EDGAR 10-K Filing

Company CIK: 1751700
Filing Year: 2021
Filename: 1751700_10-K_2021_0001558370-21-012692.json

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ITEM 1. BUSINESS
ITEM 1.
Business
Forward Looking Statements
This annual 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 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. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
● general economic conditions, either nationally or in our market areas, that are worse than expected;
● changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
● our ability to access cost-effective funding;
● fluctuations in real estate values and both residential and commercial real estate market conditions;
● demand for loans and deposits in our market area;
● our ability to implement and change our business strategies;
● competition among depository and other financial institutions;
● inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses, and prepayments on loans we have made and make;
● adverse changes in the securities or secondary mortgage markets;
● changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
● 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 Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
● our ability to retain key employees;
● the effects of any federal government shutdown;
● changes in the financial condition, results of operations or future prospects of issuers of securities that we own;
● the effect of the COVID-19 pandemic on the Company’s credit quality, revenue, and business operations; and
● adverse changes in the economy or business conditions, either nationally or in our markets, including, without limitation, the adverse effects of the COVID-19 pandemic on the global, national, and local economy.
The COVID-19 pandemic has caused significant economic dislocation in the United States. Given its ongoing and dynamic nature, 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 open. As a 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 continue to reopen, and/or high levels of unemployment return,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 a result of the decline in the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may 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 with continuing market turmoil;
● Our cyber security risks are increased as a result of an increase in the number of employees working remotely; and
● FDIC premiums may increase if the agency experiences additional resolution costs.
Because of these and other uncertainties, our future results may be materially different from the results indicated by these forward-looking statements.
TEB Bancorp, Inc.
TEB Bancorp, Inc., a Maryland corporation that was organized in 2018, is a bank holding company headquartered in Wauwatosa, Wisconsin. TEB Bancorp, Inc.’s common stock is traded on the OTC Pink Marketplace under the symbol “TBBA.” TEB Bancorp, Inc. conducts its operations primarily through its wholly owned subsidiary, The Equitable Bank, S.S.B., a Wisconsin-chartered savings bank (“The Equitable Bank”). TEB Bancorp, Inc. manages its operations as one unit, and thus does not have separate operating segments. At June 30, 2021, TEB Bancorp, Inc. had total assets of $315.7 million, net loans of $215.4 million, deposits of $269.9 million, and stockholders’ equity of $33.1 million.
TEB Bancorp, Inc. was formed as part of the mutual holding company reorganization of The Equitable Bank, S.S.B., which was completed in April 2019. In connection with the reorganization, TEB Bancorp, Inc. sold 1,309,547 shares of common stock to the public at $10.00 per share, representing 49.9% of its outstanding shares of common stock. TEB MHC has been organized as a mutual holding company under the laws of the State of Wisconsin and owns the remaining 50.1% of the outstanding common stock of TEB Bancorp, Inc.
The executive offices of TEB Bancorp, Inc. are located at 2290 North Mayfair Road, Wauwatosa, Wisconsin 53226, and its telephone number is (414) 476-6434. Our website address is www.tebbancorp.com. Information on our website is not and should not be considered a part of this annual report.
TEB Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).
TEB MHC
TEB MHC was formed as a Wisconsin mutual holding company and will, for as long as it is in existence, own a majority of the outstanding shares of TEB Bancorp, Inc.’s common stock.
TEB MHC’s principal assets are the common stock of TEB Bancorp, Inc. it received in the reorganization and offering and $100,000 cash in initial capitalization, which was contributed from the net proceeds of the stock offering. Presently, the only business activity of TEB MHC is owning a majority of TEB Bancorp, Inc.’s common stock. TEB MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under state and federal law, including investing in loans and securities.
The Equitable Bank, S.S.B.
The Equitable Bank is a Wisconsin-chartered savings bank headquartered in Wauwatosa, Wisconsin. The Equitable Bank was originally chartered in 1927 as a Wisconsin-chartered mutual building and loan association under the name The Equitable Savings Building and Loan Association. In 1990, we changed our name to “The Equitable Bank, S.S.B.” and in 1993 we converted to a Wisconsin-chartered mutual savings bank.
We conduct our business from our main office and five branch offices, which are located in Milwaukee, Racine and Waukesha Counties, Wisconsin, and a loan production office, which is located in Ozaukee County, Wisconsin. Our primary market area is broadly defined as the Milwaukee, Wisconsin metropolitan area, which is geographically located in the southeast corner of the state. Our primary market area for deposits includes the communities in which we maintain our banking office locations, while our primary lending market area is broader, and also includes Ozaukee County, where we maintain our loan production office, Washington County, Wisconsin, which borders both Ozaukee County and Waukesha County, as well as Kenosha and Walworth County, Wisconsin, which border Racine County.
Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans (both owner occupied and non-owner occupied), multifamily residential real estate loans and commercial real estate loans, and, to a lesser extent, consumer loans (primarily home equity lines of credit), construction, land and development loans, and commercial and industrial loans. Subject to market conditions, we expect to increase our focus on originating multifamily residential real estate, owner-occupied commercial real estate and non-owner occupied one- to four-family residential real estate loans in an effort to further diversify our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk. We also invest in securities, which have historically consisted primarily of obligations of states and political subdivisions. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We borrow funds, primarily from the Federal Home Loan Bank of Chicago, to fund our operations as necessary.
The Equitable Bank is subject to comprehensive regulation and examination by the Wisconsin Department of Financial Institutions (the “WDFI”) and the Federal Deposit Insurance Corporation.
Our executive office is located at 2290 North Mayfair Road, Wauwatosa, Wisconsin 53226, and our telephone number at this address is (414) 476-6434.
Mutual Holding Company Ownership Structure
Public stockholders own a minority of the outstanding shares of TEB Bancorp, Inc.’s common stock. As a result, stockholders other than TEB MHC are not able to exercise voting control over most matters put to a vote of stockholders. TEB MHC owns a majority of TEB Bancorp, Inc.’s common stock and, through its board of directors, is able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage The Equitable Bank also manage TEB Bancorp, Inc. and TEB MHC. The board of directors of TEB MHC must ensure that the interests of depositors of The Equitable Bank (as members of TEB MHC) are represented and considered in matters put to a vote of stockholders of TEB Bancorp, Inc. Therefore, TEB MHC may take action that the public stockholders believe to be contrary to their interests. For example, TEB MHC may exercise its voting control to defeat a stockholder nominee for election to the board of directors of TEB Bancorp, Inc.
In addition, stockholders are not able to force a merger or second-step conversion transaction without the consent of TEB MHC since such transactions also require the approval of a majority of all of the outstanding voting stock of TEB Bancorp, Inc., which can only be achieved if TEB MHC voted to approve such transactions. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since, on a fully converted basis, most full stock institutions tend to trade at higher multiples than mutual holding companies. Stockholders could, however, prevent a second-step conversion or the implementation of equity incentive plans as under current regulations and policies, such matters also require the separate approval of the stockholders other than TEB MHC.
Market Area
We conduct our business from our main office and five branch offices, which are located in Milwaukee, Racine and Waukesha Counties, Wisconsin, and a loan production office, which is located in Ozaukee County, Wisconsin. Our primary market area is broadly defined as the Milwaukee, Wisconsin metropolitan area, which is geographically located in the southeast corner of the state. Our primary market area for deposits includes the communities in which we maintain our banking office locations, while our primary lending market area is broader, and also includes Ozaukee County, where we maintain our loan production office, as well as Washington County, Wisconsin, which borders both Ozaukee County and Waukesha County. The following discusses the demographics of the counties where our offices are located.
According to information from S&P Global Market Intelligence as of August 2021, from 2016 to 2021, the population decreased in Milwaukee County by 1.6%, and experienced increases in Racine, Waukesha and Ozaukee Counties of 0.6%, 2.4% and 2.0%, respectively, compared to 1.0% for Wisconsin and 2.6% for the United States as a whole. Projections indicate that through 2026, the population will remain fairly stable in Milwaukee County (-0.1%), with modest increases (less than 1.8%) for Racine, Waukesha and Ozaukee Counties, as well as for Wisconsin, compared to projected United States population growth of 2.9%. Trends in numbers of households in our market area, Wisconsin and the United States as a whole were consistent with trends in population, and projections for the numbers of households are also consistent with the projections for population changes.
The median household income for 2021 was $54,231, $64,161, $93,695 and $88,966 for Milwaukee, Racine, Waukesha and Ozaukee Counties, respectively, compared to $66,361 in Wisconsin and $67,761 for the United States as a whole. By 2026, the projected annual growth rates in median household income are expected to be 2.0%, 1.1%, 1.9% and 1.6% in Milwaukee, Racine, Waukesha and Ozaukee Counties, respectively, compared to 1.8% for Wisconsin and 1.7% for the United States as a whole.
