SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

[ ]	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-38239

FFBW, Inc.

(Exact name of registrant as specified in its charter)

Federal		82-3027075
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

1360 South Moorland Road Brookfield, Wisconsin		53005
(Address of Principal Executive Offices)		(Zip Code)

(262) 542-4448

(Registrant’s telephone number)

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

Title of class	Trading Symbol	Name of exchange on which registered

Common Stock; $0.01 par value	FFBW	The Nasdaq Stock Market

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

YES [X] 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 [X ] NO [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 [X]
	Emerging growth company [X]

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 [X]

6,566,478 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of November 14, 2019.

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FFBW, Inc.

Form 10-Q

Index

		Page
Part I. Financial Information

Item 1.	Financial Statements

	Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	1

	Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	2

	Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)	3

	Statements of Changes in Equity for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	4

	Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)	5

	Notes to Financial Statements (unaudited)	6

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

Part II. Other Information

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

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

Item 3.	Defaults upon Senior Securities

Item 4.	Mine Safety Disclosures

Item 5.	Other Information

Item 6.	Exhibits

	Signature Page

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Part I. – Financial Information

Item 1.

Financial Statements

FFBW, Inc.

Balance Sheets

September 30, 2019 (Unaudited) and December 31, 2018

(In thousands, except share data)

	September 30,			December 31,
	2019			2018
Assets

Cash and due from banks	$	4,185		$	1,746
Fed funds sold		-			2,742
Cash and cash equivalents		4,185			4,488
Available for sale securities, stated at fair value		44,603			43,751
Loans held for sale		1,118			679
Loans, net of allowance for loan and lease losses of $2,262 and $2,118, respectively		193,307			198,694
Premises and equipment, net		4,818			5,057
Foreclosed assets		84			69
Other equity investments		730			739
Accrued interest receivable		766			768
Cash value of life insurance		7,155			7,007
Other assets		1,323			1,474

TOTAL ASSETS	$	258,089		$	262,726

Liabilities and Equity

Deposits	$	178,698		$	183,205
Advance payments by borrowers for taxes and insurance		1,125			55
FHLB advances		14,850			17,750
Accrued interest payable		840			70
Other liabilities		1,266			1,284
Total liabilities	$	196,779		$	202,364

Preferred stock ($0.01 par value, 1,000,000 authorized, no shares issued or outstanding as of September 30, 2019 and December 31, 2018, respectively)	$	-		$	-

Common stock ($0.01 par value, 19,000,000 and 19,000,000 shares authorized, 6,706,742 and 6,696,742 shares issued, 6,566,748 and 6,696,742 shares outstanding as of September 30, 2019 and December 31, 2018, respectively)		67			67
Additional paid in capital		28,580			28,326
Unallocated common stock of Employee Stock Ownership Plan ("ESOP") (233,583 and 243,303 shares at September 30, 2019 and December 31, 2018, respectively)		(2,336	)		(2,433	)
Retained earnings		36,002			34,995
Accumulated other comprehensive income (loss), net of income taxes		458			(593	)
Less treasury stock, 140,264 and 0 shares at cost, at September 30, 2019 and December 31, 2018, respectively		(1,461	)		-
Total equity	$	61,310		$	60,362

TOTAL LIABILITIES AND EQUITY	$	258,089		$	262,726

The accompanying notes are an integral part of these financial statements.

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FFBW, Inc.

Statements of Income

Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)

(In thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	2019		2018			2019			2018

Interest and dividend income:
Loans, including fees	$	2,499	$	2,397		$	7,444		$	6,691
Securities
Taxable		285		315			842			994
Tax-exempt		5		11			11			48
Other		23		17			69			48

Total interest and dividend income		2,812		2,740			8,366			7,781

Interest Expense:
Interest-bearing deposits		631		451			1,863			1,139
Borrowed funds		88		156			267			325

Total interest expense		719		607			2,130			1,464

Net interest income		2,093		2,133			6,236			6,317
Provision for loan losses		45		111			200			415

Net interest income after provision for loan losses		2,048		2,022			6,036			5,902

Noninterest income:
Service charges and other fees		63		44			162			155
Net gain on sale of loans		82		67			250			142
Net gain (loss) on sale of securities		-		11			(3	)		20
Increase in cash surrender value of insurance		50		49			148			144
Other noninterest income		23		25			72			72

Total noninterest income		218		196			629			533

Noninterest expense:
Salaries and employee benefits		1,082		1,053			3,210			3,249
Occupancy and equipment		223		232			707			691
Data processing		172		167			516			477
Technology		74		55			231			159
Foreclosed assets, net		3		(1	)		5			36
Professional fees		110		101			326			276
Other noninterest expense		111		151			340			474

Total noninterest expense		1,775		1,758			5,335			5,362

Income before income taxes		491		460			1,330			1,073
Provision for income taxes		121		111			323			248

Net income	$	370	$	349		$	1,007		$	825

Earnings per share
Basic	$	0.06	$	0.05		$	0.16		$	0.13
Diluted	$	0.06	$	0.05		$	0.16		$	0.13

The accompanying notes are an integral part of these financial statements.

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FFBW, Inc.

Statement of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2019 and 2018, (Unaudited)

(In thousands)

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018

Net income	$	370		$	349		$	1,007		$	825
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period		306			(233	)		1,438			(1,189	)
Reclassification adjustment for losses (gains) realized in net income		-			(11	)		3			(20	)
Other comprehensive income (loss) before tax effect		306			(244	)		1,441			(1,209	)
Tax effect of other comprehensive income (loss) items		(83	)		66			(390	)		296
Other comprehensive income (loss), net of tax		223			(178	)		1,051			(913	)
Comprehensive income (loss)	$	593		$	171		$	2,058		$	(88	)

The accompanying notes are an integral part of these financial statements.

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FFBW, Inc.

Statement of Changes in Equity

For the Nine Months Ended September 30, 2019 and 2018, (Unaudited)

(In thousands, except share data)

	Common Stock		Additional Paid-In Capital		Unallocated Common Stock of ESOP			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at December 31, 2017	$	66	$	28,296	$	(2,563	)	$	33,937	$	(247	)	$	-		$	59,489
Net income		-		-		-			825		-			-			825
ESOP shares committed to be released (9,720 shares)		-		11		97			-		-			-			108
Other comprehensive loss									-		(913	)					(913	)
Balance at September 30, 2018	$	66	$	28,307	$	(2,466	)	$	34,762	$	(1,160	)	$	-		$	59,509

Balance at December 31, 2018	$	67	$	28,326	$	(2,433	)	$	34,995	$	(593	)	$	-			60,362
Net income		-		-		-			1,007		-						1,007
ESOP shares committed to be released (9,720 shares)		-		5		97			-		-			-			102
Stock based compensation expense		-		249		-			-		-			-			249
Other comprehensive income		-		-		-			-		1,051			-			1,051
Repurchase of common stock		-		-		-			-		-			(1,461	)		(1,461	)
Balance at September 30, 2019	$	67	$	28,580	$	(2,336	)	$	36,002	$	458		$	(1,461	)	$	61,310

The accompanying notes are an integral part of these financial statements.

