FFBW, Inc. /MD/ - FORM 10-Q

Attached files

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EX-32 - EX-32 - FFBW, Inc. /MD/	ffbw-20210331xex32.htm
EX-31.2 - EX-31.2 - FFBW, Inc. /MD/	ffbw-20210331ex31249aaa5.htm
EX-31.1 - EX-31.1 - FFBW, Inc. /MD/	ffbw-20210331ex311be3f07.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

	For the quarterly period ended March 31, 2021.

OR

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

	For the transition period from to .

Commission file number: 001-39182

FFBW, INC.

(Exact name of registrant as specified in its charter)

Maryland		37-1962248
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1360 South Moorland Road		53005
Brookfield, Wisconsin
(Address of principal executive offices)		(Zip Code)

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

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

Common stock, par value $0.01 per share		The NASDAQ Stock Market, LLC
(Title of each class to be registered)		(Name of each exchange on which each class is to be registered)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒

Emerging growth company ☒

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒

As of May 10, 2021, there were 7,197,902 issued and outstanding shares of the Registrant’s Common Stock.

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FFBW, Inc.

Form 10-Q

Index


		Page
Part I. Financial Information		3

Item 1.	Financial Statements	3

	Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020	3

	Statements of Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)	4

	Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020 (unaudited)	5

	Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020 (unaudited)	6

	Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (unaudited)	7

	Notes to Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41

Item 4.	Controls and Procedures	41

Part II. Other Information		42

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	44

	Signature Page	45

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Part I. – Financial Information

Item 1. Financial Statements

FFBW, Inc.

Balance Sheets

March 31, 2021 (Unaudited) and December 31, 2020

(In thousands, except share data)


	March 31,		December 31,
	2021		2020
Assets
Cash and due from banks	$	50,725	$	41,454
Fed funds sold		8,400		25
Cash and cash equivalents		59,125		41,479
Available for sale securities, stated at fair value		56,463		64,243
Loans held for sale		1,098		1,708
Loans, net of allowance for loan and lease losses of $2,813 and $2,811, respectively		203,376		214,723
Premises and equipment, net		5,551		5,594
Foreclosed assets		—		125
Other equity investments		1,279		1,279
Accrued interest receivable		912		995
Cash value of life insurance		8,576		7,272
Other assets		1,371		1,554
TOTAL ASSETS	$	337,751	$	338,972


Liabilities and Equity

Deposits	$	229,577	$	226,498
Advance payments by borrowers for taxes and insurance		391		127
FHLB advances		7,500		7,500
Accrued interest payable		117		17
Other liabilities		1,091		1,565
Total liabilities	$	238,676	$	235,707
Preferred stock ($0.01 par value, 50,000,000 authorized, no shares issued or outstanding as of March 31, 2021 and December 31, 2020, respectively)	$	—	$	—
Common stock ($0.01 par value, 100,000,000 authorized, 7,286,461 and 7,695,214 issued and outstanding as of March 31, 2021 and December 31, 2020, respectively)		73		77
Additional paid in capital		64,563		69,090
Unallocated common stock of Employee Stock Ownership Plan ("ESOP") (573,446 and 581,093 shares at March 31, 2021 and December 31, 2020, respectively)		(5,735)		(5,811)
Retained earnings		39,052		38,382
Accumulated other comprehensive income (loss), net of income taxes		1,122		1,527
Total equity	$	99,075	$	103,265
TOTAL LIABILITIES AND EQUITY	$	337,751	$	338,972

See accompanying notes to financial statements.

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FFBW, Inc.

Statements of Income

Three Months Ended March 31, 2021 and 2020 (Unaudited)

(In thousands, except per share data)


	Three months ended
	March 31,
	2021		2020
Interest and dividend income:
Loans, including fees	$	2,872	$	2,435
Securities
Taxable		239		284
Tax-exempt		46		4
Other		9		84

Total interest and dividend income		3,166		2,807

Interest Expense:
Interest-bearing deposits		249		483
Borrowed funds		17		61

Total interest expense		266		544

Net interest income		2,900		2,263
Provision for loan losses		—		40

Net interest income after provision for loan losses		2,900		2,223

Noninterest income:
Service charges and other fees		116		55
Net gain on sale of loans		161		35
Increase in cash surrender value of insurance		53		49
Other noninterest income		25		24

Total noninterest income		355		163

Noninterest expense:
Salaries and employee benefits		1,362		1,132
Occupancy and equipment		292		244
Data processing		337		206
Technology		56		60
Foreclosed assets		1		(16)
Professional fees		106		108
Other noninterest expense		249		110

Total noninterest expense		2,403		1,844

Income before income taxes		852		542
Provision for income taxes		182		135

Net income	$	670	$	407

Earnings per share
Basic	$	0.10	$	0.06
Diluted	$	0.10	$	0.06

See accompanying notes to financial statements.

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FFBW, Inc.

Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2021 and 2020, (Unaudited)

(In thousands)


	Three months ended
	March 31,
	2021		2020
Net income	$	670	$	407
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period		(573)		997
Reclassification adjustment for (gains) losses realized in net income		—		—
Other comprehensive income (loss) before tax effect		(573)		997
Tax effect of other comprehensive income (loss) items		168		(270)
Other comprehensive income (loss), net of tax		(405)		727
Comprehensive income	$	265	$	1,134

See accompanying notes to financial statements.

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FFBW, Inc.

Statements of Changes in Equity

For the Three Months Ended March 31, 2021 and 2020, (Unaudited)

(In thousands, except share data)


						Unallocated				Accumulated
	Number			Additional		Common				Other
	of	Common		Paid-In		Stock of		Retained		Comprehensive		Treasury
	Shares	Stock		Capital		ESOP		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2019	7,702,478	$	67	$	28,672	$	(2,303)	$	36,551	$	344	$	(1,461)	$	61,870
Corporate Reorganization:
Conversion of FFBW, Inc. (net of costs of $1.2 million)	2,397		10		41,561		—		—		—		—		41,571
Purchase of 341,485 shares of ESOP	—		—		—		(3,814)		—		—		—		(3,814)
Treasury stock retired	—		—		(1,461)		—		—		—		1,461		—
Contribution of FFBW, MHC	—		—		99		—		—		—		—		99
2020 Activity:
Net income	—		—		—		—		407		—		—		407
ESOP shares committed to be released ( 7,647 shares)	—		—		(15)		78		—		—		—		63
Stock based compensation expense	—		—		87		—		—		—		—		87
Other comprehensive income	—		—		—		—		—		727		—		727
Balance at March 31, 2020	7,704,875	$	77	$	68,943	$	(6,039)	$	36,958	$	1,071	$	—	$	101,010

Balance at December 31, 2020	7,695,214	$	77	$	69,090	$	(5,811)	$	38,382	$	1,527	$	—	$	103,265
Net income	—		—		—		—		670		—		—		670
ESOP shares committed to be released (7,647 shares)	—		—		6		76		—		—		—		82
Stock based compensation expense	—		—		81		—		—		—		—		81
Repurchase of common stock	(408,753)		(4)		(4,614)		—		—		—		—		(4,618)
Other comprehensive loss	—		—		—		—		—		(405)		—		(405)
Balance at March 31, 2021	7,286,461	$	73	$	64,563	$	(5,735)	$	39,052	$	1,122	$	—	$	99,075

See accompanying notes to financial statements.

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FFBW, Inc.