Unemployment rates as of June 2021 and 2020 are set forth in the following table.
Region
June 2021
June 2020
United States
6.1
%
11.1
%
Wisconsin
3.9
%
8.5
%
Milwaukee County
6.7
%
11.6
%
Racine County
5.6
%
9.5
%
Waukesha County
3.8
%
8.0
%
Ozaukee County
3.9
%
7.8
%
While our primary market area has a diversified local economy, for 2021, in each of Milwaukee, Racine, Waukesha and Ozaukee Counties, as well as the State of Wisconsin, the three largest employment sectors consisted of education/healthcare/social services, the service sector and manufacturing, with manufacturing being the largest employment sector in Racine County.
We believe that we have developed products and services that will meet the financial needs of our current and future customer base; however, we plan, and believe it is necessary, to expand the range of products and services that we offer to be more competitive in our market area. Our marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.
Competition
We face competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2021 (the most recent date for which data is available), our market share of deposits represented 0.40% of Federal Deposit Insurance Corporation-insured deposits in Milwaukee County, ranking us 17th in market share of deposits out of 27 institutions operating in the county. In addition, as of that date, our market share of deposits represented 0.53% of Federal Deposit Insurance Corporation-insured deposits in Racine County, ranking us 14th in market share of deposits out of 14 institutions operating in the county, and our market share of deposits represented 0.14% of Federal Deposit Insurance Corporation-insured deposits in Waukesha County, ranking us 32nd in market share of deposits out of 34 institutions operating in the county.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. Included with the loans described in the table below, at June 30, 2021, we had $6.9 million of loans held for sale, $5.6 million of loans in process and $99,000 of deferred loan fees.
At June 30,
At September 30,
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
(Dollars in thousands)
Construction, land and development
$
2,458
1.13
%
$
4,598
1.93
%
$
4,319
1.65
%
$
4,845
1.83
%
$
3,455
1.31
%
One- to four-family owner occupied residential
72,012
33.21
100,506
42.11
124,846
47.80
122,599
46.21
119,847
45.40
One- to four-family non-owner occupied residential
22,369
10.32
21,213
8.89
20,969
8.03
23,837
8.98
22,837
8.65
Multifamily
91,876
42.37
76,444
32.03
73,246
28.05
71,101
26.80
60,883
23.07
Commercial real estate
18,080
8.34
23,794
9.97
26,362
10.09
29,451
11.10
42,127
15.96
Commercial and industrial
2,507
1.16
3,177
1.33
1,648
0.63
2,112
0.79
1,881
0.71
Consumer and installment (1)
7,530
3.47
8,921
3.74
9,777
3.74
11,378
4.29
12,922
4.90
216,832
100.00
%
238,653
100.00
%
261,167
100.00
%
265,323
100.00
%
263,952
100.00
%
Less:
Allowance for losses
(1,412)
(1,353)
(1,294)
(1,324)
(1,879)
Total loans
$
215,420
$
237,300
$
259,873
$
263,999
$
262,073
(1) Includes home equity loans and lines of credit, which totaled $7.4 million at June 30, 2021.
Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at June 30, 2021. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.
One- to Four-
One- to Four-
Family Non-
Construction,
Family Owner
Owner
Land and
Occupied
Occupied
June 30, 2021
Development
Residential
Residential
Multifamily
(In thousands)
Amounts due in:
One year or less
$
$
$
1,563
$
2,871
More than one to five years
7,947
63,599
More than five years
2,173
71,798
12,859
25,406
Total
$
2,458
$
72,012
$
22,369
$
91,876
Commercial
Commercial
Consumer and
June 30, 2021
Real Estate
and Industrial
Installment
Total
(In thousands)
Amounts due in:
One year or less
$
6,867
$
1,153
$
$
13,148
More than one to five years
5,406
1,354
78,784
More than five years
5,807
-
6,857
124,900
Total
$
18,080
$
2,507
$
7,530
$
216,832
The following table sets forth our fixed and adjustable-rate loans at June 30, 2021 that are contractually due after June 30, 2021. Our balloon loans are included as fixed-rate loans for purposes of this table.
Due After June 30, 2022
Fixed
Adjustable
Total
(In thousands)
Construction, land and development
$
$
2,173
$
2,241
One- to four-family owner occupied residential
15,715
56,289
72,004
One- to four-family non-owner occupied residential
12,700
8,106
20,806
Multifamily
80,343
8,662
89,005
Commercial real estate
5,643
5,570
11,213
Commercial and industrial
1,354
-
1,354
Consumer and installment
6,186
7,061
Total loans
$
116,698
$
86,986
$
203,684
The following describes our most significant categories of loan types at June 30, 2021.
One- to Four-Family Real Estate Loans - Owner Occupied. At June 30, 2021, $72.0 million, or 33.2% of our total loan portfolio, consisted of owner-occupied one- to four-family residential real estate loans. We offer adjustable-rate owner-occupied residential real estate loans with maturities up to 30 years that include an initial introductory rate period of up to 10 years. Our adjustable-rate owner-occupied residential real estate loans have a competitive initial rate. After the initial fixed period (ranging between one to ten years) the rate adjusted to a predetermined margin plus the current index based on the 1 Year LIBOR. The rate adjustments are limited to 2.0% for the first change with subsequent adjustments every six months limited to 1.0%. The lifetime cap is limited to 6.0% over the initial rate.
On February 1, 2021, the bank discontinued offering the 1 Year LIBOR as an index, replacing it with the 30 day average Secured Overnight Financing Rate (SOFR). Any loans originated and locked after this date will adjust to predetermined margin plus the current index based on 30 day SOFR as published by the Federal Reserve Bank of New York. The rate adjustments are limited to 2.0% for the first change with subsequent adjustments every six months limited to 1.0%. The life time cap is limited to 6% over the initial rate.
Consistent with our strategy to increase our noninterest income while managing interest rate risk, we have historically sold substantially all of our fixed-rate owner-occupied, “conforming” (as described below) one- to four-family real estate loans, with the majority made up of 30-year fixed-rate loans. The loans are closed in our name, and are then sold to our investors who provide Fannie Mae and Freddie Mac conventional products as well as FHA and VA government loans. The loans are typically purchased and funded by the investors within 30 days of the originations. We earn interest income on the loans until they are purchased.
One- to four-family, owner-occupied residential real estate loans are generally underwritten according to Fannie Mae or Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate one- to four-family owner-occupied real estate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which is generally $548,250 for single-family homes in our market area. However, loans in excess of $548,250 (which are referred to as “jumbo loans”) may be originated and sold on a servicing released basis as well. We retain the majority of “jumbo loans” in our loan portfolio. We generally underwrite jumbo loans in accordance to our portfolio underwriting guidelines. At June 30, 2021, the average size of our one- to four-family, owner-occupied residential real estate loans originated for our portfolio was $157,000.
Generally, we originate loans with loan-to-value ratios of up to 80% but we also originate loans with loan-to-value ratios of up to 97%. Any loans we originate with loan-to-value ratios in excess of 80% require private mortgage insurance.
We do not offer “interest only” mortgage loans on permanent one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer
“subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
One- to Four-Family Real Estate Loans - Non-Owner Occupied. At June 30, 2021, $22.4 million, or 10.3% of our total loan portfolio, consisted of one- to four-family non-owner occupied real estate loans. Our real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property. Our one- to four-family non-owner occupied real estate loans generally have adjustable rates with 30-year terms and a fixed initial rate ranging between three to seven years. Our adjustable-rate mortgages one- to four-family non-owner occupied real estate loans have a competitive initial rate that typically resets to an applicable margin with an adjustment every six months, up to 2% over the 1 Year LIBOR Rate after the initial three-, five- or seven-year fixed period with a lifetime rate cap of 14.50%.
On February 1, 2021, the bank discontinued offering the 1 year LIBOR as an index, placing it with the 30 day average Secured Overnight Financing Rate (SOFR).Any loans orignated and locked after February 1, 2021 adjusted to a predetermined margin plus the current index based on the 30 day SOFR as published by the Federal Reserve Bank of New York. After the initial fixed rate period they reset to an appliable margin every six months up to 2% over the 30 day SOFR and have a lifetime cap of 14.50%.
We generally target one- to four-family non-owner occupied loans with balances up to $250,000. At June 30, 2021, our average one- to four-family non-owner occupied real estate loan was $127,000. Virtually all of our one- to four-family non-owner occupied real estate loans are secured by properties located in our primary lending area.