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FFBW, Inc.

Statements of Cash Flows

For the Nine Months Ended September 30, 2019 and 2018 (Unaudited)

(In thousands)

	For the nine months ended September 30,
	2019			2018
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income	$	1,007		$	825
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		200			415
Depreciation		265			254
Net accretion of loan portfolio discount and deposit premium		(80	)		(87	)
Net amortization on securities available for sale		283			412
(Gain) loss on sales and impairments of foreclosed assets		(7	)		17
(Gain) loss on sale of available for sale securities		3			(20	)
Increase in cash surrender value of life insurance		(148	)		(144	)
ESOP compensation		102			108
Stock based compensation		249			-
Changes in operating assets and liabilities:
Accrued interest receivable		2			(105	)
Loans held for sale		(439	)		(91	)
Other assets		(239	)		81
Accrued interest payable		770			504
Other liabilities		(18	)		(71	)
Net cash provided by operating activities	$	1,950		$	2,098

Cash flows from investing activities:
Proceeds from sales of available for sale securities	$	4,837		$	7,625
Maturities, calls, paydowns on available for sale securities		4,027			5,496
Purchases of available for sale securities		(8,561	)		(7,867	)
Net (increase) decrease in loans		5,195			(26,855	)
Purchases of premises and equipment		(26	)		(75	)
Proceeds from redemption of FHLB stock		215			-
Purchase of FHLB stock		-			(225	)
Purchase of Bankers' Bank stock		(206	)		-
Purchase of life insurance		-			(255	)
Proceeds from sale of foreclosed assets		76			823
Net cash provided by (used in) investing activities	$	5,557		$	(21,333	)

Cash flows from financing activities:
Net increase (decrease) in deposits	$	(4,519	)	$	3,260
Net increase in advance payments by borrowers for taxes and insurance		1,070			1,143
Repayments of FHLB advances		(2,900	)		-
Proceeds from FHLB advances		-			7,000
Repurchase of common stock		(1,461	)		-
Net cash provided by (used in) financing activities	$	(7,810	)	$	11,403
Net increase (decrease) in cash and cash equivalents	$	(303	)	$	(7,832	)
Cash and cash equivalents at beginning		4,488			11,813
Cash and cash equivalents at end	$	4,185		$	3,981

Supplemental Cash Flow Disclosures:
Cash paid for interest	$	1,360		$	960
Cash paid for income taxes		343			70
Loans transferred to foreclosed assets		84			221
Financed sales of foreclosed assets		-			21

The accompanying notes are an integral part of these 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 nine month periods ended September 30, 2019 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, 2018 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, 2018.

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 – Nature of Business and Summary of Significant Accounting Policies

Organization

On October 10, 2017, First Federal Bank of Wisconsin (the “Bank”) converted to a stock savings bank and was reorganized into the mutual holding company structure. The Bank issued all of its outstanding stock to a new holding company, FFBW, Inc., (the “Company”) which sold 2,950,625 shares of common stock to the public at $10.00 per share, and contributed an additional 25,000 shares to FFBW Community Foundation, representing 45% of its outstanding shares of common stock. This amount included shares purchased by the Bank’s employee stock ownership plan (“ESOP”), which purchased 3.92% of the Company’s outstanding common upon the completion of the reorganization and stock issuance. FFBW, Inc. is organized as a corporation under the laws of the United States. FFBW, MHC has been organized as a mutual holding company under the laws of the United States and owns 55% of the outstanding common stock of FFBW, Inc.

The cost of the reorganization and the issuing of the common stock were deferred and deducted from the sales proceeds of the offering. Reorganization costs of $1,394 were recognized.

At September 30, 2019, the significant assets of the Company were the capital stock of the Bank, and a loan to the First Federal Bank of Wisconsin Employee Stock Ownership Plan (“ESOP”). The liabilities of the Company were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“the Federal Reserve Board”).

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

On September 4, 2019, the Boards of Directors of FFBW, MHC (the "MHC"), the Company and the Bank adopted a Plan of Conversion and Reorganization (the "Plan"). Pursuant to the Plan, the MHC will be merged into the Company, and the MHC will no longer exist. The Company will merge into a new Maryland corporation named FFBW, Inc. ("New FFBW'). As part of the conversion, the MHC's ownership interest of the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represents the remaining ownership interest in the Company, will be exchanged for new shares of common stock of New FFBW. The exchange ratio will ensure that immediately after the conversion and public offering, the public shareholders of the Company will own the same aggregate percentage of the Company's common stock that they owned immediately prior to that time (excluding shares purchased in the stock offering and cash received in lieu of fractional shares), adjusted to reflect assets held by the MHC. When the conversion and public offering are completed, all of the capital stock of the Bank will be owned by New FFBW.

The Plan provides 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 will not be 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 will be deferred and reduce the proceeds from the shares sold in the public offering. Costs of $241 have been incurred related to the conversion as of September 30, 2019.

The Securities and Exchange Commission declared the New FFBW's Registration Statement effective November 12, 2019.

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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 with the scope of ASC 606. Elements of noninterest income that is within the scope of ASC 606, are as follows:

Service 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. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

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

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from banks and non-maturity deposits in the Federal Home Loan Bank of Chicago (FHLB). The Company may at times maintain balances at financial institutions that exceed federally insured limits. 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.

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

Loans Acquired in a Transfer

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

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

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

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.

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

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

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

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.

1-4 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 1-4 family residential properties. Underwriting standards for single family 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.

1-4 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 (“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 statement of income.

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 (loss). The Company’s accumulated other comprehensive income (loss) is composed of the unrealized gain (loss) 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 gains (losses) realized on sales of securities available for sale comprise the entire balance of “net gain (loss) on sale of securities” on the statements of income.

Off-Balance Sheet Financial Instruments

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

Life Insurance

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

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Subsequent Events

Management has reviewed the Company’s operations for potential disclosure or financial statement impacts related to events occurring after September 30, 2019, but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosure or financial statement impacts to these financial statements are required as of November 14, 2019.

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. 2014-09, "Revenue from Contracts with Customers."

The objective of this new standard is to provide a common revenue standard for all entities that enter into contracts with customers to transfer goods, services, or nonfinancial assets. The Company adopted this new accounting standard for the effective January 1, 2019. The Company did not identify any changes in the timing of revenue recognition when considering the amended accounting guidance, however, the Company has included additional disclosures as required by the guidance.

ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”

ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10)”

ASU No. 2016-01 is a wide-ranging standard with several elements that will impact most financial institutions. The standard introduces new guidance that applies to most equity investments. Under the standard, equity securities can no longer be classified as available-for-sale securities. Instead, market value fluctuations on equity securities will have to be recognized directly through net income. An entity may elect to value equity investments without a readily determinable fair value at its cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, with any changes recognized through net income. The standard also eliminates certain disclosure requirements related to financial instruments. Non-public business entities (“PBEs”) will no longer have to disclose the fair value of financial instruments measured at amortized cost in the financial statements. PBEs will still need to make this disclosure but will no longer be required to disclose the methods and significant assumptions used to determine the fair value of financial instruments measured at amortized cost. ASU 2016-01 is effective for non-PBEs for years beginning after December 15, 2018, and was effective for PBEs with fiscal years beginning after December 15, 2017. ASU 2016-01 will require the Company 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.

The following Accounting Standards Updates (ASUs) have been issued by the Financial Accounting Standards Board (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, 2021. 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, 2020, 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, 2020 using the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before December 15, 2019.

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

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

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 a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share data).

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net income	$	370		$	349		$	1,007		$	825
Basic potential common shares
Weighted average shares outstanding		6,580,622			6,612,500			6,638,791			6,612,500
Weighted average unallocated Employee Stock Ownership Plan Shares		(235,720	)		(247,623	)		(238,928	)		(250,863	)
Basic weighted average shares outstanding		6,344,902			6,364,877			6,399,863			6,361,637
Dilutive potential common shares		3,821			-			3,821			-
Dilutive weighted average shares outstanding		6,348,723			6,364,877			6,403,684			6,361,637
Basic earnings per share	$	0.06		$	0.05		$	0.16		$	0.13
Diluted earnings per share	$	0.06		$	0.05		$	0.16		$	0.13

Note 4 Available for Sale Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2019
Obligations of the US government and US government sponsored agencies	$	1,023	$	23	$	-		$	1,046
Obligations of states and political subdivisions		7,543		52		(8	)		7,587
Mortgage-backed securities		31,830		588		(84	)		32,334
Certificates of deposit		1,500		20		-			1,520
Corporate debt securities		2,079		37		-			2,116
Total available for sale securities	$	43,975	$	720	$	(92	)	$	44,603

December 31, 2018
Obligations of the US government and US government sponsored agencies	$	1,299	$	8	$	-		$	1,307
Obligations of states and political subdivisions		8,381		17		(103	)		8,295
Mortgage-backed securities		29,164		24		(652	)		28,536
Certificates of deposit		1,500		1		(55	)		1,446
Corporate debt securities		4,220		2		(55	)		4,167
Total available for sale securities	$	44,564	$	52	$	(865	)	$	43,751

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
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2019
Obligations of the US government and US government sponsored agencies	$	-	$	-		$	-	$	-		$	-	$	-
Obligations of states and political subdivisions		994		(4	)		1,068		(4	)		2,062		(8	)
Mortgage-backed securities		2,855		(22	)		5,307		(62	)		8,162		(84	)
Certificates of deposit		-		-			-		-			-		-
Corporate debt securities		-		-			-		-			-		-
Total	$	3,849	$	(26	)	$	6,375	$	(66	)	$	10,224	$	(92	)
December 31, 2018
Obligations of the US government and US government sponsored agencies	$	175	$	-		$	113	$	-		$	288	$	-
Obligations of states and political subdivisions		-		-			6,142		(103	)		6,142		(103	)
Mortgage-backed securities		1,171		(24	)		24,725		(628	)		25,896		(652	)
Certificates of deposit		-		-			1,195		(55	)		1,195		(55	)
Corporate debt securities		384		(2	)		3,128		(53	)		3,512		(55	)
Total	$	1,730	$	(26	)	$	35,303	$	(839	)	$	37,033	$	(865	)

At September 30, 2019, the investment portfolio included 15 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 8 securities available for sale, which had been in an unrealized loss position for less than twelve months. At December 31, 2018, the investment portfolio included 79 securities available for sale, which had been in an unrealized loss position for greater than twelve months, and 6 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 intend to sell them prior to maturity; therefore the Company 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.

The Company regularly assesses the securities portfolio for other-than-temporary impairment (OTTI). The 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 the Company will have to sell securities prior to expected recovery. The Company did not have any impairment losses recognized in earnings for the nine months ended September 30, 2019 and September 30, 2018.

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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:

	September 30, 2019
	Amortized Cost		Fair Value
Due in one year or less	$	893	$	902
Due after one year through 5 years		3,527		3,563
Due after 5 years through 10 years		4,227		4,284
Due after 10 years		3,498		3,520

Subtotal	$	12,145	$	12,269
Mortgage-backed securities		31,830		32,334

Total	$	43,975	$	44,603

Proceeds from sales of available for sale securities during the three months ended September 30, 2019 and September 30, 2018 were $0 and $1,188, respectively. Proceeds from sales of available for sale securities during the nine months ended September 30, 2019 and September 30, 2018 were $4,837 and $7,625, respectively. Gross realized gains during the three months ended September 30, 2019 and September 30, 2018 on these sales amounted to $0 and $11, respectively, while gross realized losses on these sales were $0 and $0 during the same periods. Gross realized gains during the nine months ended September 30, 2019 and September 30, 2018 on these sales amounted to $22 and $35, respectively. Gross realized losses on these sales were $25 and $15, during the nine months ended September 30, 2019 and September 30, 2018, respectively.

Available for sale securities with a fair value of $1,016 and $960 were pledged securities at September 30, 2019 and December 31, 2018, respectively.

Note 5 Loans

Major classifications of loans are as follows:

	September 30,			December 31,
	2019			2018
Commercial
Development	$	17,602		$	7,801
Real estate		71,181			69,425
Commercial and industrial		11,273			13,142
Residential real estate and consumer
1-4 family owner-occupied		30,834			41,018
1-4 family investor-owned		29,373			32,312
Multifamily		32,064			34,467
Consumer		3,435			2,733
Subtotal	$	195,762		$	200,898
Deferred loan fees		(193	)		(86	)
Allowance for loan losses		(2,262	)		(2,118	)
Net loans	$	193,307		$	198,694

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Analysis of the allowance for loan losses for the three and nine months ended September 30, 2019 and 2018 follows:

Three Months Ended	Commercial		Residential real estate and consumer			Total

Balance at June 30, 2019	$	1,053	$	1,199		$	2,252
Provision for loan losses		44		1			45
Loans charged off		-		(36	)		(36	)
Recoveries of loans previously charged off		-		1			1
Balance at September, 2019	$	1,097	$	1,165		$	2,262


Balance at June 30, 2018	$	806	$	1,102		$	1,908
Provision for loan losses		47		64			111
Loans charged off		-		-			-
Recoveries of loans previously charged off		-		1			1
Balance at September 30, 2018	$	853	$	1,167		$	2,020

Nine Months Ended	Commercial			Residential real estate and consumer			Total

Balance at December 31, 2018	$	940		$	1,178		$	2,118
Provision for loan losses		157			43			200
Loans charged off		-			(57	)		(57	)
Recoveries of loans previously charged off		-			1			1
Balance at September 30, 2019	$	1,097		$	1,165		$	2,262


