TEB BANCORP, INC The summary information presented below atSeptember 30, 2021 andJune 30, 2021 and for the three months endedSeptember 30, 2021 and 2020 is derived in part from the financial statements of TheEquitable Bank . The financial condition data atJune 30, 2021 is derived from the audited financial statements of TEB Bancorp, Inc. The information as ofSeptember 30, 2021 and for the three months endedSeptember 30, 2021 and 2020 is derived from unaudited financial statements ofTEB Bancorp, Inc. forSeptember 30, 2021 and 2020 and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. The following information is only a summary, and should be read in conjunction with our audited financial statements and notes as of and for the year endedJune 30, 2021 and for the three months endedSeptember 30, 2021 and 2020. The results of operations for the three months endedSeptember 30, 2021 are not necessarily indicative of the results to be achieved for all of the year endingJune 30, 2021 .
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," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "contemplate," "continue," "potential," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating
strategies;
? statements regarding the quality of our loan and investment portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
adverse changes in the economy or business conditions, either nationally or in
? our markets, including, without limitation, the adverse effects of the COVID-19
or any other pandemic on the global, national, and local economy;
? the effect of the COVID-19 pandemic on the Company's credit quality, revenue,
and business operations;
? 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;
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? competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins
? and yields, our mortgage banking revenues, the fair value of financial
instruments or our level of loan originations, or increase the level of
defaults, losses and prepayments on loans we have made and make;
? adverse changes in the securities or secondary mortgage markets;
? changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital requirements;
? changes in the quality or composition of our loan or investment portfolios;
? technological changes that may be more difficult or expensive than expected, or
the failure or breaches of information technology security systems;
? the inability of third-party providers to perform as expected;
? our ability to manage market risk, credit risk and operational risk in the
current economic environment;
? our ability to enter new markets successfully and capitalize on growth
opportunities;
our ability to successfully integrate into our operations any assets,
? liabilities, customers, systems and management personnel we may acquire and our
ability to realize related revenue synergies and cost savings within expected
time frames, and any goodwill charges related thereto;
? changes in consumer spending, borrowing and savings habits;
changes in accounting policies and practices, as may be adopted by the bank
? regulatory agencies, the
and
? our ability to retain key employees; and
? changes in the financial condition, results of operations or future prospects
of issuers of securities that we own.
COVID-19 Outbreak
InDecember 2019 , a coronavirus (COVID-19) was reported inChina , and, inMarch 2020 was declared a national emergency inthe United States . The COVID-19 pandemic has caused significant economic dislocation inthe United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry, and the retail industry. The following table shows the Company's exposure within these hard-hit industries. Percentage of Commercial Loan Type September 30, 2021 Portfolio Loans Restaurant, food service, bar $ 1,568,178 0.69 % Retail 2,230,898 0.98 % Hospitality and tourism
- - %
$ 3,799,076 1.67 %
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The Company's allowance for loan losses was $1.5 million for September 30, 2021
and $1.4 million at September 30, 2020 . At September 30, 2021 and September 30,
2020 , the allowance for loan losses represented 0.64% and 0.58% of total loans,
respectively. During 2020, the Company adjusted the economic risk factor
methodology to incorporate the current economic implications and higher
unemployment rate from the COVID-19 pandemic, leading to the increase in the
allowance for loan losses as a percentage of total loans. In determining its
allowance for loan loss level at September 30, 2021 , the Company considered,
among other things, the health and composition of its loan portfolio in relation
to the COVID-19 pandemic. At September 30, 2021 , approximately 99.2% of the
Company's loan portfolio is collateralized by real estate. Approximately 1.7% of
the Company's loan portfolio is to borrowers in the more particularly hard-hit
industries (including the restaurant and food service industries, retail
industry, and hospitality and tourism industries) and the Company has no
international exposure.
Given the ongoing and dynamic nature of the circumstances, it is difficult to
predict the full impact of the COVID-19 outbreak on our business. The extent of
such impact will depend on future developments, which are highly uncertain,
including when the coronavirus can be controlled and abated and how the economy
continues to reopen. As the result of the COVID-19 pandemic and the related
adverse local and national economic consequences, we could be subject to any of
the following risks, any of which could have a material, adverse effect on our
business, financial condition, liquidity, and results of operations:
? demand for our products and services may decline, making it difficult to grow
assets and income;
if the economy is unable to stay open, and high levels of unemployment occur
? for an extended period of time, loan delinquencies, problem assets, and
foreclosures may increase, resulting in increased charges and reduced income;
? collateral for loans, especially real estate, may decline in value, which could
cause loan losses to increase;
our allowance for loan losses may have to be increased if borrowers experience
? financial difficulties beyond forbearance periods, which will adversely affect
our net income;
? the net worth and liquidity of loan guarantors may decline, impairing their
ability to honor commitments to us;
as the result of the decline in the
? funds rate to near 0%, the yield on our assets may continue to decline to a
greater extent than the decline in our cost of interest-bearing liabilities,
reducing our net interest margin and spread and reducing net income;
? our uninsured investment revenues may decline if there is market turmoil;
? our cyber security risks will increase if there is an increase in the number of
employees working remotely;
we rely on third party vendors for certain services and the unavailability of a
? critical service due to the COVID-19 outbreak could have an adverse effect on
us; and
?
experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to an increased outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition, and results of operations and prospects.