When originating one- to four-family non-owner occupied real estate loans, we consider the net operating income of the property, the borrower’s expertise and credit history, the global cash flow of the borrowers and the value of the underlying property. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.00x, using 75% of estimated or actual rents against principal, interest, taxes and insurance (PITI) for one and two unit properties, and at least 1.00x using 70% of estimated or actual rents against PITI for three or four unit properties.
Generally, one- to four-family real estate loans made to business entities require the principals to execute the loan agreements in their individual capacity through personal guarantees, as well as signing on behalf of such business entity.
Once a borrower exceeds $1.0 million in loans, we require one- to four-family non-owner occupied loan borrowers to provide annually updated financial statements and federal tax returns. Additionally, these borrowers with larger exposure are subject to underwriting standards similar to multifamily loans, which include a global debt service requirement of 1.20x.
Multifamily Real Estate Loans. At June 30, 2021 multifamily real estate loans were $91.9 million, or 42.4%, of our total loan portfolio. We originate individual multifamily real estate loans to experienced, growing small- and mid-size owners and investors in our market areas. Our multifamily real estate loans are generally secured by properties consisting of five to 40 rental units within our market. However, due to the highly competitive nature and the limited inventory in our market, we have expanded beyond our market, but within the State of Wisconsin, for multifamily opportunities without compromising credit quality.
We originate balloon loans with a variety of fixed-rate periods, typically up to seven years, with amortization terms up 25 years, although we will provide amortization terms up to 30 years on an exception basis. Interest rates and payments on our balloon loans are typically determined based on our internal pricing requirements and the current competitive market. Multifamily real estate loan amounts generally do not exceed 75% of the property’s appraised value at the time the loan is originated. We require each property to meet a minimum debt service ratio of 1.20x (calculated as net operating income divided by debt service). In addition, each borrowing entity must meet a global debt service ratio of 1.20x. We require multifamily real estate borrowers with loans in excess of $500,000 to submit annual financial statements including federal tax returns (both business and personal), personal financial statement for each
borrower/guarantor and an updated rent roll for each property. Properties with a loan in excess of $300,000 are subject to bi-annual inspections to verify appropriate maintenance is being performed.
Commercial Real Estate Loans. In recent years, we have sought to increase our originations of owner-occupied commercial real estate loans, and we have limited our originations of non-owner occupied commercial real estate loans. At June 30, 2021, we had $18.1 million in commercial real estate loans, representing 8.3% of our total loan portfolio, and $2.5 million in commercial and industrial loans, representing 1.2% of our total loan portfolio. Most of our commercial real estate loans are balloon loans with a three-, five- or seven-year initial term and a 25-year amortization period. The maximum loan-to-value ratio of our commercial real estate loans is generally 75%. These loans are secured by traditional commercial property types including industrial, office, retail and warehouse/storage facilities.
We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. We require each property to meet a minimum debt service ratio of 1.20x (calculated as net operating income divided by debt service). In addition, each borrowing entity must meet a global debt service ratio of 1.20x. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the strength and stability of the net operating income of the mortgaged property and the ratio of the loan amount to the appraised value of the mortgaged property, along with our assessing any environmental concerns associated with the property. The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Under applicable regulations, we are only required to obtain independent appraisals on commercial real estate loans in amounts greater than $500,000 for non-owner-occupied properties and $1.0 million for owner-occupied properties, and any decision not to obtain an outside, independent appraisal is made in accordance with these regulations. Personal guarantees are generally obtained from any principals of the underlying borrowing entity having a 25% or greater ownership/membership interest. We require all commercial real estate borrowers having an overall loan exposure of $500,000 or greater to provide annually updated financial statements and federal tax returns, which are used to conduct an annual review of the relationship.
Home Equity Loans and Lines of Credit. At June 30, 2021, home equity loans and lines of credit (which we categorize as consumer loans) totaled $16.6 million, with $7.4 million in outstanding balances. This total consisted of $787,000 of home equity loans and $6.6 million of home equity lines of credit. The underwriting standards utilized for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity lines of credit are offered with a loan-to-value ratio up to 80%. However, we offer special programs to borrowers who satisfy certain underwriting criteria (such as having an additional banking relationship) with loan-to-value ratios of up to 85%. Our home equity loans and lines of credit are generally 10-year balloon loans. Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.
Loan Underwriting Risks
Commercial Real Estate and Multifamily Real Estate Loans. Loans secured by commercial and multifamily real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. The primary concerns in commercial and multifamily real estate lending are the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial or multifamily real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. A Phase I environmental site assessment is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.
If we foreclose on a commercial or multifamily real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial and multifamily real estate loans can be unpredictable and substantial.
One- to Four-Family Non-Owner Occupied Residential Real Estate Loans. One- to four-family non-owner occupied residential real estate loans are subject to some of the same risks as our commercial real estate and multifamily real estate loans, in that they depend on the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Such loans are also subject to similar risks with respect to foreclosures and subsequent operations of the property and resale.
Construction, Land and Development Loans. Our construction loans are based upon estimates of costs and values associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.
Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment primarily dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.
Balloon Loans. Although balloon mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they may reprice at the end of the term, subject to renegotiation of rate and terms at maturity, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline prior to the expiration of the term of the loan or in a rising interest rate environment.
Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.
Originations, Purchases and Sales of Loans
Residential lending activities are conducted by salaried and commissioned loan personnel operating at our main and branch office locations and our loan production office. Loans we originate are underwritten pursuant to our policies and procedures. Loans originated with the intent for sale are also underwritten pursuant to secondary market guidelines. Our ability to originate fixed-rate loans, adjustable-rate loans or balloon loans depends on relative customer demand for such loans, which can be affected by current and expected future levels of market interest rates. We originate residential real estate loans through our loan originators, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders, accountants and financial advisors.
Commercial lending activities are conducted by salaried commercial lenders operating primarily out of our main location. All loans originated by us are underwritten pursuant to our policies and procedures. Our commercial loans are typically fixed-rate balloon loans with terms between three and seven years, with loan rates dependent on current and expected future levels of market interest rates. Commercial and multifamily lending are sourced primarily through loan
originator contacts, networking and marketing efforts, our customer base and referrals from real estate brokers, accountants and financial advisors.
We currently sell a significant majority of the fixed-rate one- to four-family residential real estate loans we originate on the secondary market. The loans are closed in our name, and are then sold to our investors who provide Fannie Mae and Freddie Mac conventional products as well as FHA and VA government loans. During the year ended June 30, 2021, we originated $520.3 million of one- to four-family residential real estate loans and sold $496.5 million, and during the year ended June 30, 2020, we originated $355.3 million of one- to four-family residential real estate loans and sold $334.9 million.
Loan Approval Procedures and Authority
Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 20% of our capital. This limit may be increased to 50% of capital for loans secured by certain assets. At June 30, 2021, based on the 20% limitation, our loans-to-one-borrower limit was approximately $7.1 million. On the same date, we had no borrowers with outstanding balances in excess of this amount. At June 30, 2021, our largest loan relationship with one borrower was for $5.5 million, which was secured by a mix of multifamily buildings, with the underlying loans performing in accordance with their original terms on that date.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.
All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. Subject to our underwriting procedures, each of our Chairman of the Board, our President and Chief Executive Officer, Executive Vice President, and Vice President of Mortgage Lending has individual authorization to approve certain residential loans up to $1.0 million, or aggregate exposure up to $2.0 million. Any residential loan above $1.0 million, and any commercial loan above $500,000, requires Loan Committee approval. Our Loan Committee consists of our Chairman of the Board, our President and Chief Executive Officer, our Executive Vice President, our Chief Credit Officer and our Vice President of Mortgage Lending. Commercial loans above $2.0 million require board approval and any commercial borrowing relationship exceeding $3.0 million requires board approval for all subsequent loans.
Delinquencies and Asset Quality
Delinquency Procedures. Our loss recovery process for delinquent loans does not provide a set formula for all borrowers; rather, we tailor our recovery efforts based on the borrower’s credit history with The Equitable Bank, their other account relationships with The Equitable Bank, their current employment situation and other individual circumstances. Our loan recovery specialists contact delinquent borrowers through telephone calls and/or mailing notices, typically beginning when a loan payment becomes 17 days past due. We may request receivership for delinquent loans that are 120 or more days past due, or we can initiate foreclosure procedures at that time if approved by our Chairman of the Board or President and Chief Executive Officer. Alternatively, we may determine that it is in the best interests of The Equitable Bank to work further with the borrower to arrange a workout plan.
Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All
loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.
When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. Initially, the real estate owned is recorded at the fair value less costs to sell. Then after foreclosure, each foreclosed real estate parcel is carried at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.
A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.
Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.