Statements of Cash Flows

For the Three Months Ended March 31, 2021 and 2020 (Unaudited)

(In thousands)


`	Three months ended
	March 31,
	2021		2020
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income	$	670	$	407
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—		40
Depreciation		72		79
Net amortization of loan portfolio discount and deposit premium		317		—
Net amortization on securities available for sale		145		81
(Gain) loss on sales and impairments of foreclosed assets		2		(11)
Increase in cash surrender value of life insurance		(53)		(49)
ESOP compensation		82		61
Stock based compensation		81		87
Changes in operating assets and liabilities:
Accrued interest receivable		82		(91)
Loans held for sale		611		(343)
Other assets		325		641
Accrued interest payable		101		208
Other liabilities		(474)		(60)
Net cash provided by operating activities	$	1,961	$	1,050
Cash flows from investing activities:
Maturities, calls, paydowns on available for sale securities	$	7,062	$	2,655
Purchases of available for sale securities		—		(8,624)
Net (increase) decrease in loans		11,056		(4,012)
Purchases of premises and equipment		(30)		(16)
Purchase of life insurance		(1,250)		—
Proceeds from sale of foreclosed assets		122		95
Cash received in MHC merger		—		99
Net cash provided by (used in) investing activities	$	16,960	$	(9,803)
Cash flows from financing activities:
Net (increase) decrease in deposits	$	3,079	$	(53,858)
Net increase in advance payments by borrowers for taxes and insurance		264		334
Repurchase of common stock		(4,618)		—
Purchase of shares of ESOP		—		(3,814)
Net proceeds from issuance of common stock		—		41,571
Net cash used in financing activities	$	(1,275)	$	(15,767)
Net change in cash and cash equivalents	$	17,646	$	(24,520)
Cash and cash equivalents at beginning		41,479		39,377
Cash and cash equivalents at end	$	59,125	$	14,857

Supplemental Cash Flow Disclosures:
Cash paid for interest	$	165	$	336
Cash paid for income taxes		626		—
Loans transferred to foreclosed assets		—		347

See accompanying notes to financial statements

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FFBW, Inc.

Form 10-Q

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

NOTE 1 – Basis of Presentation

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

In the opinion of management, all adjustments necessary for a fair presentation of the financial statements have been included. The results of operations for the three month period ended March 31, 2021 are not necessarily indicative of the results which may be expected for the entire year. These statements should be read in conjunction with the Financial Statements and notes thereto for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (“SEC”) as part of FFBW, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

NOTE 2 - Summary of Significant Accounting Policies

Organization

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

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

The Bank is a community bank headquartered in Waukesha, Wisconsin that provides financial services to individuals and businesses from our offices in Waukesha, Brookfield, and the South Side of Milwaukee.

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

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

Use of Estimates

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

Revenue Recognition

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

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

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

Interchange fees - Customers use a Bank-issued debit card to purchase goods and services, and the Company earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Company records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. These fees are included in “service charges and other fees” on the Consolidated Statements of Operations. There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods.

Cash and Cash Equivalents

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

Available for Sale Securities

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

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

Loans Acquired in a Transfer

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

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

At each reporting date, the Company continues to estimate cash flows expected to be collected for each loan or pool. If expected cash flows have decreased from the acquisition date estimate, the Company recognizes an allowance for loan losses. If expected cash flows have increased from the acquisition date estimate, the Company increases the amount of accretable yield to be recognized as interest income over the remaining life of the loan or pool.

Loans Held for Sale

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

Loans

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

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

Allowance for Loan Losses

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

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

Commercial development: These loans are secured by vacant land and/or property that are in the process of improvement. Repayment of these loans can be dependent on the sale of the property to third parties or the successful

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completion of the improvements by the builder for the end user. Construction loans include not only construction of new structures, but loans originated to finance additions to or alterations of existing structures. Until a permanent loan originates, or payoff occurs, all commercial construction loans secured by real estate are reported in this loan pool. Development loans also have the risk that improvements will not be completed on time, or in accordance with specifications and projected costs.

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

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

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

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

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

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

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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.

Foreclosed Assets

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

Premises and Equipment

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

Other Equity Investments

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

Income Taxes

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

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

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

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

Transfers of Financial Assets

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

Advertising

Advertising costs are expensed as incurred.

Other Comprehensive Income (Loss)

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

Off-Balance Sheet Financial Instruments

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

Life Insurance

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

Subsequent Events

Subsequent events have been evaluated through May 11, 2021, which is the date the financial statements are available to be issued.

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Recent Accounting Pronouncements

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

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

ASU No. 2019-12, “Simplifying the Accounting for Income Taxes”

This standard is intended to simplify the accounting for income taxes and improve the consistent application of accounting guidance through the following changes: 1) removes certain exceptions for recognizing deferred tax liabilities, tax allocations, and the calculation methodology for an interim year-to-date loss that exceeds the anticipated loss for the year; 2) requires a franchise tax or similar tax based partially on income be recognized as an income-based tax and account for any incremental amount incurred as a non-income based tax; 3) requires an entity evaluate when a step up in the tax basis of goodwill should be considered part of a business combination in which goodwill was originally recognized and when it should be considered a separate transaction; 4) does not require the allocation of consolidated current and deferred tax expense to a member entity that is not subject to tax in separate financial statements, but may elect to do so for certain legal entities that are disregarded by the taxing authority; and 5) amends guidance on the handling of an enacted change in tax law or rates within interim tax periods. This new standard is effective for financial statements issued for interim and annual periods beginning after December 15, 2020. The Company does not believe this will have a significant impact on its financial statements.

ASU No. 2020-04 “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”

This standard provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform if certain criteria are met. Effective March 12, 2020, the amendments in this ASU are elective and prospectively applied only to contracts modified on or before December 31, 2022, or hedging relationships entered into or evaluated through December 31, 2022. The adoption of this standard has not impacted the Company’s financial staetments and management does not believe it will have a significant impact moving forward.

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

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

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

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

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

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

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

ASU No. 2018-11, "Targeted Improvements"

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

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

The new standard is effective for the Company on January 1, 2022, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) the new standard's effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company expects to adopt the new standard on January 1, 2022 using the effective date as its date of initial application. The Company is evaluating what impact this standard will have on its consolidated financial statements.

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

This ASU modifies the disclosure requirements on fair value measurements in Topic 820, including the removal, modification to, and addition of certain disclosure requirements. This ASU was adopted effective January 1, 2020. Given the nature of the Company’s fair value instruments, the impact of adoption did not significantly impact the fair value disclosures provided in Note 15.

NOTE 3 – Earnings Per Share

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

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


	Three months ended
	March 31,
	2021		2020
Net income	$	670	$	407
Basic potential common shares
Weighted average shares outstanding		7,224,401		7,704,875
Weighted average unallocated Employee Stock Ownership Plan Shares		(576,061)		(607,924)
Basic weighted average shares outstanding		6,648,340		7,096,951
Dilutive potential common shares		13,770		—
Dilutive weighted average shares outstanding		6,662,110		7,096,951

Basic earnings per share	$	0.10	$	0.06
Diluted earnings per share	$	0.10	$	0.06

NOTE 4 – Available for Sale Securities

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


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
March 31, 2021
Obligations of the US government and US government sponsored agencies	$	655	$	$ 29	$	—	$	684
Obligations of states and political subdivisions		14,978		413		(99)		15,292
Mortgage-backed securities		32,968		1,083		(68)		33,983
Certificates of deposit		4,150		51		—		4,201
Corporate debt securities		2,177		126		—		2,303
Total available for sale securities	$	54,928	$	1,702	$	(167)	$	56,463

December 31, 2020
Obligations of the US government and US government sponsored agencies	$	717	$	37	$	—	$	754
Obligations of states and political subdivisions		15,012		612		(19)		15,605
Mortgage-backed securities		36,347		1,361		(28)		37,680
Certificates of deposit		7,880		57		—		7,937
Corporate debt securities		2,179		92		(4)		2,267
Total available for sale securities	$	62,135	$	2,159	$	(51)	$	64,243

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.