Balance at December 31, 2017	$	660		$	1,140		$	1,800
Provision for loan losses		217			198			415
Loans charged off		(24	)		(172	)		(196	)
Recoveries of loans previously charged off		-			1			1
Balance at September 30, 2018	$	853		$	1,167		$	2,020

Allowance for loan losses at September 30, 2019:	Commercial		Residential real estate and consumer		Total
Individually evaluated for impairment	$	-	$	84	$	84
Collectively evaluated for impairment		1,097		1,081		2,178
Total allowance for loan losses	$	1,097	$	1,165	$	2,262

Allowance for loan losses at December 31, 2018:
Individually evaluated for impairment	$	-	$	-	$	-
Collectively evaluated for impairment		940		1,178		2,118
Total allowance for loan losses	$	940	$	1,178	$	2,118

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September 30, 2019	Commercial		Residential real estate and consumer
Loans:
Individually evaluated for impairment	$	816	$	1,838	$	2,654
Collectively evaluated for impairment		99,240		93,868		193,108
Total loans	$	100,056	$	95,706	$	195,762

December 31, 2018
Loans:
Individually evaluated for impairment	$	87	$	1,469	$	1,556
Collectively evaluated for impairment		90,281		109,061		199,342
Total loans	$	90,368	$	110,530	$	200,898

Analysis for loans evaluated for impairment as of September 30, 2019 and December 31, 2018, follows:

As of September 30, 2019	Principal Balance		Recorded Investment		Related Allowance		Average Investment		Interest Recognized
Loans with related allowance for loan losses:
Residential real estate and consumer
1-4 family investor-owned	$	419	$	412	$	84	$	417	$	-

Loans with no related allowance for loan losses:
Commercial
Commercial and industrial		819		816		-		825		11
Residential real estate and consumer
1-4 family owner-occupied		1,014		986		-		995		22
1-4 family investor-owned		402		346		-		353		-
Consumer		105		94		-		101		-
Total loans with no related allowance for loan losses		2,340		2,242		-		2,274		33

Total impaired loans	$	2,759	$	2,654	$	84	$	2,686	$	33

As of December 31, 2018	Principal Balance		Recorded Investment		Related Allowance		Average Investment		Interest Recognized
Loans with no related allowance for loan losses:
Commercial
Commercial and industrial	$	89	$	87	$	-	$	93	$	5
Residential real estate and consumer
1-4 family owner-occupied		1,142		1,120		-		1,137		26
1-4 family investor-owned		248		241		-		246		-
Consumer		114		108		-		114		-

Total impaired loans	$	1,593	$	1,556	$	-	$	1,590	$	31

As of September 30, 2019 and December 31, 2018, no additional funds are committed to be advanced in connection with impaired loans.

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.

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Commercial 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.

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 commercial loans by class as of September 30, 2019 and December 31, 2018, follows:

	Pass		Special Mention		Substandard		Doubtful		Totals
September 30, 2019
Development	$	17,602	$	-	$	-	$	-	$	17,602
Real estate		70,653		528		-		-		71,181
Commercial and industrial		8,341		2,916		16		-		11,273
1-4 family investor-owned		28,615		-		758		-		29,373
Multifamily		32,064		-		-		-		32,064
Totals	$	157,275	$	3,444	$	774	$	-	$	161,493
December 31, 2018
Development	$	7,801	$	-	$	-	$	-	$	7,801
Real estate		69,425		-		-		-		69,425
Commercial and industrial		13,122		-		20		-		13,142
1-4 family investor-owned		30,558		1,353		401		-		32,312
Multifamily		34,467		-		-		-		34,467
Totals	$	155,373	$	1,353	$	421	$	-	$	157,147

Information regarding the credit quality indicators most closely monitored for residential real estate and consumer loans by class as of September 30, 2019 and December 31, 2018, follows:

	Performing		Non-performing		Totals
September 30, 2019
1-4 family owner-occupied	$	29,531	$	1,303	$	30,834
Consumer		3,347		88		3,435
	$	32,878	$	1,391	$	34,269
December 31, 2018
1-4 family owner-occupied	$	39,919	$	1,099	$	41,018
Consumer		2,625		108		2,733
	$	42,544	$	1,207	$	43,751

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Loan aging information as of September 30, 2019, follows:

			Loans Past Due		Loans Past Due				Nonaccrual
September 30, 2019	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
Commercial
Development	$	17,602	$	-	$	-	$	17,602	$	-
Real estate		71,181		-		-		71,181		-
Commercial and industrial		11,257		16		-		11,273		16
Residential real estate and consumer
1-4 family owner-occupied		30,368		113		353		30,834		353
1-4 family investor-owned		29,253		120		-		29,373		758
Multifamily		32,064		-		-		32,064		-
Consumer		3,378		57		-		3,435		88
Total	$	195,103	$	306	$	353	$	195,762	$	1,215

Loan aging information as of December 31, 2018, follows:

			Loans Past Due		Loans Past Due				Nonaccrual
December 31, 2018	Current Loans		30-89 Days		90+ Days		Total Loans		Loans
Commercial
Development	$	7,801	$	-	$	-	$	7,801	$	-
Real estate		69,425		-		-		69,425		-
Commercial and industrial		13,076		66		-		13,142		20
Residential real estate and consumer
1-4 family owner-occupied		41,013		5		-		41,018		365
1-4 family investor-owned		32,069		243		-		32,312		241
Multifamily		34,467		-		-		34,467		-
Consumer		2,733		-		-		2,733		94
Total	$	200,584	$	314	$	-	$	200,898	$	720

There were no loans past due ninety days or more and still accruing interest as of September 30, 2019 and December 31, 2018.

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, interest-only payments for a period of time, and/or extending amortization terms. During the nine months ended and as of September 30, 2019, there was a 1-4 family owner-occupied property totaling $83, a 1-4 family investor –owned property totaling $421, and two commercial and industrial loans totaling $748 that were new troubled debt restructurings. $0 was charged to the allowance for losses related to these loans. No troubled debt restructurings defaulted within 12 months of their modification date during the nine months ended September 30, 2019. During the year ended and as of December 31, 2018, there were two 1-4 family owner-occupied properties totaling $302, a 1-4 family investor-owned property totaling $250, and a consumer loan totaling $20 that were new troubled debt restructurings. $0 was charged to the allowance for losses related to these loans. No troubled debt restructurings defaulted within 12 months of their modification date during the year ended December 31, 2018.

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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:

	September 30,		December 31,
	2019		2018

Non-interest bearing checking	$	21,330	$	22,763
Interest bearing checking		9,458		5,424
Money market		46,017		41,910
Statement savings accounts		12,899		13,773
Health savings accounts		10,728		11,197
Certificates of deposit		78,266		88,138

Total	$	178,698	$	183,205

Certificates of deposit that meet or exceed the FDIC insurance limit of two hundred fifty thousand dollars totaled $29,540 and $30,590 as of September 30, 2019 and December 31, 2018, respectively.