At June 30,
30-59
60-89
90 Days
30-59
60-89
90 Days
30-59
60-89
90 Days
Days
Days
or More
Days
Days
or More
Days
Days
or More
Past Due
Past Due
Past Due
Past Due
Past Due
Past Due
Past Due
Past Due
Past Due
(In thousands)
Construction, land and development
$
-
$
-
$
-
$
$
-
$
-
$
-
$
-
$
-
One- to four-family owner occupied residential
-
1,275
2,129
1,203
One- to four-family non-owner occupied residential
-
-
-
-
-
-
-
Multifamily
-
-
-
-
-
-
-
-
-
Commercial real estate
-
-
-
-
-
-
Commercial and industrial
-
-
-
-
-
-
-
-
-
Consumer and installment
-
-
-
Total
$
$
-
$
$
1,408
$
$
1,341
$
2,305
$
$
1,525
At June 30,
At September 30,
30-59
60-89
90 Days
30-59
60-89
90 Days
Days
Days
or More
Days
Days
or More
Past Due
Past Due
Past Due
Past Due
Past Due
Past Due
(In thousands)
Construction, land and development
$
$
-
$
$
$
-
$
-
One- to four-family owner occupied residential
2,075
-
1,346
1,225
One- to four-family non-owner occupied residential
-
-
-
-
Multifamily
-
-
-
-
-
-
Commercial real estate
-
-
-
Commercial and industrial
-
-
-
-
-
-
Consumer and installment
-
-
Total
$
2,241
$
-
$
1,444
$
1,654
$
$
1,765
Non-Performing Assets. The following table sets forth information regarding our non-performing assets. There were no non-accruing troubled debt restructured loans as of June 30, 2021, 2020 2019, and 2018. As of September 30, 2017, there were $1.4 million in non-accruing troubled debt restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.
At June 30,
At September 30,
(Dollars in thousands)
Non-accrual loans:
Construction, land and development
$
-
$
-
$
-
$
$
-
One- to four-family owner occupied residential
1,203
1,225
One- to four-family non-owner occupied residential
-
-
Multifamily
-
-
-
-
-
Commercial real estate
Commercial and industrial
-
-
-
-
-
Consumer and installment
Total non-accrual loans
1,341
1,525
1,444
1,765
Accruing loans past due 90 days or more
-
-
-
-
-
Real estate owned:
Construction, land and development
1,114
1,278
One- to four-family owner occupied residential
-
-
One- to four-family non-owner occupied residential
-
-
-
-
-
Multifamily
-
-
-
-
-
Commercial real estate
-
1,854
2,787
2,741
2,957
Commercial and industrial
-
-
-
-
-
Consumer and installment
-
-
-
-
Total real estate owned
2,288
4,080
3,957
4,371
Total non-performing assets
$
$
3,629
$
5,605
$
5,401
$
6,136
Total accruing troubled debt restructured loans
$
$
$
-
$
-
$
1,408
Total non-performing loans to total loans
0.37
%
0.56
%
0.58
%
0.54
%
0.67
%
Total non-performing assets to total assets
0.30
%
1.19
%
1.80
%
1.72
%
1.99
%
Interest income that would have been recorded for the fiscal year ended June 30, 2021 had non-accruing loans been current according to their original terms amounted to $44,000. We recognized $20,000 of interest income for these loans for the fiscal year ended June 30, 2021. In addition, interest income that would have been recorded for the fiscal year ended June 30, 2021 had accruing troubled debt restructurings been current according to their original terms, amounted to $2,000. We recognized $5,000 of interest income for these loans for the fiscal year ended June 30, 2021.
Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain
“some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
On the basis of our review of our assets, our classified and special mention assets at the dates indicated were as follows:
At June 30,
(In thousands)
Substandard assets - not accruing
$
$
3,440
Doubtful assets
-
-
Loss assets
Total classified assets
$
$
3,629
Special mention assets
$
4,527
$
8,119
During the year ended June 30, 2021, classified assets improved by $2.7 million year over year. Activities having the largest impact on the balances include net proceeds from OREO sales of $2.0 million and $153,000 in charge-offs on OREO properties. In addition, $523,000 in assets consisting of seven residential real estate loans were no longer classified as of June 30, 2021.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions, including the impact of COVID-19. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various 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.
In addition, the WDFI and the Federal Deposit Insurance Corporation periodically review our allowance for loan losses and as a result of such reviews, we may have to adjust our allowance for loan losses or recognize further loan charge-offs.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
At or for the
At or for the
At or for the
Years Ended
Nine Months Ended
Year Ended
June 30,
June 30,
September 30,
(Dollars in thousands)
Allowance at beginning of period
$
1,353
$
1,294
$
1,324
$
1,879
$
4,482
$
4,482
Provision for loan losses
-
-
-
Charge offs:
Construction, land and development
-
-
-
-
-
-
One- to four-family owner occupied residential
-
One- to four-family non-owner occupied residential
-
-
-
Multifamily
-
-
-
-
-
-
Commercial real estate
-
-
-
2,610
2,639
Commercial and industrial
-
-
-
-
-
-
Consumer and installment
Total charge-offs
1,035
2,638
2,675
Recoveries:
Construction, land and development
-
-
-
One- to four-family owner occupied residential
-
One- to four-family non-owner occupied residential
-
-
-
Multifamily
-
-
-
-
Commercial real estate
-
-
-
Commercial and industrial
-
-
-
-
-
-
Consumer and installment
Total recoveries
Net (charge-offs) recoveries
(91)
(76)
(30)
(980)
(2,580)
(2,603)
Allowance at end of period
$
1,412
$
1,353
$
1,294
$
1,324
$
1,902
$
1,879
Allowance to non-performing loans
178.09
%
100.91
%
84.86
%
91.68
%
130.32
%
106.47
%
Allowance to total loans outstanding at the end of the period
0.65
%
0.57
%
0.50
%
0.50
%
0.73
%
0.71
%
Net (charge-offs) recoveries to average loans outstanding during the period
(0.04)
%
(0.03)
%
(0.01)
%
(0.51)
%(1)
(1.32)
% (1)
(1.00)
%
(1) Annualized.
Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The
allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
At June 30,
Percent of
Percent of
Percent of
Percent of
Percent of
Percent of
Allowance
Loans in
Allowance
Loans in
Allowance
Loans in
in Category
Each
in Category
Each
in Category
Each
Allowance
to Total
Category to
Allowance
to Total
Category to
Allowance
to Total
Category to
for Loan
Allocated
Total
for Loan
Allocated
Total
for Loan
Allocated
Total
Losses
Allowance
Loans
Losses
Allowance
Loans
Losses
Allowance
Loans
(Dollars in thousands)
Construction, land and development
$
0.84
%
1.13
%
$
1.13
%
1.93
%
$
0.40
%
1.65
%
One- to four-family owner occupied residential
24.91
33.21
28.74
42.11
6.27
47.80
One- to four-family non-owner occupied residential
8.86
10.32
6.21
8.89
2.47
8.03
Multifamily
35.06
42.37
23.16
32.03
10.19
28.05
Commercial real estate
24.14
8.34
32.28
9.97
73.86
10.10
Commercial and industrial
1.07
1.16
0.65
1.33
0.31
0.63
Consumer and installment
5.12
3.47
7.83
3.74
6.50
3.74
Total allocated allowance
1,309
100.00
%
100.00
%
1,239
100.00
%
100.00
%
1,078
100.00
%
100.00
%
Unallocated
Total
$
1,412
$
1,353
$
1,294
At June 30,
At September 30,
Percent of
Percent of
Allowance
Percent of
Allowance
Percent of
in Category
Loans in
in Category
Loans in
Allowance
to Total
Each
Allowance
to Total
Each
for Loan
Allocated
Category to
for Loan
Allocated
Category to
Losses
Allowance
Total Loans
Losses
Allowance
Total Loans
Construction, land and development
$
0.38
%
1.82
%
$
5.81
%
1.31
%
One- to four-family owner occupied residential
0.54
46.21
3.71
45.40
One- to four-family non-owner occupied residential
5.42
8.98
8.39
8.65
Multifamily
5.42
26.80
4.21
23.07
Commercial real estate
72.78
11.10
61.25
15.96
Commercial and industrial
7.95
0.80
5.26
0.71
Consumer and installment
7.49
4.29
11.37
4.90
Total allocated allowance
1,309
100.00
%
100.00
%
1,445
100.00
%
100.00
%
Unallocated
Total
$
1,324
$
1,879
Investment Activities
General. The goals of our investment policies are to provide liquidity, manage interest-rate risk, maximize our rate of return and manage asset quality diversification. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
All of our investment securities are held by Equitable Investment Corp., a Nevada corporation that is a wholly-owned subsidiary of The Equitable Bank. Like many Wisconsin financial institutions, we established a Nevada subsidiary to hold our investment securities due to favorable state tax treatment. Although the favorable tax treatment is no longer applicable, we maintain the structure because of the expertise provided by the investment manager. Equitable Investment Corp.’s investment policy was adopted by its board of directors (consisting primarily of executive officers of The Equitable Bank) and is reviewed annually by its board of directors. Equitable Investment Corp.’s current investment policy permits, with certain limitations, investments in: U.S. Treasury obligations; securities issued by U.S. government agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Ginnie Mae and Freddie Mac; state and municipal obligations and bonds; money market funds and certificates of deposit; and corporate debt and securities.