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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 More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
March 31, 2021
Obligations of states and political subdivisions	$	4,475	$	(99)	$	—	$	—	$	4,475	$	(99)
Mortgage-backed securities		5,545		(61)		1,132		(7)		6,677		(68)
Total	$	10,020	$	(160)	$	1,132	$	(7)	$	11,152	$	(167)
December 31, 2020
Obligations of states and political subdivisions	$	1,543	$	(19)	$	—	$	—	$	1,543	$	(19)
Mortgage-backed securities		4,140		(21)		736		(7)		4,876		(28)
Corporate debt securities		849		(4)		—		—		849		(4)
Total	$	6,532	$	(44)	$	736	$	(7)	$	7,268	$	(51)

At March 31, 2021, the investment portfolio included 4 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 18 securities available for sale, which had been in an unrealized loss position for less than twelve months. At December 31, 2020, the investment portfolio included 4 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 13 securities available for sale, which had been in an unrealized loss position for less than twelve months. Because these securities have a fixed interest rate, their fair value is sensitive to movements in market interest rates. These unrealized losses are considered temporary because the Company does not currently have the intent to sell the securities before recovery of the losses; therefore we expect to collect all contractually due amounts from these securities. Accordingly, these investments were reduced to their fair values through accumulated other comprehensive income, not through earnings.

We regularly assess our securities portfolio for other than temporary impairment (“OTTI”). These assessments are based on the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell securities prior to expected recovery. We did not have any impairment losses recognized in earnings for the three months ended March 31, 2021 or March 31, 2020.

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:


	March 31, 2021
	Amortized Cost		Fair Value
Due in one year or less	$	418	$	425
Due after one year through 5 years		6,556		6,754
Due after 5 years through 10 years		7,758		8,061
Due after 10 years		7,228		7,240
Subtotal	$	21,960	$	22,480
Mortgage-backed securities		32,968		33,983
Total	$	54,928	$	56,463

No securities were sold during the three months ended March 31, 2021 or 2020.

Available for sale securities with a carrying value of $1,019 and $1,036 were pledged at March 31, 2021 and December 31, 2020, respectively.

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NOTE 5 - Loans

Major classifications of loans are as follows:


	March 31,		December 31,
	2021		2020
Commercial
Development	$	14,565	$	14,090
Real estate		80,224		87,605
Commercial and industrial		20,041		20,758
Residential real estate and consumer
One-to-four family owner-occupied		28,356		30,548
One-to-four family investor-owned		27,968		32,638
Multifamily		30,432		29,303
Consumer		4,972		3,016
Subtotal	$	206,558	$	217,958
Deferred loan fees		(369)		(424)
Allowance for loan losses		(2,813)		(2,811)
Net loans	$	203,376	$	214,723

Deposit accounts in an overdraft position and reclassified as loans approximated $4 and $5 at March 31, 2021 and December 31, 2020, respectively.

A summary of the activity in the allowance for loan losses by portfolio segment is as follows:


			Residential real
			estate
Three Months Ended	Commercial		and consumer		Total

March 31, 2021
Balance at December 31, 2020	$	1,834	$	977	$	2,811
Provision for loan losses		58		(58)		—
Loans charged off		—		—		—
Recoveries of loans previously charged off		—		2		2
Total ending allowance balance	$	1,892	$	921	$	2,813


March 31, 2020
Balance at December 31, 2019	$	1,251	$	1,013	$	2,264
Provision for loan losses		50		(10)		40
Loans charged off		—		—		—
Recoveries of loans previously charged off		—		3		3
Total ending allowance balance	$	1,301	$	1,006	$	2,307

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Information about how loans were evaluated for impairment and the related allowance for loan losses follows:


			Residential Real
			Estate and
March 31, 2021	Commercial		Consumer		Total
Loans:
Individually evaluated for impairment	$	827	$	1,245	$	2,072
Collectively evaluated for impairment		114,003		90,483		204,486
Total loans	$	114,830	$	91,728	$	206,558

Allowance for loan losses:
Individually evaluated for impairment	$	450	$	—	$	450
Collectively evaluated for impairment		1,442		921		2,363
Total allowance for loan losses	$	1,892	$	921	$	2,813


			Residential Real
			Estate and
December 31, 2020	Commercial		Consumer		Total
Loans:
Individually evaluated for impairment	$	792	$	1,228	$	2,020
Collectively evaluated for impairment		121,661		94,277		215,938
Total loans	$	122,453	$	95,505	$	217,958

Allowance for loan losses:
Individually evaluated for impairment	$	450	$	—	$	450
Collectively evaluated for impairment		1,384		977		2,361
Total allowance for loan losses	$	1,834	$	977	$	2,811

Information regarding impaired loans follows:


	Principal		Recorded		Related		Average		Interest
As of March 31, 2021	Balance		Investment		Allowance		Investment		Recognized
Loans with related allowance for loan losses:
Commercial
Commercial and industrial	$	713	$	704	$	450	$	708	$	—
Total loans with related allowance for loan losses		713		704		450		708		—
Loans with no related allowance for loan losses:
Commercial
Commercial and industrial		146		123		—		135		1
Residential real estate and consumer
One-to-four family owner-occupied		1,039		992		—		1,016		9
One-to-four family investor-owned		242		203		—		222		—
Consumer		50		50		—		50		—
Total loans with no related allowance for loan losses		1,477		1,368		—		1,423		10

Total impaired loans	$	2,190	$	2,072	$	450	$	2,131	$	10

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	Principal		Recorded		Related		Average		Interest
As of December 31, 2020	Balance		Investment		Allowance		Investment		Recognized
Loans with related allowance for loan losses:
Commercial
Commercial and industrial	$	713	$	704	$	450	$	713	$	19
Residential real estate and consumer
One-to-four family investor-owned		—		—		—		—		—
Total loans with related allowance for loan losses		713		704		450		713		19
Loans with no related allowance for loan losses:
Commercial
Commercial and industrial		108		88		—		109		5
Residential real estate and consumer
One-to-four family owner-occupied		1,017		971		—		979		9
One-to-four family investor-owned		242		206		—		242		—
Consumer		52		51		—		54		—
Total loans with no related allowance for loan losses		1,419		1,316		—		1,384		14

Total impaired loans	$	2,132	$	2,020	$	450	$	2,097	$	33

Additional funds of $0 and $215 were committed to impaired loans as of March 31, 2021 and December 31, 2020, respectively.

The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loan losses. The credit quality indicators monitored differ depending on the class of loan.

Commercial loans and one-to-four family investor-owned and multifamily loans are generally evaluated using the following internally prepared ratings:

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

“Special mention” ratings are assigned to loans where management has some concern that the collateral or debt service ability may not be adequate, though the collectability of the contractual loan payments is still probable.

“Substandard” ratings are assigned to loans that do not have adequate collateral and/or debt service ability such that collectability of the contractual loan payments is no longer probable.

“Doubtful” ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and collectability of the contractual loan payments is unlikely.

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Information regarding the credit quality indicators most closely monitored for commercial loans by class follows:


			Special
	Pass		Mention		Substandard		Doubtful		Totals
March 31, 2021
Development	$	14,565	$	—	$	—	$	—	$	14,565
Real estate		80,224		—		—		—		80,224
Commercial and industrial		19,252		—		85		704		20,041
One-to-four family investor-owned		27,968		—		—		—		27,968
Multifamily		30,432		—		—		—		30,432
Totals	$	172,441	$	—	$	85	$	704	$	173,230
December 31, 2020
Development	$	14,090	$	—	$	—	$	—	$	14,090
Real estate		87,605		—		—		—		87,605
Commercial and industrial		20,046		—		8		704		20,758
One-to-four family investor-owned		32,358		—		280		—		32,638
Multifamily		29,303		—		—		—		29,303
Totals	$	183,402	$	—	$	288	$	704	$	184,394

Residential real estate and consumer loans are generally evaluated based on whether or not the loan is performing according to the contractual terms of the loan.

Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans by class follows:


	Performing		Non-performing		Totals
March 31, 2021
One-to-four family owner-occupied	$	28,199	$	157	$	28,356
Consumer		4,972		—		4,972
	$	33,171	$	157	$	33,328
December 31, 2020
One-to-four family owner-occupied	$	30,548	$	—	$	30,548
Consumer		3,016		—		3,016
	$	33,564	$	—	$	33,564

Loan aging information follows:


			Loans Past Due		Loans Past Due				Nonaccrual
	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
March 31, 2021
Commercial
Development	$	14,565	$	—	$	—	$	14,565	$	—
Real estate		80,224		—		—		80,224		—
Commercial and industrial		20,041		—		—		20,041		789
Residential real estate and consumer
One-to-four family owner-occupied		28,241		115		—		28,356		157
One-to-four family investor-owned		27,968		—		—		27,968		203
Multifamily		30,432		—		—		30,432		—
Consumer		4,972		—		—		4,972		—
Total	$	206,443	$	115	$	—	$	206,558	$	1,149

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			Loans Past Due		Loans Past Due				Nonaccrual
	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
December 31, 2020
Commercial
Development	$	14,090	$	—	$	—	$	14,090	$	—
Real estate		87,040		565		—		87,605		—
Commercial and industrial		20,054		704		—		20,758		792
Residential real estate and consumer
One-to-four family owner-occupied		30,347		201		—		30,548		69
One-to-four family investor-owned		32,638		—		—		32,638		206
Multifamily		29,303		—		—		29,303		—
Consumer		3,016		—		—		3,016		—
Total	$	216,488	$	1,470	$	—	$	217,958	$	1,067

There are no loans 90 or more days past due and accruing interest as of March 31, 2021 or December 31, 2020.

When, for economic or legal reasons related to the borrower’s financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider, the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, allowing interest-only payments for a period of time, and/or extending amortization terms. During the three months ended and as of March 31, 2021, there were no new troubled debt restructurings. No troubled debt restructurings defaulted within 12 months of their modification date during the three months ended March 31, 2021. During the year ended and as of December 31, 2020, there were no new troubled debt restructurings. No troubled debt restructurings defaulted within 12 months of their modifications during the year ended December 31, 2020.

During April 2020, the Coronavirus Aid, Relief and Economic Security Act was signed into law which provides optional, temporary relief from accounting for certain pandemic-related loan modifications as a TDR. During 2020, the Bank offered payment deferrals to loan customers that were excluded from TDR classification based on this Act. Loans totaling $4.5 million remain on a modified status as of March 31, 2021.

Management regularly monitors impaired loan relationships. In the event facts and circumstances change, an additional provision for loan losses may be necessary.

NOTE 6 - Deposits

The composition of deposits are as follows:


	March 31,		December 31,
	2021		2020

Non interest-bearing checking	$	52,852	$	51,802
Interest-bearing checking		10,523		10,899
Money market		69,119		70,455
Statement savings accounts		35,152		31,977
Health savings accounts		10,859		10,854
Certificates of deposit		51,072		50,511
Total	$	229,577	$	226,498

Certificates of deposit that meet or exceed the FDIC insurance limit of $250 totaled $9,752 and $9,485 at March 31, 2021 and December 31, 2020, respectively.

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The scheduled maturities of certificates of deposit are as follows as of March 31, 2021:


2021	$	28,530
2022		17,780
2023		2,999
2024		1,200
2025		460
2026		103
Total	$	51,072

NOTE 7– FHLB Advances

FHLB advances consist of the following:


	March 31, 2021			December 31, 2020
	Rates	Amount		Rates	Amount

Fixed rate, fixed term advances	0.0%-1.71%	$	5,500	0.0%-1.71%	$	5,500
Fixed term advances with floating spread	2.10%		2,000	2.10%		2,000

		$	7,500		$	7,500

The following is a summary of scheduled maturities of fixed term FHLB advances as of March 31, 2021:


	Fixed Rate Advances				Adjustable Rate Advances
	Weighted				Weighted				Total
	Average Rate		Amount		Average Rate		Amount		Amount

2021	0.0	%	$	4,000	2.10	%	$	2,000	$	6,000
2022	1.71	%		1,500	—			—		1,500

Total	0.47	%	$	5,500	2.10	%	$	2,000	$	7,500

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

The Company has a master contract agreement with the FHLB that provides for a borrowing up to the lesser of a determined multiple of FHLB stock owned or a determined percentage of the book value of the Company’s qualifying one-to-four family, multifamily, commercial real estate and commercial business loans. The Company pledged approximately $172,647 and $149,304 of one-to-four family, multifamily, commercial real estate and commercial business loans to secure FHLB advances at March 31, 2021 and December 31, 2020, respectively. FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest, such as Federal funds, FHLB discount note or prime rates. Fixed rate advances are priced in reference to market rates of interest at the time of the advance, namely the rates that FHLB pays to borrowers at various maturities. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $851 of FHLB stock owned by the Company at both March 31, 2021 and December 31, 2020.

At March 31, 2021, the Company’s available and unused portion of this borrowing agreement based on the amount of FHLB stock was $14,459.

In addition, the Company has a $7,000 federal funds line of credit through Bankers’ Bank of Wisconsin, which was not drawn on as of March 31, 2021. The Company also has the authority to borrow through the Federal Reserve’s Discount Window.

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NOTE 8 – Employee Stock Ownership Plan

The Company maintains a leveraged employee stock ownership plan (“ESOP”) that covers substantially all employees. The ESOP was established in conjunction with the Company’s initial stock offering completed in October 2017 and operates on a plan year ending December 31. The loan to fund the acquisition of stock by the ESOP was made by the Company. Additional shares were purchased by the ESOP in conjunction with the stock offering completed in January 2020, which was also financed by a loan from the Company. The Bank makes annual contributions to the ESOP equal to the ESOP’s debt service. The ESOP shares initially were pledged as collateral for this debt. As the debt is repaid, shares are released from collateral and allocated to active participants, based on the proportion of debt service paid in the year. Because the debt is intercompany, it is eliminated in consolidation for presentation in these financial statements. The shares pledged as collateral are reported as unearned ESOP shares in the balance sheet.

As shares are committed to be released from collateral and allocated to active participants, the Company reports compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-shares (EPS) computations. During the quarters ended March 31, 2021 and 2020, 7,647 and 7,647 shares were committed to be released, respectively. During the three months ended March 31, 2021 the average fair value per share of stock was $10.77 resulting in total ESOP compensation expense of $82 for the three months ended March 31, 2021. During the three months ended March 31, 2020 the average fair value per share of stock was $10.15 resulting in total ESOP compensation expense of $63 for the three months ended March 31, 2020. The ESOP shares as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021		December 31, 2020
Shares allocated to active participants		62,305		33,861
Shares committed to be released and allocated to participants		7,647		30,584
Shares distributed		—		(2,140)
Total unallocated shares		573,446		581,093
Total ESOP shares		643,398		643,398
Fair value of unallocated shares (based on $11.25 and $10.02 share price at March 31, 2021 and December 31, 2020, respectively)	$	6,451	$	5,823

NOTE 9 - Share-based Compensation Plans

The Company adopted the FFBW, Inc. 2018 Equity Incentive Plan (the “2018 Equity Incentive Plan”) in 2018. ASC Topic 718 requires that the grant date fair value of equity awards to employees and directors be recognized as compensation expense over the period during which they are required to provide service in exchange for such awards.