The scheduled maturities of certificates of deposit are as follows as of September 30, 2019:

2019	$	23,508
2020		34,892
2021		14,791
2022		2,310
2023		1,983
2024		782

Total	$	78,266

Note 7 FHLB Advances

FHLB advances consist of the following:

	September 30, 2019					December 31, 2018
	Rates			Amount		Rates			Amount
Fixed rate, fixed term advances	1.42%	-	2.70%	$	8,850	1.42%	-	2.70%	$	11,750
Fixed term advances with floating spread	1.68%	-	2.09%		6,000	1.54%	-	2.05%		6,000
				$	14,850				$	17,750

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The following is a summary of scheduled maturities of fixed term FHLB advances as of September 30, 2019:

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

2019		1.69	%	$	1,350		1.68	%	$	2,000	$	3,350
2020		2.34	%		6,000		1.83	%		2,000		8,000
2021		0.00	%		-		2.09	%		2,000		2,000
2022		1.71	%		1,500		0.00	%		-		1,500

Total		2.13	%	$	8,850		1.86	%	$	6,000	$	14,850

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 1-4 family, multifamily, and commercial real estate loans. The Company pledged approximately $153,474 and $158,923 of 1-4 family, multifamily, and commercial real estate loans to secure FHLB advances at September 30, 2019 and December 31, 2018, respectively. FHLB provides both fixed and floating rate advances. Floating rates are tied to short-term market rates of interest, such as LIBOR, Federal funds or Treasury Bill 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 $524 and $739 of FHLB stock owned by the Company at September 30, 2019 and December 31, 2018, respectively.

At September 30, 2019 and December 31, 2018, the Company’s available and unused portion of this borrowing agreement was $178 and $889, respectively. Additionally, the Company has a fluctuating $5,000 letter of credit under this agreement, which collateralizes certain public deposits. 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 September 30, 2019 or December 31, 2018. The Company also has the authority to borrow through the Federal Reserve’s Discount Window.

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 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. 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 nine month periods ended September 30, 2019 and 2018, 9,720 shares were committed to be released. During the period ended September 30, 2019, the average fair value per share of stock was $10.47 resulting in total ESOP compensation expense of $102 for the nine months ended September 30, 2019. During the period ended September 30, 2018, the average fair value per share of stock was $11.06 resulting in total ESOP compensation expense of $108 for the nine months ended September 30, 2018.

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The ESOP shares as of September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019		December 31, 2018
Shares allocated to active participants		15,907		2,947
Shares committed to be released and allocated to participants		9,720		12,960
Total unallocated shares		233,583		243,303
Total ESOP shares		259,210		259,210
Fair value of unallocated shares (based on $10.98 and $10.03 share price at September 30, 2019 and December 31, 2018, respectively)	$	2,565	$	2,440

Note 9 Share-based Compensation Plans

ASC Topic 718 requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is 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:

	Nine Months Ended September 30, 2019
Total cost of stock grant plan during the year	$	145
Total cost of stock option plan during the year		104
Total cost of share-based payment plans during the year	$	249

Amount of related income tax benefit recognized in income	$	68

The Company adopted the FFBW, Inc. 2018 Equity Incentive Plan (the “2018 Equity Incentive Plan”) in 2018. In November 2018, the Company’s stockholders approved the 2018 Equity Incentive Plan which authorized the issuance of up to 129,605 restricted stock awards and up to 324,012 stock options. As of September 30, 2019, there were 35,363 restricted stock awards and 101,923 options available for future grants. Shares granted under the 2018 Equity Incentive Plan may be authorized but unissued, currently held or, to the extent permitted by applicable law, subsequently acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions. Forfeited or canceled shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of stock available for delivery under the Plan.

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.

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The following table summarizes stock options activity for the nine months ended September 30, 2019:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Options outstanding as of December 31, 2018		192,089	$	10.81
Granted		30,000		10.64
Exercised		-		-
Expired or canceled		-		-
Forfeited		-		-
Options outstanding as of September 30, 2019		222,089	$	10.79		9.26	$	-
Options exercisable as of September 30, 2019		-	$	-		-	$	-

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.

The following assumptions were used for options granted during the nine months ended September 30, 2019:

	For the Nine Months Ended September 30,
	2019
Risk-free interest rate		2.30	%
Expected volatility		18.38	%
Expected dividend yield		0	%
Expected life of options (years)		7.5
Weighted average fair value per option of options granted during the year	$	2.90

The total intrinsic value of options exercised during the nine months ended September 30, 2019 was $0.

The following is a summary of changes in restricted shares for the nine months ended September 30, 2019:

	Number of Shares		Weighted Average Grant Date Fair Value
Shares outstanding as of December 31, 2018		84,242	$	10.82
Granted		10,000		10.64
Exercised		-		-
Forfeited		-		-
Shares outstanding as of September 30, 2019		94,242	$	10.80

The total intrinsic value of restricted shares that vested during the nine months ended September 30, 2019 was $0.

As of September 30, 2019, there was $1.5 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 September 30, 2019, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 2.61 years.

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Note 10 Regulatory Capital Ratios

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 Bank’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 December 31, 2018 and as of September 30, 2019, that the Bank meets all applicable capital adequacy requirements.

As of September 30, 2019, and December 31, 2018, 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 September 30, 2019 that management believes have changed the Bank's category.

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

Actual

For Capital Adequacy

Purposes

To Be Well Capitalized

Under Prompt Corrective

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

September 30, 2019

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

49,706

24.2

> 9,256

> 4.5

> 13,370

> 6.5

Tier 1 capital (to risk‑weighted assets)

49,706

24.2

> 12,342

> 6.0

> 16,456

> 8.0

Total capital (to risk‑weighted assets)

51,968

25.3

> 16,456

> 8.0

> 20,570

> 10.0

Tier 1 capital (to average assets)

49,706

19.4

> 10,267

> 4.0

> 12,834

> 5.0

December 31, 2018

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

48,502

23.7

> 9,209

> 4.5

> 13,302

> 6.5

Tier 1 capital (to risk‑weighted assets)

48,502

23.7

> 12,279

> 6.0

> 16,372

> 8.0

Total capital (to risk‑weighted assets)

50,620

24.7

> 16,372

> 8.0

> 20,465

> 10.0

Tier 1 capital (to average assets)

48,502

18.4

> 10,542

> 4.0

> 13,178

> 5.0

Note 11 Fair Value Measurements

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.

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Some assets and liabilities, such as available for sale securities, 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 valuation methodology used for each asset measured at fair value on a recurring or nonrecurring basis, as well as the classification of the asset 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 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.