Because Equitable Investment Corp. is our wholly owned subsidiary, we have incorporated Equitable Investment Corp.’s investment policy into our policies, and we have adopted general guidelines with respect to the types of investments that can be made by Equitable Investment Corp., including targeted guidelines on amounts of municipal investments, agency securities, collateralized mortgage obligations and corporate debt.
At June 30, 2021, our investment portfolio consisted primarily of obligations issued by states and political subdivisions, and Federal Home Loan Bank of Chicago stock. At June 30, 2021, we owned $1.0 million of Federal Home Loan Bank of Chicago stock. As a member of Federal Home Loan Bank of Chicago, we are required to purchase stock in the Federal Home Loan Bank of Chicago, which stock is carried at cost and classified as restricted equity securities.
The following table sets forth the amortized cost and estimated fair value of our available for sale securities portfolio at the dates indicated. At the dates indicated, we did not hold any securities as held to maturity.
At June 30,
Estimated
Estimated
Estimated
Amortized
Fair
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
Cost
Value
(In thousands)
Obligations of states and political subdivisions
$
23,350
$
23,776
$
17,563
$
18,005
$
18,720
$
18,878
U.S. government agency obligations
6,000
5,982
-
-
-
-
Mortgage-backed securities
1,230
1,275
1,372
1,444
1,065
1,106
Municipal leases
1,002
1,003
-
-
-
-
Certificates of deposit
Total
$
32,382
$
32,869
$
19,735
$
20,298
$
20,340
$
20,542
As of June 30, 2021, we had no securities of issuers that exceeded 10% of our total equity as of that date.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2021, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at June 30, 2021, were taxable securities.
More than One Year
More than Five Years
One Year or Less
through Five Years
through Ten Years
More than Ten Years
Total
Weighted
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Fair
Average
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Value
Yield
(Dollars in thousands)
U.S. Government sponsored enterprises
$
2.29
%
$
8,762
2.95
%
$
4,772
2.64
%
$
8,830
2.25
%
$
23,350
$
23,776
2.59
%
U.S. government agency obligations
-
-
3,000
0.53
%
3,000
1.01
%
-
-
6,000
5,982
0.77
%
Mortgage-backed securities
-
-
-
-
1,230
3.35
%
-
-
1,230
1,275
3.35
%
Municipal leases
-
-
2.00
%
-
-
2.24
%
1,002
1,003
2.15
%
Certificates of deposit
-
-
2.49
%
-
-
-
-
2.49
%
Total
$
2.29
%
$
12,923
2.33
%
$
9,002
2.19
%
$
9,471
2.25
%
$
32,382
$
32,869
2.27
%
Sources of Funds
General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits. Our deposits are generated primarily from our primary market area. We offer a selection of deposit accounts, including savings accounts, checking accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals.
We rely upon personalized customer service, long-standing relationships with customers, a thorough and user-friendly internet website, and the favorable image of The Equitable Bank in the community to attract and retain deposits. We also seek to obtain deposits from our commercial loan customers.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The ability to attract and maintain deposits and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions.
The following table sets forth the distribution of total deposits by account type at the dates indicated.
At June 30,
Average
Average
Average
Amount
Percent
Rate
Amount
Percent
Rate
Amount
Percent
Rate
(Dollars in thousands)
Non-interest bearing accounts
$
44,015
16.31
%
-
%
$
39,235
15.32
%
-
%
$
28,914
12.33
%
-
%
Interest-bearing demand
64,976
24.08
0.06
%
54,393
21.24
0.06
%
48,500
20.67
0.04
%
Interest-bearing savings and NOW accounts
88,157
32.66
0.08
%
75,398
29.45
0.08
%
70,386
30.01
0.08
%
Certificates of deposit
72,738
26.95
1.47
%
87,046
33.99
1.84
%
86,761
36.99
1.80
%
Total
$
269,886
100.00
%
0.57
%
$
256,072
100.00
%
0.83
%
$
234,561
100.00
%
0.70
%
As of June 30, 2021, the aggregate amount of all our certificates of deposit in amounts greater than or equal to $250,000 was $6.9 million. The following table sets forth the maturity of these certificates as of June 30, 2021.
At
June 30, 2021
(In thousands)
Maturity Period:
Three months or less
$
1,068
Over three through six months
Over six through twelve months
1,014
Over twelve months
4,307
Total
$
6,896
Borrowings. As of June 30, 2021, we had a master contract agreement with the Federal Home Loan Bank of Chicago pursuant to which we could borrow $121.4 million. At June 30, 2021, we had Federal Home Loan Bank of Chicago advances totaling $5.0 million. In addition, we have a $5.0 million line of credit with U.S. Bank. No amount was outstanding on this line of credit at June 30, 2021.
The following table sets forth information concerning balances and interest rates on borrowings at the dates and for the periods indicated.
At or For the
Year Ended
June 30,
(Dollars in thousands)
Balance outstanding at end of period
$
5,000
$
9,000
$
44,200
Weighted average interest rate at the end of period
-
%
0.34
%
2.49
%
Maximum amount of borrowings outstanding at any month end during the period
$
9,000
$
36,000
$
61,700
Average balance outstanding during the period
$
5,215
$
23,300
$
46,756
Weighted average interest rate during the period
0.14
%
1.71
%
2.47
%
Subsidiary Activities
The Equitable Bank currently has two active subsidiaries. Equitable Investment Corp. is a Nevada corporation that holds all of the investment securities of The Equitable Bank. Equity Credit Corp. is a corporation that holds an asset of bank-owned real estate that had been taken into ownership by The Equitable Bank in 2010.
Personnel
As of June 30, 2021, we had 91 full-time employees and 24 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good working relations with our employees.
TAXATION
The Equitable Bank, TEB MHC and TEB Bancorp, Inc. are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal and state taxation is intended only to summarize material income tax matters and is not a comprehensive description of the tax rules applicable to TEB MHC, TEB Bancorp, Inc. and The Equitable Bank.
Our federal and state tax returns have not been audited for the past five years.
Federal Taxation
Method of Accounting. For federal income tax purposes, The Equitable Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its federal income tax returns. TEB Bancorp, Inc. and The Equitable Bank file a consolidated federal income tax return. The Small Business Protection Act of 1996 eliminated the use of the mutual savings bank bad debt reserve method of calculating the tax return bad debt deduction. For taxable years beginning after 1995, The Equitable Bank has been subject to the same bad debt reserve rules as commercial banks. It currently utilizes the specific charge-off method under Section 582(a) of the Internal Revenue Code.
Minimum Tax. For tax years beginning before 2018, the Internal Revenue Code imposed an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences, less an exemption amount, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent tax computed this way exceeds tax computed by applying the regular tax rates to regular taxable income. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Prior payments of alternative minimum tax create AMT credits that may be used to offset as credits against regular tax liabilities in future years. In addition, these AMT credits are refundable for any taxable year beginning after 2017 and before 2021 in an amount equal to 50% (100% in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over
the amount of the credit allowable for the year against regular tax liability. As of June 30, 2021, The Equitable Bank has no minimum tax credit carryforward to utilize in the future. The credit is not subject to expiration.
Net Operating Loss Carryovers. For losses originated in taxable years beginning before 2018, a financial institution may generally carry back federal net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At June 30, 2021, The Equitable Bank had approximately $26.8 million of federal net operating loss carryforwards.
Capital Loss Carryovers. A corporation cannot recognize capital losses in excess of capital gains generated. Generally, a financial institution may carry back capital losses to the preceding three taxable years and forward to the succeeding five taxable years. Any capital loss carryback or carryover is treated as a short-term capital loss for the year to which it is carried. As such, it is grouped with any other capital losses for the year to which it is carried and is used to offset any capital gains. Any unutilized loss carryforward remaining after the five-year carryover period is not deductible. At June 30, 2021, The Equitable Bank had no capital loss carryovers.