The following table summarizes the impact of the Company’s share-based payment plans in the financial statements for the period shown:


	Three Months Ended
	March 31,
	2021		2020
Total cost of stock grant plan during the year	$	44	$	50
Total cost of stock option plan during the year		37		37
Total cost of share-based payment plans during the year	$	81	$	87

Amount of related income tax benefit recognized in income	$	19	$	23

Options are granted with an exercise price equal to no less than the market price of the Company’s shares at the date of grant: those option awards generally vest pro-rata over five years of service and have 10-year contractual terms. Restricted shares typically vest pro-rata over a five year period, 20% per year beginning one year from the issuance date.

Share amounts related to periods prior to the date of the closing of the Offering on January 16, 2020 have been restated to give retroactive recognition to the 1.1730 exchange ratio applied in the offering.

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The following table summarizes stock options activity for the three months ended March 31, 2021:


	Outstanding
				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Stock Option	Exercise		Contractual	Intrinsic
	Awards	Price		Term (years)	Value
Options outstanding as of December 31, 2020	269,220	$	10.51
Granted	—		—
Exercised	—		—
Forfeited	—		—
Options outstanding as of March 31, 2021	269,220	$	10.51	8.26	$	201,772
Options exercisable as of March 31, 2021	81,964	$	10.81	7.98	$	19,926

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions. Since the Company does not have sufficient historical fair value estimates of its stock, the Company calculates expected volatility using the historical volatility of the Dow Jones U.S. Financial Services Index. The risk-free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of options is estimated based on the assumption that options will be exercised evenly throughout their life after vesting and represents the period of time that options granted are expected to remain outstanding.

There were no options granted during the three months ended March 31, 2021.

The following is a summary of changes in restricted shares for the three months ended March 31, 2021:


		Weighted
		Average
	Number of	Grant Date Fair
	Shares	Value
Nonvested stock awards as of December 31, 2020	62,060	$	10.73
Granted	—		—
Vested	—		—
Forfeited	—		—
Nonvested stock awards as of March 31, 2021	62,060	$	10.73

As of March 31, 2021, there was $1.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including share option and non-vested share awards) granted under the 2018 Equity Incentive Plan. At March 31, 2021, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 2.9 years.

NOTE 10 – Equity and Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Common Equity Tier 1, Tier 1, and Total capital to risk-weighted assets and of Tier 1 capital to average assets. It is management’s opinion, as of March 31, 2021, that the Bank meet all applicable capital adequacy requirements.

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As of March 31, 2021, the Bank is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum regulatory capital ratios as set forth in the table. There are no conditions or events since March 31, 2021 that management believes have changed the category.

The Bank’s actual capital amounts and ratios are presented in the following tables:

To Be Well

Capitalized

Under Prompt

For Capital Adequacy

Corrective

Actual

Purposes

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2021

Common Equity Tier 1 capital (to risk‑weighted assets)

74,087

33.9

≥ 9,832

≥ 4.5

≥ 14,202

≥ 6.5

Tier 1 capital (to risk‑weighted assets)

74,087

33.3

≥ 13,110

≥ 6.0

≥ 17,479

≥ 8.0

Total capital (to risk‑weighted assets)

76,819

34.5

≥ 17,479

≥ 8.0

≥ 21,849

≥ 10.0

Tier 1 capital (to average assets)

74,087

22.3

≥ 13,309

≥ 4.0

≥ 16,637

≥ 5.0

December 31, 2020

Common Equity Tier 1 capital (to risk‑weighted assets)

73,665

33.1

≥ 10,018

≥ 4.5

≥ 14,471

≥ 6.5

Tier 1 capital (to risk‑weighted assets)

73,665

33.1

≥ 13,358

≥ 6.0

≥ 17,810

≥ 8.0

Total capital (to risk‑weighted assets)

76,448

34.3

≥ 17,810

≥ 8.0

≥ 22,263

≥ 10.0

Tier 1 capital (to average assets)

73,665

25.2

≥ 11,700

≥ 4.0

≥ 14,625

≥ 5.0

NOTE 11 – Fair Value

Accounting standards describe three levels of inputs that may be used to measure fair value (the fair value hierarchy). The level of an asset or liability within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement of that asset or liability.

Following is a brief description of each level of the fair value hierarchy:

Level 1 - Fair value measurement is based on quoted prices for identical assets or liabilities in active markets.

Level 2 - Fair value measurement is based on: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; or (3) valuation models and methodologies for which all significant assumptions are or can be corroborated by observable market data.

Level 3 - Fair value measurement is based on valuation models and methodologies that incorporate at least one significant assumption that cannot be corroborated by observable market data. Level 3 measurements reflect the Company’s estimates about assumptions market participants would use in measuring fair value of the asset or liability.

Some assets and liabilities, such as securities available for sale, are measured at fair value on a recurring basis under accounting principles generally accepted in the United States. Other assets and liabilities, such as impaired loans, may be measured at fair value on a nonrecurring basis.

Following is a description of the Company’s valuation methodology and significant inputs used for each asset and liability measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset or liability within the fair value hierarchy.

Available for sale securities - Available for sale securities may be classified as Level 1 or Level 2 measurements within the fair value hierarchy. Level 1 securities include equity securities traded on a national exchange. The fair value measurement of a Level 1 security is based on the quoted price of the security. Level 2 securities include U.S. government and agency securities, obligations of states and political subdivisions, corporate debt securities, and

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mortgage related securities. The fair value measurement of a Level 2 security is obtained from an independent pricing service and is based on recent sales of similar securities and other observable market data.

Loans - Loans are not measured at fair value on a recurring basis. However, loans considered to be impaired may be measured at fair value on a nonrecurring basis. The fair value measurement of an impaired loan that is collateral dependent is based on the fair value of the underlying collateral. Independent appraisals are obtained that utilize one or more valuation methodologies - typically they will incorporate a comparable sales approach and an income approach. Management routinely evaluates the fair value measurements of independent appraisers and adjusts those valuations based on differences noted between actual selling prices of collateral and the most recent appraised value. Such adjustments are usually significant, which results in a Level 3 classification. All other impaired loan measurements are based on the present value of expected future cash flows discounted at the applicable effective interest rate and, thus, are not fair value measurements.

Foreclosed assets - Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, foreclosed assets are initially measured at fair value (less estimated costs to sell) when they are acquired and may also be measured at fair value (less estimated costs to sell) if they become subsequently impaired. The fair value measurement for each asset may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based on management’s comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements.

Other equity investments - Certain equity investments are measured at fair value on a non-recurring basis using observable transactions and are classified as Level 2.

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Assets measured at fair value on a recurring basis are summarized below:


	Recurring Fair Value Measurements Using
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Instruments		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total

As of March 31, 2021
Assets:
Available for sale securities:
Obligations of the US government and US government sponsored agencies	$	—	$	684	$	—	$	684
Obligations of states and political subdivisions		—		15,292		—		15,292
Mortgage-backed securities		—		33,983		—		33,983
Certificates of deposit		—		4,201		—		4,201
Corporate debt securities		—		2,303		—		2,303
Total available for sale securities	$	—	$	56,463	$	—	$	56,463


As of December 31, 2020
Assets:
Available for sale securities:
Obligations of the US government and US government sponsored agencies	$	—	$	754	$	—	$	754
Obligations of states and political subdivisions		—		15,605		—		15,605
Mortgage-backed securities		—		37,680		—		37,680
Certificates of deposit		—		7,937		—		7,937
Corporate debt securities		—		2,267		—		2,267
Total available for sale securities	$	—	$	64,243	$	—	$	64,243

Information regarding the fair value of assets measured at fair value on a nonrecurring basis follows:


			Nonrecurring Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Assets		Identical		Observable		Unobservable
	Measured at		Instruments		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

As of March 31, 2021
Assets:
Loans	$	254	$	—	$	—	$	254
Other equity investments		225		—		225		—

As of December 31, 2020
Assets:
Loans	$	254	$	—	$	—	$	254
Foreclosed assets		125		—		—		125
Other equity investments		225		—		225		—

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Loans with a carrying amount of $704 were considered impaired and were written down to their estimated fair value of $254 as of March 31, 2021. Loans with a carrying amount of $704 were considered impaired and were written down to their estimated fair value of $254 as of December 31, 2020. As a result, the Company recognized a specific valuation allowance against these impaired loans totaling $450 and $450 as of March 31, 2021 and December 31, 2020, respectively.