Information regarding the fair value of assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 follows:

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

September 30, 2019
Assets - Available for sale securities	$	44,603	$	-	$	44,603	$	-

December 31, 2018
Assets - Available for sale securities	$	43,751	$	-	$	43,751	$	-

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. 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. Fair value measurements of underlying collateral that utilize observable market data, such as independent appraisals reflecting recent comparable sales are considered Level 2 measurements. Other fair value measurements that incorporate estimated assumptions market participants would use to measure fair value are considered Level 3 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.

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Information regarding the fair value of assets measured at fair value on a nonrecurring basis as of September 30, 2019 and December 31, 2018 follows:

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

As of September 30, 2019
Assets:
Loans	$	328	$	-	$	-	$	328
Foreclosed assets		84		-		-		84

As of December 31, 2018
Assets :
Loans	$	-	$	-	$	-	$	-
Foreclosed assets		69		-		-		69

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The carrying value and estimated fair value of financial instruments at September 30, 2019 and December 31, 2018 follow:

	September 30, 2019
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	4,185	$	4,185	$	-	$	-
Available for sale securities		44,603		-		44,603		-
Loans held for sale		1,118		-		1,118		-
Loans		193,307		-		-		195,872
Accrued interest receivable		766		766		-		-
Cash value of life insurance		7,155		-		-		7,155
Other equity investments		730		-		-		730

Financial liabilities:
Deposits		178,698		100,432		-		78,513
Advance payments by borrowers for taxes and insurance		1,125		1,125		-		-
FHLB advances		14,850		-		-		14,835
Accrued interest payable		840		840		-		-

	December 31, 2018
	Carrying Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	4,488	$	4,488	$	-	$	-
Available for sale securities		43,751		-		43,751		-
Loans held for sale		679		-		679		-
Loans		198,694		-		-		199,048
Accrued interest receivable		768		768		-		-
Cash value of life insurance		7,007		-		-		7,007
Other equity investments		739		-		-		739

Financial liabilities:
Deposits		183,205		95,067		-		87,531
Advance payments by borrowers for taxes and insurance		55		55		-		-
FHLB advances		17,750		-		-		17,505
Accrued interest payable		70		70		-		-

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 of 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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Item 2.

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

General

Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended September 30, 2019 and 2018 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing on Part I, Item 1 of this quarterly report on Form 10-Q.

CAUTIONARY NOTE REGARDING 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,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

●

statements of our goals, intentions and expectations;

●

statements regarding our business plans, prospects, growth and operating strategies;

●

statements regarding the quality of our loan and investment portfolios; and

●

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management 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.

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;

●

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 the Company have made and make;

●

adverse changes in the securities or secondary mortgage markets;

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●

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 the Company 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

●

changes in the financial condition, results of operations or future prospects of issuers of securities that the Company 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, 2018.

Comparison of Financial Condition at September 30, 2019 and December 31, 2018

Total Assets. Total assets decreased $4.6 million, or 1.8%, to $258.1 million at September 30, 2019 from $262.7 million at December 31, 2018. This decrease was primarily due to a decrease in net loans of $5.4 million, partially offset by an increase in available for sale securities of $852,000.

Cash and cash equivalents. Cash and due from banks increased $2.4 million, or 139.7%, to $4.2 million at September 30, 2019 from $1.7 million at December 31, 2018. Fed funds sold decreased $2.7 million, or 100.0%, to $0 at September 30, 2019 from $2.7 million at December 31, 2018. The change in change in cash and cash equivalents was due to normal fluctuations.

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Net Loans. Net loans decreased $5.4 million, or 2.7%, to $193.3 million at September 30, 2019 from $198.7 million at December 31, 2018. The decrease resulted primarily from decreases in one- to –four-family owner-occupied loans of $10.2 million, or 24.8%, and multifamily loans of $2.4 million, or 7.0%, offset by increases in commercial development loans of $9.8 million, or 125.6%, and commercial real estate loans of $1.8 million, or 2.5%. The decrease in one- to –four-family owner-occupied loans is directly related to the Company’s strategy to sell the majority of conforming, fixed rate one- to –four-family loans in the secondary market.

During the nine months ended September 30, 2019, the Company sold $10.5 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 and manage interest rate risk.

Available for sale securities. Available for sale securities increased $852,000, or 1.9%, to $44.6 million at September 30, 2019 from $43.8 million at December 31, 2018. This was a result of purchases of $8.6 million and a change in unrealized gain of $1.4 million offset by sales of $4.8 million and maturities, normal paydowns and amortization of $4.3 million.

Other equity investments. Other equity investments decreased $9,000, or 1.2%, to $730,000 at September 30, 2019 from $739,000 at December 31, 2018.

Deposits. Deposits decreased $4.5 million, or 2.5%, to $178.7 million at September 30, 2019 from $183.2 million at December 31, 2018. Noninterest-bearing checking accounts decreased $1.4 million, or 6.3%, to $21.3 million as of September 30, 2019 compared to $22.8 million as of December 31, 2018. Interest-bearing checking accounts increased $4.0 million, or 74.4%, to $9.5 million at September 30, 2019 from $5.4 million at December 31, 2018. Additionally, money market accounts increased $4.1 million to $46.0 million at September 30, 2019, compared to $41.9 million at December 31, 2018, and savings accounts decreased $874,000 to $12.9 million at September 30, 2019, compared to $13.8 million at December 31, 2018. Certificates of deposit decreased $9.9 million, or 11.2%, to $78.3 million as of September 30, 2019 from $88.1 million as of December 31, 2018. Health savings accounts decreased $469,000 to $10.7 million at September 30, 2019 from $11.2 million as of December 31, 2018.

Borrowings. Borrowings, consisting entirely of FHLB advances, decreased $2.9 million, or 16.3%, to $14.9 million at September 30, 2019 from $17.8 million December 31, 2018. The aggregate cost of outstanding FHLB advances was 2.02% at September 30, 2019, compared to the cost of deposits of 1.46% at that date.

Other liabilities. Other liabilities decreased $18,000, or 1.4%, to $1.3 million at September 30, 2019 from $1.3 million at December 31, 2018.

Total Equity. Total equity increased $948,000, or 1.6%, to $61.3 million at September 30, 2019 from $60.4 million at December 31, 2018. The increase resulted from net income of $1.0 million for the nine months ended September 30, 2019 and the change in net unrealized gain in available for sale securities of $1.1 million offset by the repurchases of common stock of $1.5 million.