Corporate Dividends. TEB Bancorp, Inc. may generally exclude from its income 100% of dividends received from The Equitable Bank as a member of the same affiliated group of corporations.
State Taxation
As a Maryland business corporation, TEB Bancorp, Inc. is required to file an annual report with and pay franchise taxes to the state of Maryland.
TEB MHC and TEB Bancorp, Inc. are subject to the Wisconsin corporate franchise (income) tax. The State of Wisconsin imposes a corporate franchise tax of 7.9% on the combined taxable income of the members of a consolidated income tax group.
In general, Wisconsin net business losses may be carried forward to the succeeding 20 taxable years. However, losses originated in taxable years beginning before 2009 may be carried forward to tax years beginning before 2032. At June 30, 2021, The Equitable Bank had approximately $43.0 million of Wisconsin net business loss carryforwards.
SUPERVISION AND REGULATION
General
As a state savings bank, The Equitable Bank is subject to examination, supervision and regulation, primarily by the WDFI and by the Federal Deposit Insurance Corporation. The state and federal systems of regulation and supervision establish a comprehensive framework of activities in which The Equitable Bank may engage and is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, and not for the protection of security holders.
The Equitable Bank is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board,” which governs the reserves to be maintained against deposits and other matters. In addition, The Equitable Bank is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the eleven regional banks in the Federal Home Loan Bank System.
As a bank holding company, TEB Bancorp, Inc. is subject to examination and supervision by, and be required to file certain reports with, the Federal Reserve Board. TEB Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws, and certain state securities laws.
Set forth below are certain material regulatory requirements that are applicable to The Equitable Bank and TEB Bancorp, Inc. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on The Equitable Bank and TEB Bancorp, Inc. Any change in these laws or regulations,
whether by Congress or the applicable regulatory agencies, could have a material adverse impact on TEB Bancorp, Inc., The Equitable Bank and their operations.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
The CARES Act, which became law on March 27, 2020, provided over $2.0 trillion to combat the coronavirus (“COVID-19”) and stimulate the economy. The law had several provisions relevant to financial institutions, including:
● Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes. The passage of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (EAA), being part of the larger omnibus package, the consolidated Appropriations Act, enacted 12/27/2020, extended this provision of the CARES Act to the earlier to occur of January 1, 2022, or 60 days after the COVID-19 National Emergency has been declared over.
● Temporarily reducing the Community Bank Leverage Ratio (the “CBLR”) to 8%. The threshold increased to 8.5% in 2021 and will return to 9% in 2022. This law also states that if a qualifying community bank falls below the CBLR, it “shall have a reasonable grace period” to again achieve compliance.
● The ability of a borrower of a federally backed mortgage loan (VA, FHA, USDA, Freddie and Fannie) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account. The period to request forbearance has been extended several times, most recently to at least September 30, 2021.
● The ability of a borrower of a multi-family federally backed mortgage loan that was current as of February 1, 2020, to submit a request for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the COVID-19 emergency. During the time of the forbearance, the multifamily borrower cannot evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of rent. Additionally, a multifamily borrower that receives a forbearance may not require a tenant to vacate a dwelling unit before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance. Most recently, the FHA announced an extension of the multi-family loan forbearance program until at least September 30, 2021.
The Paycheck Protection Program
The CARES Act provided approximately $350 billion to fund loans to eligible small businesses through the Small Business Administration’s (“SBA”) 7(a) loan guaranty program. These loans were 100% federally guaranteed (principal and interest) through December 31, 2020. An eligible business could apply for a Paycheck Protection Program (“PPP”) loan up to 2.5 times its average monthly “payroll costs" limited to a loan amount of $10.0 million. The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year), mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans had: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA guaranteed 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds were used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.
On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act became law, which provided an additional $320 billion in PPP funding. Additionally the Economic Aid to Hard-Hit Small Business, Nonprofits, and Venues Act became law on December 27, 2020, which again provided $285 billion in PPP funding. This third Act
expanded the eligible expenditures for which a business could use PPP proceeds, and provided for a simplified forgiveness application for PPP loans of $150,000 or less. On May 5, 2021, the SBA announced that all PPP funds had been exhausted.
Intrastate and Interstate Merger and Branching Activities
Wisconsin Law and Regulation. Any Wisconsin savings bank meeting certain requirements may, upon approval of the WDFI, establish one or more branch offices in the state of Wisconsin and the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, and Ohio. In addition, upon WDFI approval, a Wisconsin savings bank may establish a branch office in any other state as the result of a merger or consolidation.
Federal Law and Regulation. The Interstate Banking Act permits the federal banking agencies to, under certain circumstances, approve merger transactions between banks located in different states, regardless of whether an acquisition would be prohibited under state law. The Interstate Banking Act, as amended, authorizes de novo branching into another state at locations at which banks chartered by the host state could establish a branch. The establishment of branches and bank mergers require the prior approval of the Federal Deposit Insurance Corporation.
Loans and Investments
Wisconsin Law and Regulations. Under Wisconsin law and regulation, The Equitable Bank is authorized to make, invest in, sell, purchase, participate or otherwise deal in mortgage loans or interests in mortgage loans without geographic restriction, including loans made on the security of residential and commercial property. Wisconsin savings banks also may lend funds on a secured or unsecured basis for business, commercial or agricultural purposes, provided the total of all such loans does not exceed 20% of the savings bank’s total assets, unless the WDFI authorizes a greater amount. Loans are subject to certain other limitations, including percentage restrictions based on total assets.
Wisconsin savings banks may invest funds in certain types of debt and equity securities, including obligations of federal, state and local governments and agencies. Subject to prior approval of the WDFI, compliance with capital requirements and certain other restrictions, Wisconsin savings banks may invest in residential housing development projects. Wisconsin savings banks may also invest in service corporations or subsidiaries with the prior approval of the WDFI, subject to certain restrictions.
Wisconsin savings banks may make loans and extensions of credit, both direct and indirect, to one borrower in amounts up to 20% of the savings bank’s capital plus an additional 5% for loans fully secured by readily marketable collateral. In addition, and notwithstanding the 20% of capital and additional 5% of capital limitations set forth above, Wisconsin savings banks may make loans to one borrower, or a related group of borrowers, for any purpose in an amount not to exceed $500,000, or to develop domestic residential housing units in an amount not to exceed the lesser of $30 million or 30% of the savings bank’s capital, subject to certain conditions. At June 30, 2021, The Equitable Bank had no borrowers with outstanding balances in excess of the loans-to-one borrower limit.
Federal Law and Regulation. Federal Deposit Insurance Corporation regulations also govern the equity investments of The Equitable Bank and, notwithstanding Wisconsin law and regulations, such regulations prohibit The Equitable Bank from making certain equity investments and generally limit The Equitable Bank’s equity investments to those that are permissible for national banks and their subsidiaries. Also, under Federal Deposit Insurance Corporation regulations, The Equitable Bank must obtain prior Federal Deposit Insurance Corporation approval before directly, or indirectly through a majority-owned subsidiary, engaging “as principal” in any activity that is not permissible for a national bank unless certain exceptions apply. The activity regulations provide that state banks that meet applicable minimum capital requirements would be permitted to engage in certain activities that are not permissible for national banks, including certain real estate and securities activities conducted through subsidiaries. The Federal Deposit Insurance Corporation will not approve an activity that it determines presents a significant risk to the Federal Deposit Insurance Corporation insurance fund. The current activities of The Equitable Bank and its subsidiaries are permissible under applicable federal regulations.
Loans to, and other transactions with, affiliates of The Equitable Bank, such as TEB Bancorp, Inc., are restricted by the Federal Reserve Act and regulations issued by the Federal Reserve Board thereunder. See “-Transactions with Affiliates and Insiders” below.
Lending Standards
Wisconsin Law and Regulation. Wisconsin law and regulations issued by the WDFI impose on Wisconsin savings banks certain fairness in lending requirements and prohibit savings banks from discriminating against a loan applicant based upon the applicant’s physical condition, developmental disability, sex, marital status, race, color, creed, national origin, religion or ancestry.
Federal Law and Regulation. The federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under the joint regulations adopted by the federal banking agencies, all insured depository institutions, such as The Equitable Bank, must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and loan documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository institution to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits:
● for loans secured by raw land, 65% of the value of the collateral;
● for land development loans (i.e., loans for the purpose of improving unimproved property prior to the erection of structures), the supervisory loan-to-value limit is 75%;
● for loans for the construction of commercial, over four-family or other non-residential property, the supervisory limit is 80%;
● for loans for the construction of one- to four-family properties, the supervisory limit is 85%; and
● for loans secured by other improved property (e.g., farmland, completed commercial property and other income-producing property, including non-owner occupied, one- to four-family property), the supervisory limit is 85%.
