities 12 1,023
Increase in cash surrender value of insurance 407 400
Unrealized gain on marketable equity securities 222 568
Noninterest expense:
Foreclosed assets, net — (6 )
Advertising and promotions 111 110
Income before income taxes 21 3,053
Income (benefit) tax expense (64 ) 1,736
Earnings per share:
Average common shares outstanding:
See accompanying notes to the consolidated financial statements.
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1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Years ended December 31,
Other comprehensive (loss) income:
Unrealized holding (losses) gains arising during the period (1,352 ) 2,435
Reclassification adjustment for gains realized in net income (12 ) (1,023 )
Other comprehensive (loss) income before tax effect (1,364 ) 1,412
Tax effect of other comprehensive (loss) income items (368 ) 381
Other comprehensive (loss) income, net of tax (996 ) 1,031
Comprehensive (loss) income $ (911 ) $ 2,348
See accompanying notes to the consolidated financial statements.
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1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Other comprehensive income — — — — — 1,031 1,031
Common stock reclassified to treasury stock — — (175 ) — — — (175 )
Repurchase of common stock — — (1,053 ) — — — (1,053 )
ESOP shares committed to be released (7,021 shares) (1) — (3 ) — 70 — — 67
Stock compensation expense — 156 — — — — 156
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 — — — —
Purchase of ESOP shares — — — (2,041 ) — — (2,041 )
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
See accompanying notes to the consolidated financial statements.
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1895 BANCORP OF WISCONSIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
Cash flows from operating activities
Adjustments to reconcile net income to net cash from operating activities:
Net amortization of investment securities 221 232
Provision for loan losses 30 500
Net loss on disposal of premises and equipment — 33
Net change in fair value of marketable equity securities (222 ) (568 )
Net gain on sale of available for sale securities (12 ) (1,023 )
Stock compensation expense 241 156
Adjustment to mortgage servicing rights valuation (369 ) 369
(Benefit from) provision for deferred income tax (64 ) 1,650
Originations of mortgage loans held for sale (121,562 ) (195,425 )
Proceeds from sales of mortgage loans held for sale 124,366 197,125
Net gain on sale of mortgage loans held for sale (1,503 ) (3,499 )
Net change in cash value of life insurance (407 ) (400 )
Changes in operating assets and liabilities:
Net change in mortgage servicing rights 139 (3 )
Change in accrued interest receivable and other assets (243 ) (248 )
Change in accrued interest payable and other liabilities 1,108 322
Net cash provided by operating activities 2,708 1,266
Cash flows from investing activities
Proceeds from sales of available for sale securities 1,018 19,515
Maturities, prepayments and calls of available for sale securities 12,442 55,217
Purchase of available for sale securities (68,770 ) (59,857 )
Net change in marketable equity securities (330 ) (46 )
Net decrease (increase) in loans 5,254 (18,899 )
Net capital expenditures for premises and equipment (243 ) (288 )
Net increase in Federal Home Loan Bank stock — (2,119 )
Cash received in MHC merger 100 —
Net cash used in investing activities (50,529 ) (6,477 )
Cash flows from financing activities
Proceeds from the issuance of Federal Home Loan Bank advances — 52,000
Gross proceeds from stock offering 35,418 —
Stock offering costs (1,988 ) —
Purchase of ESOP shares (2,041 ) —
Purchases of common stock (151 ) (1,053 )
Sale of treasury stock by Rabbi Trust 10 —
Principal payments on Federal Home Loan Bank advances (12,956 ) (1,225 )
Stock options exercised 30 —
Net cash provided by financing activities 22,098 86,030
Net (decrease) increase in cash and cash equivalents (25,723 ) 80,819
Cash and cash equivalents at beginning of year 92,526 11,707
Cash and cash equivalents at end of year $ 66,803 $ 92,526
Supplemental cash flow information:
Cash paid during the year for interest $ 1,610 $ 3,242
Cash received during the year for income taxes $ (196) $ (5)
Noncash activities:
Retirement of common stock $ 69 $ —
Loans transferred to loans held for sale — 124
Issuance of treasury stock – stock compensation plans 15 —
Retirement of treasury stock 1,053 —
See accompanying notes to the consolidated financial statements.
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1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021 and 2020
(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.
Impact of
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus
(“COVID-19”)
as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of
COVID-19
could continue to adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the
COVID-19
outbreak may continue to adversely affect the Company’s financial condition and results of operations. As a result of the spread of the
COVID-19
coronavirus, economic uncertainties have arisen which may negatively impact our business, financial condition, results of operations and cash flows.
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.
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1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021 and 2020
(In thousands)
NOTE 1 — Summary of Significant Accounting Policies – (continued)
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 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 for the period related to marketable equity securities still held as of December 31, 2021 and 2020 was $222 and $568, 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, 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.
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1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021 and 2020
(In thousands)
NOTE 1 — Summary of Significant Accounting Policies – (continued)
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.
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.
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1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021 and 2020
(In thousands)
NOTE 1 — Summary of Significant Accounting Policies – (continued)
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.
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.
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.
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Table of Contents
1895 BANCORP OF WISCONSIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2021 and 2020
(In thousands)
NOTE 1 — Summary of Significant Accounting Policies – (continued)
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.