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As ofSeptember 30, 2021 , the Company originated 26 PPP loans totaling$1.8 million and generated approximately$76,000 from the processing fees. All PPP loan originations occurred before the end of theSeptember 30, 2021 reporting period. As ofSeptember 30, 2021 , 23 PPP loans totaling$1.8 million have been forgiven. As ofSeptember 30, 2021 , the Company had received requests to modify 86 loans aggregating$22.4 million , which excludes any loans that had been paid off subsequent to modification. Of these modifications,$22.1 million , or 98.7%, were performing in accordance with the accounting treatment under Section 4013 of the CARES Act and therefore did not qualify as TDRs. As ofSeptember 30, 2021 , all of these modifications have resumed monthly loan payments. Three loans totaling$287,000 were modified and did not qualify for the favorable accounting treatment under Section 4013 of the CARES Act and therefore each loan was reported as a TDR, however two of the loans were transferred out of TDR status after receiving six consequtive monthly payments after the end of the deferral period. Management has evaluated the loans and determined that based on the liquidation value of the collateral, no specific reserve is necessary.
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
Comparison of Financial Condition at
Total Assets. Total assets increased$1.5 million , or 0.5%, to$317.2 million atSeptember 30, 2021 from$315.7 million atJune 30, 2021 . The increase in assets was primarily due to an increase of$10.2 million in net loans held for investment and a$962,000 increase in loans held for sale, offset by a decrease in cash and cash equivalents of$11.1 million . Cash and Cash Equivalents. Cash and cash equivalents decreased$11.1 million , or 22.5%, to$38.2 million atSeptember 30, 2021 from$49.4 million atJune 30, 2021 . This decrease in cash and cash equivalents was a result of loan fundings as discussed below.
Interest Bearing Deposits. Interest bearing deposits remained relatively
consistent, increasing by
Available-for-Sale Securities . Available-for-sale securities increased$1.4 million , or 4.2%, to$34.3 million atSeptember 30, 2021 from$32.9 million atJune 30, 2021 , due to the purchase of securities totaling$1.9 million , offset by maturities and calls of$391,000 . Net Loans Held for Investment. Net loans held for investment increased$10.2 million , or 4.7%, to$225.6 million atSeptember 30, 2021 from$215.4 million atJune 30, 2021 , primarily reflecting an increase in construction and multifamily loans. Construction loans increased$5.6 million , or 228.3%, from$2.5 million atJune 30, 2021 to$8.1 million atSeptember 30, 2021 , and multifamily loans increased$4.9 million , or 5.4%, to$96.8 million atSeptember 30, 2021 from$91.9 million atJune 30, 2021 . Additionally, one- to four-family owner occupied residential real estate loans increased$2.0 million , or 2.8%, from$72.0 million atJune 30, 2021 to$74.0 million atSeptember 30, 2021 . We currently sell the majority of the single family loans we originate. Loans Held for Sale. Loans held for sale increased$962,000 , or 14.0%, to$7.8 million atSeptember 30, 2021 from$6.9 million atJune 30, 2021 , due to slower payment speeds by loan correspondents during the quarter, reflecting slower secondary market sales of loans originated.
Other Real Estate Owned. Other real estate owned remained the same at
Federal Home LoanBank Stock .Federal Home Loan Bank stock remained unchanged at$1.0 million atSeptember 30, 2021 , andJune 30, 2021 , respectively, as a result of the same balance in borrowed funds as discussed below. 34
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Deposits. Total deposits decreased$2.1 million , or 0.8%, to$267.8 million atSeptember 30, 2021 from$269.9 million atJune 30, 2021 . The decrease was due to decreases in demand accounts of$4.8 million , or 4.4%, from$109.0 million atJune 30, 2021 to$104.2 million atSeptember 30, 2021 and in certificates of deposit of$876,000 , or 1.2%, to$71.9 million atSeptember 30, 2021 from$72.7 million atJune 30, 2021 . The decreases were offset partially by the increase in savings and NOW accounts of$3.6 million , or 4.1%, from$88.2 million atJune 30, 2021 to$91.8 million atSeptember 30, 2021 . Borrowed Funds. Borrowed funds, consisting solely ofFederal Home Loan Bank advances, remained unchanged at$5.0 million atSeptember 30, 2021 andJune 30, 2021 . Loan payments and payoffs have reduced our need for borrowings to fund our operations. Stockholders' Equity. Total stockholders' equity increased$453,000 or 1.4%, to$33.6 million atSeptember 30, 2021 from$33.1 million atJune 30, 2021 . The increase was due primarily to net income of$624,000 during the three months endedSeptember 30, 2021 .