Although no supervisory loan-to-value limit has been established for permanent mortgages on owner-occupied, one- to four-family or home equity loans, the Interagency Guidelines state that for any such loan with a loan-to-value ratio that equals or exceeds 90% at origination, an institution should require appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.
Deposits
Wisconsin Law and Regulation. Under Wisconsin law, The Equitable Bank is permitted to establish deposit accounts and accept deposits. The Equitable Bank’s board of directors, or its designee, determines the rate and amount of interest to be paid on or credited to deposit accounts subject to Federal Deposit Insurance Corporation limitations.
Deposit Insurance
Wisconsin Law and Regulation. Under Wisconsin law, The Equitable Bank is required to obtain and maintain insurance on its deposits from a deposit insurance corporation. The deposits of The Equitable Bank are insured up to the applicable limits by the Federal Deposit Insurance Corporation.
Federal Law and Regulation. The Equitable Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. The Equitable Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $250,000 per depositor.
The Federal Deposit Insurance Corporation imposes deposit insurance assessment against all insured depository institutions. An institution’s assessment rate depends upon the perceived risk of the institution to the Deposit Insurance Fund, with institutions deemed less risky paying lower rates. Currently, assessments for institutions of less than $10 billion of total assets are based on financial measures and supervisory ratings derived from statistical models estimating the probability of failure within three years. That system was effective in 2016 and replaced a system under which each institution was assigned to a risk category. Assessment rates (inclusive of possible adjustments) currently range from 1.5 to 30 basis points of each institution’s total assets less tangible capital. The current scale, also effective in 2016, is a reduction from the previous range of 2.5 to 45 basis points. The Federal Deposit Insurance Corporation may increase or decrease the range of assessments uniformly, except that no adjustment can deviate more than two basis points from the base assessment rate without notice and comment rulemaking. The existing system represents a change, required by the federal legislation, from the Federal Deposit Insurance Corporation’s prior practice of basing the assessment on an institution’s aggregate deposits.
The Federal Deposit Insurance Corporation has the authority to increase insurance assessments. A significant increase in insurance premiums would have an adverse effect on the operating expenses and results of operations of The Equitable Bank. We cannot predict what deposit insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not know of any practice, condition or violation that might lead to termination of deposit insurance at The Equitable Bank.
Capital Requirements
Wisconsin Law and Regulation. Wisconsin savings banks are required to maintain a minimum capital to assets ratio of 6% and must maintain total capital necessary to ensure the continuation of insurance of deposit accounts by the Federal Deposit Insurance Corporation. If the WDFI determines that the financial condition, history, management or earning prospects of a savings bank are not adequate, the WDFI may require a higher minimum capital level for the savings bank. If a Wisconsin savings bank’s capital ratio falls below the required level, the WDFI may direct the savings bank to adhere to a specific written plan established by the WDFI to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the payment of dividends. At June 30, 2021, The Equitable Bank’s net worth ratio, as calculated under Wisconsin law DFI-SB 1.03(9), was 9.1%.
Federal Law and Regulation. Federal regulations require Federal Deposit Insurance Corporation insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the federal legislation.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated
subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Equitable Bank exercised its AOCI opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential real estate loans, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019.
In assessing an institution’s capital adequacy, the Federal Deposit Insurance Corporation takes into consideration, not only these numeric factors, but qualitative factors as well, including the bank’s exposure to interest rate risk. The Federal Deposit Insurance Corporation has the authority to establish higher capital requirements for individual institutions where deemed necessary due to a determination that an institution’s capital level is, or is likely to become, inadequate in light of particular circumstances.
On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing the new CBLR (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds that ratio is deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The CBLR was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying bank may opt in and out of the CBLR framework on its quarterly call report. A bank that ceases to meet any qualifying criteria is provided with a two-quarter grace period to either comply with the CBLR requirements or the generally applicable capital regulations.
Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 required that the CBLR be temporarily lowered to 8%. The federal regulators issued a rule making the lower ratio effective April 23, 2020. The rules also established a two-quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% CBLR requirement so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio, increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.
The Equitable Bank is “well capitalized” for regulatory capital purposes.
Safety and Soundness Standards
Each federal banking agency, including the Federal Deposit Insurance Corporation, has adopted guidelines establishing general standards relating to internal controls, internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits, and information security. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.
Prompt Corrective Regulatory Action
Federal bank regulatory authorities are required to take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the regulations, as amended effective January 1, 2015 to incorporate the previously mentioned amendments to the regulatory capital requirements, a bank is deemed to be (i) “well capitalized” if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 8.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and a common equity Tier 1 ratio of 6.5% or more, and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a Tier 1 leveraged capital ratio of 4.0% or more and a common equity Tier 1 ratio of 4.5% or more, and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 6.0%, a Tier 1 leverage capital ratio that is less than 4.0% or a common equity Tier 1 ratio of less than 4.5%; (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0% and a Tier 1 risk-based capital ratio that is less than 4.0% or a common equity Tier 1 ratio of less than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. As previously noted, a qualifying bank that elects and complies with the alternative CBLR framework is deemed to be “well capitalized.”
Federal law and regulations also specify circumstances under which a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an institution classified as less than well capitalized to comply with supervisory actions as if it were in the next lower category (except that the Federal Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as critically undercapitalized).
The Federal Deposit Insurance Corporation may order savings banks that have insufficient capital to take corrective actions. For example, a savings bank that is categorized as “undercapitalized” is subject to growth limitations and is required to submit a capital restoration plan, and a holding company that controls such a savings bank is required to guarantee that the savings bank complies with the restoration plan. A “significantly undercapitalized” savings bank may be subject to additional restrictions. Savings banks deemed by the Federal Deposit Insurance Corporation to be “critically undercapitalized” would be subject to the appointment of a receiver or conservator.
The Equitable Bank is considered “well capitalized” for regulatory capital purposes.
Dividends
Under Wisconsin law and applicable regulations, a Wisconsin savings bank that meets its regulatory capital requirements may declare dividends on capital stock based upon net profits, provided that its paid-in surplus equals its capital stock. In addition, prior WDFI approval is required before dividends exceeding 50% of net profits for any calendar year may be declared and before a stock dividend may be declared out of retained earnings.
The Federal Deposit Insurance Corporation has the authority to prohibit The Equitable Bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of The Equitable Bank. Institutions may not pay dividends if they would be “undercapitalized” following payment of the dividend within the meaning of the prompt corrective action regulations.
Liquidity and Reserves
Wisconsin Law and Regulation. Under WDFI regulations, all Wisconsin savings banks are required to maintain a certain amount of their assets as liquid assets, consisting of cash and certain types of investments. The exact amount of assets a savings bank is required to maintain as liquid assets is set by the WDFI, but generally ranges from 4% to 15% of the savings bank’s average daily balance of net withdrawable accounts plus short-term borrowings (the “Required Liquidity Ratio”). At June 30, 2021, The Equitable Bank’s Required Liquidity Ratio was 8%, and The Equitable Bank was in compliance with this requirement. In addition, 50% of the liquid assets maintained by a Wisconsin savings bank must consist of “primary liquid assets,” which are defined to include securities issued by the United States Government, United States Government agencies or the state of Wisconsin or a subdivision thereof, and cash. At June 30, 2021, The Equitable Bank was in compliance with this requirement.
Federal Law and Regulation. Under federal law and regulations, The Equitable Bank is required to maintain sufficient liquidity to ensure safe and sound banking practices. Regulation D, promulgated by the Federal Reserve Board, contemplates reserve requirements on all depository institutions, including The Equitable Bank, which maintain transaction accounts or non-personal time deposits. Checking accounts, NOW accounts, Super NOW checking accounts, and certain other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits (including certain money market deposit accounts) at a savings institution. For 2019, a depository institution was required to maintain average daily reserves equal to 3% on the first $124.2 million of transaction accounts, plus 10% of that portion of total transaction accounts in excess of $124.2 million. The first $16.3 million of otherwise reservable balances (subject to adjustment by the Federal Reserve Board) was exempt from the reserve requirements. For 2020 and 2021, all reserve requirements have been reduced to 0% due to a change in the Federal Reserve Board’s framework for monetary policy. The Federal Reserve Board has indicated that it has no plans to reimpose a reserve management but could do so if future conditions warrant. Savings institutions have authority to borrow from the Federal Reserve’s “discount window,” but Federal Reserve policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve. This policy has been updated as a result of COVID-19 such that all other sources need not be exhausted before borrowing from the Federal Reserve. As of June 30, 2021, The Equitable Bank met its Regulation D reserve requirements.