Foreclosed assets with a carrying amount of $0 and $125 were determined to be at their fair value as of March 31, 2021 and December 31, 2020, respectively.

The following presents quantitative information about nonrecurring Level 3 fair value measurements:


					Range/Weighted
	Fair Value		Valuation Technique	Unobservable Input(s)	Average
As of March 31, 2021
Loans	$	254	Market and/or income approach	Management discount on appraised values	10	%	-	20	%
Foreclosed assets	$	0	Market and/or income approach	Management discount on appraised values	10	%	-	20	%

As of December 31, 2020
Loans	$	254	Market and/or income approach	Management discount on appraised values	10	%	-	20	%
Foreclosed assets	$	125	Market and/or income approach	Management discount on appraised values	10	%	-	20	%

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The carrying value and estimated fair value of financial instruments as of March 31, 2021 and December 31, 2020 follow:


	March 31, 2021
	Carrying			Fair Value
	Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	59,125	$	59,125	$	—	$	—
Available for sale securities		56,463		—		56,463		—
Loans held for sale		1,098		—		1,098		—
Loans		203,376		—		—		205,155
Accrued interest receivable		912		912		—		—
Cash value of life insurance		8,576		—		—		8,576
Other equity investments		1,278		—		225		1,053

Financial liabilities:
Deposits		229,577		175,987		—		51,164
Advance payments by borrowers for taxes and insurance		391		391		—		—
FHLB advances		7,500		—		—		7,535
Accrued interest payable		117		117		—		—


	December 31, 2020
	Carrying			Fair Value
	Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	41,479	$	41,479	$	—	$	—
Available for sale securities		64,243		—		64,243		—
Loans held for sale		1,708		—		1,708		—
Loans		214,723		—		—		217,893
Accrued interest receivable		995		995		—		—
Cash value of life insurance		7,272		—		—		7,272
Other equity investments		1,279		—		225		1,054

Financial liabilities:
Deposits		226,498		175,987		—		50,732
Advance payments by borrowers for taxes and insurance		127		127		—		—
FHLB advances		7,500		—		—		7,544
Accrued interest payable		17		17		—		—

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

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NOTE 12 – Business Combination

On December 31, 2020, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Mitchell Bank pursuant to the Purchase and Acquisition Agreement dated July 24, 2020. The assets acquired and the liabilities assumed from Mitchell Bank were recorded at their fair value as of the closing date of the acquisition. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available. A bargain purchase gain of $7,000 was recorded at the time of the acquisition.



		As Recorded		Fair Value and Other		As Recorded
		by Mitchell Bank		Merger Related Adjustments		by the Company
Consideration Paid
Cash					$	4,978

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and due from banks	$	38,266	$	-	$	38,266
Securities		7,133		16		7,149
Other equity securities		51		177		228
Loans, net of allowance		14,512		(217)		14,295
Premises and equipment		529		499		1,028
Core deposit intangibles		-		369		369
Accrued interest receivable		83		-		83
Foreclosed assets		185		(60)		125
Deferred tax asset		228		(228)		-
Other assets		209		(88)		121
Total assets acquired	$	61,196	$	468		61,664

Deposits	$	56,641	$	-		56,641
Other liabilities		38		-		38
Total liabilities assumed	$	56,679	$	-		56,679

Total identifiable assets		4,517		468		4,985

Bargain purchase gain resulting from acquisition						(7)

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

● Statements of our goals, intentions and expectations;

● Statements regarding our business plans, prospects, growth and operating strategies;

● Statements regarding the asset quality of our loan and investment portfolios; and

● Estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

● General economic conditions, either nationally or in our market areas, that are worse than expected;

●

Economic and/or policy changes related to the COVID-19 pandemic;

●

Changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

● Our ability to access cost-effective funding;

● Fluctuations in real estate values and both residential and commercial real estate market conditions;

● Demand for loans and deposits in our market area;

● Our ability to implement and change our business strategies;

● Competition among depository and other financial institutions;

● Inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make;

● Adverse changes in the securities or secondary mortgage markets;

● Changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;

● The impact of the Dodd-Frank Act and the implementing regulations;

● Changes in the quality or composition of our loan or investment portfolios;

● Technological changes that may be more difficult or expensive than expected;

● The inability of third-party providers to perform as expected;

● Our ability to manage market risk, credit risk and operational risk in the current economic environment;

● Our ability to enter new markets successfully and capitalize on growth opportunities;

● Our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;

● Changes in consumer spending, borrowing and savings habits;

● Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

● Our ability to retain key employees;

● Our compensation expense associated with equity allocated or awarded to our employees; and

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● Changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Impact of COVID-19

During the first quarter of 2020, global financial markets experienced significant volatility resulting from the spread of a novel coronavirus known as COVID-19. In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a National Public Health Emergency. The COVID-19 pandemic has restricted the level of economic activity in our markets. In response to the pandemic, the governments of the State of Wisconsin and of most other states have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forego time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These measures dramatically increased unemployment in the United States and have negatively impacted many businesses, and thereby threatened the repayment ability of some of our borrowers.

To address the economic impact in the United States, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act included a number of provisions that affected us, including accounting relief for troubled debt restructurings (“TDRs”), or loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates. The CARES Act also established the Paycheck Protection Program (“PPP”), which allowed us to lend money to small businesses to maintain employee payrolls through the crisis with guarantees from the SBA. Under this program, loan amounts may be forgiven if the borrower maintains employee payrolls and meets certain other requirements.

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 COVID-19 pandemic and to protect our employees and customers from potential exposure to the virus, all First Federal Bank of Wisconsin lobbies continue to observe best practice protocols to limit exposure and/or spread of the virus.

We have implemented 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 (“U.S. GAAP”). Through March 31, 2021 we had 15 COVID-19 related loans on deferral totaling $14.6 million. As of March 31, 2021, one of these loans remained on a COVID-19 related deferral totaling $4.5 million. The one remaining deferred loan is on principal only payments.

The health of the banking industry is highly correlated with that of the economy. The temporary and/or partial closures of non-essential businesses in our local and national economies increases the likelihood of recession, which typically results in an increased level of credit losses. Accordingly, our provisions for loan losses have increased and will be closely monitored throughout the COVID-19 pandemic. In addition to utilizing quantitative loss factors, we consider qualitative factors, such as changes in underwriting policies, current economic conditions, delinquency statistics, the adequacy of the underlying collateral, and the financial strength of the borrower. The impact of the COVID-19 pandemic on the performance of our loan portfolio in future quarters is unknown, however all of these factors are likely to be affected by the COVID-19 pandemic.

Given the unprecedented uncertainty and rapidly 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 are

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highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued 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, 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.

Comparison of Financial Condition at March 31, 2021 and December 31, 2020

Total Assets. Total assets decreased $1.2 million, or 0.4%, to $337.8 million at March 31, 2021 from $339.0 million at December 31, 2020 due, in part, to the share repurchase activity.

Cash and cash equivalents. Cash and cash equivalents increased $17.6 million, or 42.5%, to $59.1 million at March 31, 2021 from $41.5 million at December 31, 2020. The decrease resulted from decreases in net loans and available-for-sale securities.