Nonperforming Loans, Potential Problem Loans and Foreclosed Properties. The Company 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 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 troubled debt restructuring typically involves the granting of some concession to the borrower involving a 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:

	September 30, 2019 and Nine Months Then Ended			December 31, 2018 and Twelve Months Then Ended			December 31, 2017 and Twelve Months Then Ended
	(in thousands)
Nonperforming assets:
Nonaccrual loans	$	1,215		$	720		$	1,243
Accruing loans past due 90 days or more		-			-			-
Total nonperforming loans ("NPLs")	$	1,215		$	720		$	1,243
Foreclosed assets		84			69			619
Total nonperforming assets ("NPAs")	$	1,299		$	789		$	1,862
Troubled Debt Restructurings ("TDRs")		1,998			1,201			1,630
Nonaccrual TDRs		1,079			700			969
Average outstanding loan balance		199,079			189,233			170,577
Loans, end of period		195,762			200,898			173,229
ALLL, at beginning of period		2,118			1,800			1,478
Loans charged off:
Commercial		-			(24	)		-
Residential real estate and consumer		(57	)		(172	)		(133	)
Total loans charged off	$	(57	)	$	(196	)	$	(133	)
Recoveries of loans previously charged off:
Residential real estate and consumer		1			1			36
Total recoveries of loans previous charged off		1			1			36
Net loans charged off ("NCOs'")	$	(56	)	$	(195	)	$	(97	)
Additions to ALLL via provision for loan losses charged to operations		200			513			419
ALLL, at end of period	$	2,262		$	2,118		$	1,800
Ratios:
ALLL to NCOs (annualized)		3029.46	%		1086.15	%		1855.67	%
NCOs (annualized) to average loans		0.04	%		0.10	%		0.06	%
ALLL to total loans		1.16	%		1.05	%		1.04	%
NPL to total loans		0.62	%		0.36	%		0.72	%
NPAs to total assets		0.50	%		0.30	%		0.73	%
Total Assets	$	258,089		$	262,726		$	256,481

Loans 30 to 89 days past due decreased $8,000 during the nine month period ended September 30, 2019 to $306,000 compared to $314,000 at December 31, 2018. The Company believes the credit and underwriting policies continue to support more effective lending decisions by the Company, which increases the likelihood of maintain loan quality going forward. The Company believe our current ALLL is adequate to cover probable losses in our current loan portfolio.

Non-performing loans of $1.2 million at September 30, 2019, which included $1.1 million of non-accrual troubled debt restructured loans, reflected an increase of $495,000 from the non-performing loans balance of $720,000 at December 31, 2018.

Our non-performing assets were $1.3 million at September 30, 2019, or 0.50% of total assets, compared to $789,000, or 0.30% of total assets, at December 31, 2018.

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Foreclosed assets were $84,000 at September 30, 2019 compared to $69,000 at December 31, 2018. The Company strives to aggressively liquidate foreclosed assets as part of our overall credit risk management strategy.

Net charge offs for the nine month period ended September 30, 2019 were $56,000 compared to $195,000 for the nine month period ended September 30, 2018. The ratio of annualized net charge-offs to average loans receivable was 0.04% for the nine month period ended September 30, 2019, compared to 0.10% for the twelve months ended December 31, 2018. Net charge-offs decreased during the current year to date period primarily as a result of selling nonperforming assets during 2018.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and September 30, 2018

General. The Company had net income of $370,000 for the three months ended September 30, 2019, compared to net income of $349,000 for the three months ended September 30, 2018, an increase of $21,000, or 6.0%. The increase in net income was the net effect of an increase in noninterest income of $22,000, or 11.2%, and a decrease in the provision of loan losses of $66,000, or 59.5%, partially offset by an increase in noninterest expenses of $17,000, or 1.0%, and a decrease in net interest income of $40,000, or 1.9%.

Interest and dividend income. Interest and dividend income increased $72,000, or 2.6%, to $2.8 million for the three months ended September 30, 2019 from $2.7 million for the three months ended September 30, 2018. The increase was primarily attributable to a $102,000 increase in interest on loans resulting from an increase of 26 basis points in yield quarter to quarter. This was partially offset by a $36,000 decrease in interest on available for sale securities, a result of the decrease in the average balance of available for sale securities of $9.3 million quarter to quarter while the yield increased 19 basis points quarter to quarter.

Interest Expense. Interest expense increased $112,000, or 18.5%, to $719,000 for the three months ended September 30, 2019, from $607,000 for the three months ended September 30, 2018. Interest expense on interest-bearing deposits increased $180,000 quarter to quarter. The average cost of our interest-bearing deposits increased 48 basis points to 1.61% from 1.13%, and the average balance of interest-bearing deposits decreased by $3.2 million, or 2.0%, quarter to quarter. Interest expense on borrowings, consisting entirely of FHLB advances, decreased $68,000, or 43.6%, to $88,000 during the three months ended September 30, 2019 from $156,000 during the three months ended September 30, 2018, as the average balance of borrowings decreased $13.1 million to $16.3 million for the 2019 quarter from $29.4 million for the 2018 quarter. Additionally, the cost of those borrowings increased four basis points to 2.17% for the three months ended September 30, 2019 from 2.13% for the three months ended September 30, 2018.

Net Interest Income. Net interest income decreased $40,000, or 1.9%, to $2.1 million for the three months ended September 30, 2019 from $2.1 million for the three months ended September 30, 2018. Average net interest-earning assets increased $5.8 million to $70.7 million for the 2019 quarter from $64.9 million for the 2018 quarter. The increase was due primarily to the decrease in borrowings to offset the inflow in interest-bearing deposit accounts. Our net interest rate spread decreased to 2.95% for the three months ended September 30, 2019 from 3.02% for the three months ended September 30, 2018, while our net interest margin increased to 3.43% for the 2019 quarter from 3.35% for the 2018 quarter.

Provision for Loan Losses. The Company recorded a provision for loan losses of $45,000 for the three months ended September 30, 2019, compared to $111,000 provision for the three months ended September 30, 2018, a decrease of $66,000, or 59.5%. The decrease in the provision for loan losses in the 2019 quarter compared to the 2018 quarter was a result of loan growth in the prior year quarter. The allowance for loan losses was $2.3 million, or 1.16% of total loans, at September 30, 2019, compared to $2.0 million, or 1.01% of total loans, at September 30, 2018. Classified (substandard, doubtful and loss) commercial loans increased to $774,000 at September 30, 2019 from $267,000 at September 30, 2018. Total nonperforming loans increased to $1.2 million at September 30, 2019 from $757,000 at September 30, 2018. Net charge-offs for the three months ended September 30, 2019 were $35,000, compared to net recoveries of $1,000 for the three months ended September 30, 2018. At September 30, 2019, one non-performing loan of $353,000 was 90 days past due, and two non-performing loans totaling $136,000 were 30-89 days past due.

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Noninterest Income. Noninterest income increased $22,000, or 11.2%, to $218,000 for the three months ended September 30, 2019 from $196,000 for the three months ended September 30, 2018. The increase resulted primarily from an increase in service charges and fees of $19,000 and an increase in net gain on sale of loans of $15,000 offset by a decrease in net gain on sale of securities of $11,000.