Comparison of Operating Results for the Three Months Ended
General. Net income was
Interest Income. Interest income decreased$308,000 , or 11.2%, to$2.4 million for the three months endedSeptember 30, 2021 compared to$2.8 million for the three months endedSeptember 30, 2020 . Interest income on loans, which is our primary source of interest income, decreased$343,000 , or 13.2%, to$2.3 million for the three months endedSeptember 30, 2021 compared to$2.6 million for the three months endedSeptember 30, 2020 . Our annualized average yield on loans decreased 34 basis points to 4.13% for the three months endedSeptember 30, 2021 from 4.47% for the three months endedSeptember 30, 2020 , primarily due to the decrease in interest rates. The average balance of loans decreased$14.3 million , or 6.1%, to$218.4 million for the three months endedSeptember 30, 2021 from$232.6 million for the three months endedSeptember 30, 2020 . Interest Expense. Interest expense decreased$93,000 , or 25.4%, to$275,000 for the three months endedSeptember 30, 2021 compared to$369,000 for the three months endedSeptember 30, 2020 , due primarily to decreases in market interest rates and a shift in deposits from certificates of deposit to lower cost demand and savings and NOW accounts. Interest expense on deposits decreased$87,000 , or 24.1%, to$275,000 for the three months endedSeptember 30, 2021 from$362,000 for the three months endedSeptember 30, 2020 . Specifically, interest expense on certificates of deposit decreased$83,000 , or 24.6%, to$255,000 for the three months endedSeptember 30, 2021 from$338,000 for the three months endedSeptember 30, 2020 . The decrease resulted from a 17 basis point decrease in the annualized average rate we paid on certificates of deposit to 1.42% for the three months endedSeptember 30, 2021 from 1.59% for the three months endedSeptember 30, 2020 , reflecting a decrease in market rates. Additionally, there was a$13.3 million decrease in the average balance of certificates of deposits to$72.0 million atSeptember 30, 2021 from$85.3 million for the three months endedSeptember 30, 2020 . There was no interest expense on FHLB borrowings for the three months endedSeptember 30, 2021 compared to$6,000 for the three months endedSeptember 30, 2020 . This decrease resulted from decreases in both the average balance of FHLB borrowings and the average rate we paid on FHLB borrowings. The average balance of borrowings decreased$3.0 million , or 37.2%, to$5.0 million for the three months endedSeptember 30, 2021 from$8.0 million for the three months endedSeptember 30, 2020 , and the annualized average rate we paid on borrowings decreased 31 basis points to 0% for the three months endedSeptember 30, 2021 from 0.31% for the three months endedSeptember 30, 2020 . As described above, loan payments and payoffs and increases in demand and savings and NOW deposits have reduced our need for borrowings to fund our operations. 35
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Net Interest Income. Net interest income decreased$214,000 , or 9.0%, to$2.2 million for the three months endedSeptember 30, 2021 from$2.4 million the three months endedSeptember 30, 2020 , primarily as a result of the decreased interest income from loans. In addition, our net interest rate spread decreased by 65 basis points to 2.87% for the three months endedSeptember 30, 2021 from 3.52% for the three months endedSeptember 30, 2020 , and our net interest margin decreased by 65 basis points to 2.97% for the three months endedSeptember 30, 2021 from 3.61% for the three months endedSeptember 30, 2020 , due to the decreases in market interest rates. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimated at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See "Summary of Significant Accounting Policies" for additional information. After an evaluation of these factors, and based on management's current assessment of the increased inherent risk in the loan portfolio due to COVID-19, we recorded a$50,000 provision for loan losses for the three months endedSeptember 30, 2021 , compared to no provision for the three months endedSeptember 30, 2020 . Our allowance for loan losses was$1.5 million atSeptember 30, 2021 and$1.4 million atJune 30, 2021 . The allowance for loan losses to total loans was 0.64% atSeptember 30, 2021 and 0.65% atJune 30, 2021 , while the allowance for loan losses to non-performing loans was 228.57% atSeptember 30, 2021 and 178.09% atJune 30, 2021 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atSeptember 30, 2021 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFederal Deposit Insurance Corporation , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. Non-interest Income. Non-interest income decreased$1.3 million , or 40.7%, to$1.9 million for the three months endedSeptember 30, 2021 compared