Net Loans. Net loans decreased $11.3 million, or 5.3%, to $203.4 million at March 31, 2021 from $214.7 million at December 31, 2020. The decrease resulted from decreases in commercial real estate loans of $7.4 million, or 8.4%, one-to-four family owner-occupied loans of $2.2 million, or 7.2%, one-to-four family investor-owned loans of $4.7 million, or 14.3%, and commercial business loans of $717,000, or 3.5%, offset, in part, by increases of $475,000, or 3.4%, in commercial development loans, $1.1 million, or 3.9%, in multifamily loans and $2.0 million, or 64.9%, in consumer loans.

During the three months ended March 31, 2021, we sold $7.1 million of one-to-four family owner-occupied residential real estate loans, on a servicing-released basis. Subject to market and economic conditions, management intends to continue this sales activity in future periods to generate gain on sale of loans income.

Available for sale securities. Available for sale securities decreased $7.8 million, or 12.1%, to $56.5 million at March 31, 2021 from $64.2 million at December 31, 2020 as maturing investments were not replaced during the quarter.

Other equity investments. Other equity investments remained unchanged at $1.3 million at March 31, 2021 and December 31, 2020, respectively.

Deposits. Deposits increased $3.1 million, or 1.4%, to $229.6 million at March 31, 2021 from $226.5 million at December 31, 2020. The increase resulted from an increase in certificates of deposit of $561,000, or 1.1%, to $51.1 million at March 31, 2021 from $50.5 million at December 31, 2020, noninterest-bearing checking accounts of $1.1 million, or 2.0%, to $52.9 million at March 31, 2021, compared to $51.8 million at December 31, 2020 and savings accounts of $3.2 million, or 9.9%, to $35.2 million at March 31, 2021 from $32.0 million at December 31, 2020. Offsetting these increases, money market accounts decreased $1.4 million, or 1.9%, to $69.1 million at March 31, 2021 from $70.5 million as of December 31, 2020, interest-bearing checking accounts decreased $376,000, or 3.4%, to $10.5 million at March 31, 2021 from $10.9 million at December 31, 2020, while health savings accounts remained unchanged at $10.9 million at both March 31, 2021 and December 31, 2020. Included in the certificates of deposit were brokered deposits of $1.0 million as of both March 31, 2021 and December 31, 2020.

Borrowings. Borrowings, consisting entirely of FHLB advances, remained unchanged at $7.5 million at March 31, 2021 and December 31, 2020. The aggregate cost of outstanding advances from the FHLB was 0.9% at March 31, 2021 compared to the Bank’s cost of deposits of 0.6% at that date.

Other liabilities. Other liabilities decreased $474,000, or 1.3%, to $1.1 million at March 31, 2021 from $1.6 million at December 31, 2020. The decrease resulted, in part, from a decrease in outstanding accounts payable and a decrease in accrued expenses.

Total Equity. Total equity decreased $4.2 million, or 4.1%, to $99.1 million at March 31, 2021 from $103.3 million at December 31, 2020. The decrease resulted primarily from stock repurchases of $4.6 million.

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Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. We practice early identification of non-accrual and problem loans in order to minimize the Company’s risk of loss. Non-performing loans are defined as non-accrual loans and restructured loans that were 90 days or more past due at the time of their restructure, or when management determines that such classification is warranted. The accrual of interest income is generally discontinued when contractual payments have become 90 or more days past due or when management has serious doubts about further collectability of principal or interest. Cash receipts on non-accrual loans are used to reduce principal rather than being recorded as interest income. A TDR typically involves the granting of some concession to the borrower involved in the loan modification, such as modifying the payment schedule or making interest changes. TDR loans may involve loans that have had a charge-off taken against the loan to reduce the carrying amount of the loan to fair market value as determined pursuant to ASC 310-10.

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The following table identifies the various components of non-performing assets and other balance sheet information as of the dates indicated below and changes in the ALLL for the periods then ended:


	March 31,			December 31,
	2021 and			2020 and
	Three Months			Twelve Months
	Then			Then
	Ended			Ended

	(in thousands)
Nonperforming assets:
Nonaccrual loans	$	1,149		$	1,067
Accruing loans past due 90 days or more		—			—
Total nonperforming loans ("NPLs")	$	1,149		$	1,067
Foreclosed assets		—			125
Total nonperforming assets ("NPAs")	$	1,149		$	1,192
Troubled Debt Restructurings ("TDRs")		1,413			1,414
Nonaccrual TDRs		995			990
Average outstanding loan balance		214,335			205,351
Loans, end of period		206,558			217,958
ALLL, at beginning of period		2,811			2,264
Loans charged off:
Commercial		—			—
Residential real estate and consumer		—			—
Total loans charged off	$	—		$	—
Recoveries of loans previously charged off:
Residential real estate and consumer		2			27
Total recoveries of loans previous charged off		2			27
Net loans charged off ("NCOs'")	$	2		$	27
Additions to ALLL via provision for loan losses charged to operations		—			520
ALLL, at end of period	$	2,813		$	2,811
Ratios:
NCOs (annualized) to average loans		0.00	%		0.03	%
ALLL to total loans		1.36	%		1.29	%
NPL to total loans		0.56	%		0.49	%
NPAs to total assets		0.34	%		0.35	%
Total Assets	$	337,751		$	338,972

Total loans past due decreased from $1.5 million as of December 31, 2020 to $115,000 as of March 31, 2021. We believe our credit and underwriting policies continue to support more effective lending decisions by the Company, which increases the likelihood of maintaining loan quality going forward. Moreover, we believe the favorable trends regarding our nonperforming loans and nonperforming assets reflect our continued adherence to improved underwriting criteria and practices. We believe our current ALLL is adequate to cover probable losses in our current loan portfolio.

Non-performing loans of $1.1 million as of March 31, 2021, which included $995,000 of non-accrual trouble debt restructured loans, reflected an increase of $82,000 from the non-performing loan balance as of December 31, 2020.

Our non-performing assets were $1.1 million at March 31, 2021, or 0.34% of total assets, compared to $1.2 million, or 0.35% of total assets as of December 31, 2020.

Foreclosed assets decreased to $0 at March 31, 2021 from $125,000 at December 31, 2020. We strive to aggressively liquidate foreclosed assets as a part of our overall credit risk management strategy.

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Comparison of Operating Results for the Three Months Ended March 31, 2021 and March 31, 2020

General. We had net income of $670,000 for the three months ended March 31, 2021, compared to net income of $407,000 for the three months ended March 31, 2020, an increase of $263,000, or 64.7%. The increase in net income was the net effect of an increase in net interest income after provision for loan losses of $677,000, or 30.5%, and an increase in noninterest income of $192,000, or 117.8%, offset in part by an increase in noninterest expense of $559,000, or 30.3%.

Interest and dividend income. Total interest and dividend income increased $359,000 or 12.8%, to $3.2 million for the three months ended March 31, 2021 compared to $2.8 million for the three months ended March 31, 2020. Average interest-earning assets increased $46.7 million, or 18.1%, to $304.6 million for the three months ended March 31, 2021 compared to $258.0 million for the three months ended March 31, 2020, and the weighted average yield on interest-earning assets decreased 19 basis points when comparing the 2021 and 2020 quarters. The decrease in average yield was primarily the result of lower market interest rates and increased market competition during the 2021 quarter.

Interest Expense. Total interest expense decreased $278,000, or 51.1%, to $226,000 for the three months ended March 31, 2021 compared to $544,000 for the three months ended March 31, 2020. Average interest-bearing liabilities increased $26.6 million, or 17.4%, to $179.9 million for the three months ended March 31, 2021 from $153.3 million for the three months ended March 31, 2020. The rate paid on interest-bearing liabilities decreased 83 basis points to 0.59% for the three months ended March 31, 2021 compared to 1.42% for the three months ended March 31, 2020.