Noninterest Expense. Noninterest expense increased $17,000, or 1.0%, to $1.8 million for the three months ended September 30, 2019 from $1.8 million for the three months ended September 30, 2018. The increase was due to an increase in salaries and employee benefits expense of $29,000 and technology of $19,000. The increase in noninterest expense was partially offset by decreases in occupancy and equipment of $9,000 and other noninterest expense of $40,000, which primarily consist of decreases in marketing of $33,000 and in business development of $3,000.

Income Tax Expense. The Company recorded an income tax expense of $121,000 for the three months ended September 30, 2019 compared to an income tax expense of $111,000 for the three months ended September 30, 2018, an increase of $10,000, or 9.0%. The increase was due to an increase of $31,000 in income before income taxes to $491,000 for the 2019 quarter compared to $460,000 for the 2018 quarter.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018

General. The Company had net income of $1.0 million for the nine months ended September 30, 2019, compared to net income of $825,000 for the nine months ended September 30, 2018, an increase of $182,000, or 22.1%. The increase in net income was the net effect of an increase in noninterest income of $96,000, or 18.0%, a decrease in the provision of loan losses of $215,000, or 51.8%, and an decrease in noninterest expenses of $27,000, or 0.5%, offset by a decrease in net interest income of $81,000, or 1.3%.

Interest and dividend income. Interest and dividend income increased $585,000, or 7.5%, to $8.4 million for the nine months ended September 30, 2019 from $7.8 million for the nine months ended September 30, 2018. The increase was primarily attributable to a $753,000 increase in interest on loans resulting from an increase of $12.7 million in the average balance of loans period to period with a 20 basis point increase in yield period to period. Excluding second quarter 2018 one-time adjustments of $136,000 in nonaccrual interest recognized from the payoff of nonperforming loans, the yield on loans increased by 30 basis points. This was partially offset by a $189,000 decrease in interest on available for sale securities, a result of the decrease in the average balance of available for sale securities of $13.0 million period to period while the yield increased 15 basis points period to period.

Interest Expense. Interest expense increased $666,000, or 45.5%, to $2.1 million for the nine months ended September 30, 2019, from $1.5 million for the nine months ended September 30, 2018. Interest expense on interest-bearing deposits increased $724,000 period to periods. The average cost of our interest-bearing deposits increased 58 basis points to 1.54% from 0.96%, and the average balance of interest-bearing deposits increased $2.2 million, or 1.4%, period to period. Interest expense on borrowings, consisting entirely of FHLB advances, decreased $58,000, or 17.8%, to $267,000 during the nine months ended September 30, 2019 from $325,000 during the nine months ended September 30, 2018, as the average balance of borrowings decreased $5.4 million to $16.4 million for the 2019 period from $21.8 million for the 2018 period. Additionally, the cost of borrowings increased 18 basis points to 2.16% for the nine months ended September 30, 2019 from 1.98% for the nine months ended September 30, 2018.

Net Interest Income. Net interest income decreased $81,000, or 1.3%, to $6.2 million for the nine months ended September 30, 2019 from $6.3 million for the nine months ended September 30, 2018. Average net interest-earning assets increased $2.6 million to $68.4 million for the 2019 period from $65.9 million for the 2018 period. The increase was due primarily to the increase in loans and the decrease in borrowings offset by an increase in noninterest-bearing deposit accounts and a decrease in available for sale securities. Our net interest rate spread decreased to 2.93% for the nine months ended September 30, 2019 from 3.13% for the nine months ended September 30, 2018, while our net interest margin decreased to 3.38% for the 2019 period from 3.41% for the 2018 period.

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Provision for Loan Losses. The Company recorded a provision for loan losses of $200,000 for the nine months ended September 30, 2019, compared to a $415,000 provision for the nine months ended September 30, 2018, a decrease of $215,000, or 51.8%. The decrease in the provision for loan losses in the 2019 period compared to the 2018 period was a result of charge-offs in the prior year period. The allowance for loan losses was $2.3 million, or 1.16% of total loans, at September 30, 2019, compared to $2.0 million, or 1.01% of total loans, at September 30, 2018. Classified (substandard, doubtful and loss) commercial loans increased to $774,000 at September 30, 2019 from $267,000 at September 30, 2018. Total nonperforming loans increased to $1.2 million at September 30, 2019 from $757,000 at September 30, 2018. Net charge-offs for the nine months ended September 30, 2019 were $56,000, compared to $195,000 for the nine months ended September 30, 2018. At September 30, 2019, one non-performing loan of $353,000 was 90 days past due, and two non-performing loans totaling $136,000 were 30-89 days past due.

Noninterest Income. Noninterest income increased $96,000, or 18.0%, to $629,000 for the nine months ended September 30, 2019 from $533,000 for the nine months ended September 30, 2018. The increase resulted primarily from the increase in net gain on sale of loans of $108,000 offset by a decrease in net gain on sale of securities of $23,000.

Noninterest Expense. Noninterest expense decreased $27,000, or 0.5%, to $5.3 million for the nine months ended September 30, 2019 from $5.4 million for the nine months ended September 30, 2018. The decrease was due to a decrease in salaries and employee benefits of $39,000 due to staffing efficiencies and vacancies, as well as foreclosed assets expense of $31,000 and other noninterest expense of $134,000, which primarily is a reduction in marketing, business development, FDIC insurance, and supervisory expenses. The decrease in noninterest expense was partially offset by increases in professional fees of $50,000, data processing of $39,000, and technology of $72,000.

Income Tax Expense. The Company recorded an income tax expense of $323,000 for the nine months ended September 30, 2019 compared to an income tax expense of $248,000 for the nine months ended September 30, 2018, an increase of $75,000, or 30.2%. The increase was due to an increase of $257,000 in income before income taxes to $1.3 million for the 2019 period compared to $1.1 million for the 2018 period.

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Analysis of Net Interest Income

Net interest income represents the difference between the income the Company earns on interest-earning assets and the interest expense the Company pays on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Average balances are derived from daily average balances for all periods presented in the table. Non-accrual loans were included in the computation of average balances but have been reflected in the tables as loans carrying a zero yield. No tax-equivalent yield adjustments were made, as the effect thereof was not material. The yields set forth below include the effect of loans fees, discounts and premiums that are amortized or accreted to interest income.

	For the Three Months Ended September 30,
	2019								2018
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(in thousands)								(in thousands)
Interest-earning assets:
Loans	$	196,785		$	2,499		5.08	%	$	198,913		$	2,397		4.82	%
Available for sale securities		44,095			290		2.63	%		53,409			326		2.44	%
Interest-bearing deposits		2,434			15		2.47	%		1,378			9		2.61	%
Other equity investments		800			8		4.00	%		945			8		3.39	%
Total interest-earning assets		244,114			2,812		4.61	%		254,645			2,740		4.30	%
Noninterest-earning assets		15,465								16,970
Allowance for loan losses		(2,258	)							(1,969	)
Total assets	$	257,321							$	269,646

Interest-bearing liabilities:
Demand accounts	$	9,391

FFBW, Inc. 10-Q