to$3.3 million for the three months endedSeptember 30, 2020 . The gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) decreased$1.4 million , or 45.4%, to$1.6 million for the three months endedSeptember 30, 2021 compared to$3.0 million for the three months endedSeptember 30, 2020 . The decrease in the gain on sale of motgage loans was due primarily to the decrease in the originations for sale of$72.6 million of mortgage loans during the 2021 period compared to$142.5 million of such originations during the 2020 period. Non-interest Expenses. Non-interest expenses decreased$441,000 , or 11.4%, to$3.4 million for the three months endedSeptember 30, 2021 from$3.9 million for the three months endedSeptember 30, 2020 . Compensation and benefits expense decreased$303,000 , or 12.4%, to$2.1 million for the three months endedSeptember 30, 2021 from$2.4 million for the three months endedSeptember 30, 2020 , as we experienced a decrease in payroll expense due to lower loan officer compensation as a result of decreased loan origination volume. Other expenses decreased$93,000 or 23.5% to$303,000 for the three months endedSeptember 30, 2021 compared to$396,000 as ofSeptember 30, 2020 due to decreased loan sold volume and the associated loan origination costs that are written off at time of sale. Income Tax Expense. We recognized no income tax expense or benefits for the three months endedSeptember 30, 2021 and for the three months endedSeptember 30, 2020 due to a full valuation allowance being recorded against the Company's deferred tax assets. 36 Table of Contents Average Balance Sheets The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale. For the Three Months Ended September 30, 2021 2020 Average Average Average Average Outstanding Yield/ Outstanding Yield/ Balance Interest Rate (1) Balance Interest Rate (1) Interest-earning assets: Loans$ 218,371,546 $ 2,256,146 4.13 %$ 232,635,658 $ 2,599,597 4.47 % Securities 33,369,216 175,573 2.10 % 20,301,633 140,386 2.77 %Federal Home Loan Bank of Chicago stock 1,031,200 5,710 2.21 % 1,345,500 11,604 3.45 % Other 39,770,651 7,188 0.07 % 9,553,405 559 0.02 % Total interest-earning assets 292,542,613 2,444,617 3.34 % 263,836,196 2,752,146 4.17 % Non-interest-earning assets 18,891,366 35,449,900 Total assets$ 311,433,979 $ 299,286,096 Interest-bearing liabilities: Demand deposits$ 66,835,869 $ 3,733 0.02 %$ 55,966,341 $ 8,325 0.06 % Savings and NOW deposits 90,700,767 16,571 0.07 % 78,460,847 16,234 0.08 % Certificates of deposit 71,979,850 254,870 1.42 % 85,277,751 337,940 1.59 % Total interest-bearing deposits 229,516,486 275,174 0.48 % 219,704,939 362,499 0.66 % Borrowings 5,000,000 - - % 7,955,556 6,142 0.31 % Total interest-bearing liabilities 234,516,486 275,174
0.47 % 227,660,495 368,641 0.65 % Non-interest-bearing liabilities 43,385,868
47,705,361
Total liabilities 277,902,354 275,365,856
Total equity 33,531,625 23,920,240
Total liabilities and equity $ 311,433,979 $ 299,286,096
Net interest income $ 2,169,443 $ 2,383,505
Net interest rate spread (1) 2.87 % 3.52 %
Net interest-earning assets (2) $ 58,026,127 $ 36,175,701
Net interest margin (3) 2.97 % 3.61 %
Average interest-earning assets
to interest-bearing liabilities 124.74 %
115.89 %
(1) Annualized
Net interest spread represents the difference between the weighted average (2) yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Chicago and fromU.S. Bank . AtSeptember 30, 2021 , we had a$110.1 million line of credit with theFederal Home Loan Bank of Chicago , and had$5.0 million of borrowings outstanding as of that date. We also had a$5.0 million line of credit withU.S. Bank , with no borrowings outstanding as of that date. 37
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While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$1.6 million for the three months endedSeptember 30, 2021 and net cash used in operating activities was($6.4) million for the three months endedSeptember 30, 2020 . Net cash (used in) provided by investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, and proceeds from maturing securities and pay downs on securities, was($11.9) million and$4.2 million for the three months endedSeptember 30, 2021 and the three months endedSeptember 30, 2020 , respectively. Net cash used in financing activities, consisting of activity in deposit accounts and borrowings, was($0.8) million and($1.4) million for the three months endedSeptember 30, 2021 and 2020, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience, we anticipate that a substantial portion of maturing time deposits will be retained, though we also noted an increase in non-maturity deposits, assisting in liquitidy management. In the event that maturing time deposits run off at maturity, we can also supplement our funding with borrowings.
At
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