Provision for Loan Losses. The loan loss provision was $0 for the three months ended March 31, 2021 compared to $40,000 for the three months ended March 31, 2020. At March 31, 2021, our allowance for loan loss was $2.8 million, or 1.36%, of total loans. At March 31, 2021, the Bank’s allowance for loan losses excluding SBA guaranteed PPP loans is 1.46% of total loans.

Noninterest Income. Noninterest income increased $192,000, or 117.8% to $355,000 for the three months ended March 31, 2021 compared to $163,000 for the three months ended March 31, 2020. The increase was due primarily to an increase in the gain on sale of loans of $126,000 due to an increase in refinance volume.

Noninterest Expense. Noninterest expense increased $559,000, or 30.3%, to $2.4 million for the three months ended March 31, 2021 compared to $1.8 million for the three months ended March 31, 2020. The increase was primarily due to an increase in salaries and employee benefits expenses of $230,000 and an increase in data processing expenses of $131,000. Both increases resulted primarily from the acquisition of Mitchell Bank.

Income Tax Expense. We recorded an income tax expense of $182,000 for the three months ended March 31, 2021 compared to $135,000 for the three months ended March 31, 2020, an increase of $47,000, or 34.8%.

Average balances and yields. The following tables set 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.

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	For the Three Months Ended March 31,
	2021								2020
	Average								Average
	Outstanding								Outstanding					Yield/
	Balance			Interest		Yield/ Rate			Balance			Interest		Rate

	(in thousands)								(in thousands)
Interest-earning assets:
Loans	$	214,335		$	2,872		5.36	%	$	194,528		$	2,435	5.01	%
Available for sale securities		61,494			285		1.85	%		49,503			288	2.33	%
Interest-bearing deposits		33,845			9		0.11	%		13,163			76	2.31	%
Other equity investments		1,278			2		0.63	%		780			8	4.10	%
Total interest-earning assets		310,952			3,168		4.08	%		257,974			2,807	4.35	%
Noninterest-earning assets		27,895								42,844
Allowance for loan losses		(2,812)								(2,274)
Total assets	$	336,035							$	298,544

Interest-bearing liabilities:
Demand accounts	$	10,380			7		0.27	%	$	6,794			10	0.59	%
Money market accounts		66,908			63		0.38	%		45,702			133	1.16	%
Savings accounts		33,149			6		0.07	%		12,886			4	0.12	%
Health savings accounts		10,992			4		0.15	%		10,910			8	0.29	%
Certificates of deposit		50,986			169		1.33	%		65,514			328	2.00	%
Total interest-bearing deposits		172,415			249		0.58	%		141,806			483	1.36	%
Borrowings		7,500			17		0.91	%		11,500			61	2.12	%
Total interest-bearing liabilities		179,915			266		0.59	%		153,306			544	1.42	%
Noninterest-bearing deposits		50,979								21,737
Other non-interest bearing liabilities		1,427								34,630
Total liabilities		232,321								209,673
Equity		103,714								88,871
Total liabilities and equity	$	336,035							$	298,544
Net interest income					2,902								2,263
Net interest rate spread⁽¹⁾							3.48	%						2.93	%
Net interest-earning assets⁽²⁾		131,037								104,668
Net interest margin⁽³⁾							3.73	%						3.51	%
Average of interest-earning assets to interest-bearing liabilities		173	%							168	%

(1)	Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(2)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(3)	Net interest margin represents net interest income divided by 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.


	For Three Months Ended March 31,
	2021 vs. 2020
	Increase (Decrease) Due to				Total Increase
	Volume		Rate		(Decrease)

	(In thousands)
Interest-earning assets:
Loans	$	248	$	189	$	437
Available for sale securities		70		(73)		(3)
Interest-bearing deposits		119		(186)		(67)
Other equity investments		5		(11)		(6)
Total interest-earning assets	$	442	$	(81)	$	361

Interest-bearing liabilities:
Demand accounts	$	5	$	(8)	$	(3)
Money market accounts		62		(132)		(70)
Savings accounts		6		(4)		2
Health savings accounts		—		(4)		(4)
Certificates of deposit		(73)		(86)		(159)
Total deposits	$	—	$	(234)	$	(234)
Borrowings		(21)		(23)		(44)
Total interest-bearing liabilities		(21)		(257)		(278)
Change in net interest income	$	463	$	176	$	639

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 FHLB-Chicago. At March 31, 2021, we had $7.5 million outstanding in advances from the FHLB-Chicago and we had an additional availability of $14.5 million of FHLB-Chicago advances based on the FHLB stock owned.

Additionally, at March 31, 2021 we had a $7 million federal funds rate line of credit with the Bankers’ Bank of Wisconsin, of which $0 was drawn at March 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.

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 change our mix of deposits to become less reliant on certificates of deposit, we anticipate that we will continue to allow a significant portion of higher-costing certificates of deposit to run off at maturity. We also anticipate continued

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use of FHLB-Chicago advances as well as continuing to utilize brokered certificates of deposit and online sources, as needed, to fund future loan growth and our operations.

At March 31, 2021, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital level of $74.1 million, or 22.3% of adjusted total assets, which is above the well-capitalized required level of $16.6 million, or 5.0%; and total risk-based capital of $76.8 million, or 34.5% of risk-weighted assets, which is above the well-capitalized required level of $21.8 million, or 10.0%. Management is not aware of any conditions or events since March 31, 2021, that would change our category.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and 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 March 31, 2021. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2021, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – Other Information

Item 1. Legal Proceedings

We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at March 31, 2021, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

Item 1A. Risk Factors

The presentation of Risk Factors is not required for smaller reporting companies like FFBW, Inc.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

Not applicable.

(c)

On January 27, 2021 the Company’s Board of Directors authorized the repurchase of up to 769,271 shares of the Company’s common stock, representing approximately 10% of the Company’s then outstanding shares. Repurchases will be made from time to time in the open market, through block trades, in privately negotiated stock purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. Such repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interest of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital and the Company’s financial performance. Open market purchases will be conducted in accordance with the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements.

The table below sets forth the Company’s common stock repurchases during the three months ended March 31, 2021.


					(d)
				(c)	Maximum number
				Total number of	of
				shares	shares that may yet
	(a)	(b)		purchased as part	be
	Total number of	Average		of publicly	purchased under
	shares	price paid		announced plans or	the plans
Period	purchased	per share		programs	or programs
January 1 - January 31, 2021	—	$	—	—	769,271
February 1 - February 28, 2021	—	$	—	—	769,271
March 1 - March 31, 2021	408,753	$	11.30	408,753	360,518
Total	408,753			408,753

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of FFBW⁽¹⁾
3.2	Bylaws of FFBW⁽²⁾
4	Form of Common Stock Certificate⁽²⁾
31.1	Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS XBRL Instance Document
	101.SCH XBRL Taxonomy Extension Schema Document
	101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB XBRL Taxonomy Extension Label Linkbase Document
	101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

(1)

Incorporated by reference to pre-effective amendment No. 1 to the Registration Statement on Form S-1 (file no. 333-233740), filed on November 1, 2019.

(2)

Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-233740), filed on September 13, 2019.

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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.


		FFBW, Inc.

Date: May 11, 2021	By:	/s/ Edward H. Schaefer
		Edward H. Schaefer
		President and Chief Executive Officer




Date: May 11, 2021	By:	/s/ Steven L. Wierschem
		Steven L. Wierschem
		Chief Financial Officer

FFBW, Inc. /MD/ - FORM 10-Q - May 11, 2021

Attached files

FFBW, Inc. /MD/ Reports