Transactions with Affiliates and Insiders
Wisconsin Law and Regulation. Under Wisconsin law, a savings bank may not make a loan to a person owning 10% or more of its stock, an affiliated person (including a director, officer, the spouse of either and a member of the immediate family of such person who is living in the same residence), agent, or attorney of the savings bank, either individually or as an agent or partner of another, except as under the rules of the WDFI and regulations of the Federal Deposit Insurance Corporation. In addition, unless the prior approval of the WDFI is obtained, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an affiliated person, including a shareholder owning more than 10% of its capital stock, or from any firm, corporation, entity or family in which an affiliated person or 10% shareholder has a direct or indirect interest.
Federal Law and Regulation. Sections 23A and 23B of the Federal Reserve Act govern transactions between an insured savings bank, such as The Equitable Bank, and any of its affiliates, including TEB Bancorp, Inc. The Federal Reserve Board has adopted Regulation W, which comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal Reserve Board interpretations under Sections 23A and 23B.
An affiliate of a savings bank is any company or entity that controls, is controlled by or is under common control with the savings bank. A subsidiary of a savings bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the savings bank for the purposes of Sections 23A and 23B; however, the Federal Deposit Insurance Corporation has the discretion to treat subsidiaries of a savings bank as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which a savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the savings bank’s capital stock and surplus, and limit all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of
transactions. Most loans and other extensions of credit by a savings bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amounts, depending on the type of collateral. In addition, any affiliate transactions by a savings bank must be on terms that are substantially the same, or at least as favorable, to the savings bank as those that would be provided to a non-affiliate, and be consistent with safe and sound banking practices.
A savings bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks (which is generally 15% of capital and surplus). Aggregate loans by a savings bank to its insiders and insiders’ related interests in the aggregate may not exceed the savings bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s primary residence, may not exceed the greater of $25,000 or 2.5% of the savings bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the savings bank, with any interested director not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests, would exceed either $500,000 or the greater of $25,000 or 5% of the savings bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not present more than a normal risk of collectability.
An exception to the requirement for non-preferable terms is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the savings bank and that does not give any preference to insiders of the bank over other employees of the bank. For a description of The Equitable Bank’s employee loan program for full-time employees, see “Management-Transactions with Related Persons.”
Transactions Between Bank Customers and Affiliates
Wisconsin savings banks, such as The Equitable Bank, are subject to the prohibitions on certain tying arrangements. Subject to certain exceptions, a savings bank is prohibited from extending credit to or offering any other service to a customer, or fixing or varying the consideration for such extension of credit or service, on the condition that such customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution.
Examinations and Assessments
The Equitable Bank is required to file periodic reports with and is subject to periodic examinations by the WDFI and the Federal Deposit Insurance Corporation. Federal regulations require annual on-site examinations for all depository institutions except certain well-capitalized and highly rated institutions with assets of less than $1 billion, which are examined every 18 months. Recent legislation extended the asset threshold for the 18-month examination cycle to $3 billion of assets. The Equitable Bank is required to pay examination fees and annual assessments to fund its supervision.
Customer Privacy
Under Wisconsin and federal law and regulations, savings banks, such as The Equitable Bank, are required to develop and maintain privacy policies relating to information on its customers, restrict access to and establish procedures to protect customer data. Applicable privacy regulations further restrict the sharing of non-public customer data with non-affiliated parties if the customer requests.
Community Reinvestment Act
Under the Community Reinvestment Act, The Equitable Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Federal Deposit Insurance Corporation, in connection with its examination of The Equitable Bank, to assess The Equitable Bank’s record of meeting the credit needs of its community and to take that record into account in the Federal Deposit Insurance Corporation’s evaluation of certain applications by The Equitable Bank. For example, the regulations specify that a bank’s Community Reinvestment Act performance will be considered in its expansion (e.g., branching or merger) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, The Equitable Bank was rated “satisfactory” with respect to its Community Reinvestment Act compliance.
In July 2021, the Federal Deposit Insurance Corporation, Federal Reserve Board and the Office of the Comptroller of the Currency announced plans to jointly work to “strengthen and modernize” the CRA regulations and the related regulatory framework. No timetable for a rulemaking process was indicated.
Federal Home Loan Bank System
The Federal Home Loan Bank System, consisting of eleven Federal Home Loan Banks, is under the jurisdiction of the Federal Housing Finance Board. The designated duties of the Federal Housing Finance Board are to supervise the Federal Home Loan Banks; ensure that the Federal Home Loan Banks carry out their housing finance mission; ensure that the Federal Home Loan Banks remain adequately capitalized and able to raise funds in the capital markets; and ensure that the Federal Home Loan Banks operate in a safe and sound manner.
The Equitable Bank, as a member of the Federal Home Loan Bank of Chicago, is required to acquire and hold shares of capital stock in the Federal Home Loan Bank of Chicago in specified amounts. The Equitable Bank is in compliance with this requirement with an investment in Federal Home Loan Bank of Chicago stock of $1.0 million at June 30, 2021.
Among other benefits, the Federal Home Loan Banks provide a central credit facility primarily for member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes advances to members in accordance with policies and procedures established by the Federal Housing Finance Board and the board of directors of the Federal Home Loan Bank of Chicago. At June 30, 2021, The Equitable Bank had $5.0 million in advances from the Federal Home Loan Bank of Chicago.
Other Regulations
Interest and other charges collected or contracted for by The Equitable Bank are subject to state usury laws and federal laws concerning interest rates. The Equitable Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
● Truth in Savings Act; and
● rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The operations of The Equitable Bank also are subject to the:
● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and
● Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
● The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
● The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. TEB Bancorp, Inc. and TEB MHC are bank holding companies within the meaning of the Bank Holding Company of 1956. As such, TEB Bancorp, Inc. and TEB MHC are registered with the Federal Reserve Board and are subject to the regulation, examination, supervision and reporting requirements applicable to bank holding companies. In addition, the Federal Reserve Board has enforcement authority over TEB Bancorp, Inc., TEB MHC and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. Acquisitions of additional banks or savings institutions by a bank holding company generally require the prior approval of the Federal Reserve Board.
Permissible Activities. A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,” to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously permitted. Such activities can include insurance underwriting and investment banking.
Capital. Bank holding companies are subject to consolidated regulatory capital requirements, which have historically been similar to, though less stringent than, those of the Federal Deposit Insurance Corporation for The Equitable Bank. The federal legislation enacted in 2010, however, required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. A framework of consolidated regulatory capital requirements identical to that applicable to the subsidiary banks applies to bank holding companies. However, the Federal Reserve Board has provided a “Small Bank Holding Company” exception to its consolidated capital requirements, and 2018 legislation, and the related regulations, has increased the threshold for the exception to $3.0 billion. As a result, the Federal Reserve Board’s consolidated holding company regulatory capital requirements do not presently apply to TEB Bancorp, Inc. or TEB MHC.
Source of Strength. The Federal Reserve Board has issued regulations requiring that all bank holding companies serve as a source of strength to their subsidiary depository institutions by providing financial, managerial and other support in times of an institution’s distress.
Dividends and Stock Repurchases. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation with Federal Reserve Bank staff concerning dividends in certain circumstances such as when the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend, the proposed dividend is not covered by earnings for the period for which the dividend is being paid or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a bank holding company to pay dividends may be restricted if a subsidiary savings bank becomes undercapitalized.
Federal Reserve Board regulatory guidance also states that a bank holding company should consult with Federal Reserve Bank supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.
There is a separate requirement that a bank holding company give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
These regulatory policies may affect the ability of TEB Bancorp, Inc. to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Waivers of Dividends by TEB MHC. TEB Bancorp, Inc. may pay dividends on its common stock to public stockholders. If it does, it is also required to pay dividends to TEB MHC, unless TEB MHC elects to waive the receipt of dividends. Current Federal Reserve Board policy restricts a mutual holding company that is regulated as a bank holding company from waiving the receipt of dividends paid by its subsidiary holding company. Accordingly, it is unlikely that TEB MHC would be able to waive the receipt of dividends paid by TEB Bancorp, Inc.
Change in Control Regulations
Under the Change in Bank Control Act, no person (including a company), or group of persons acting in concert, may acquire control of a bank holding company unless the Federal Reserve Board has been given 60 days’ prior written notice and not disapproved the proposed acquisition. The Federal Reserve Board considers several factors in evaluating a notice, including the financial and managerial resources of the acquirer and competitive effects. Control, as defined under the applicable regulations, means the power, directly or indirectly, to direct the management or policies of the company or to vote 25% or more of any class of voting securities of the company. Acquisition of more than 10% of any class of a bank holding company’s voting securities constitutes a rebuttable presumption of control under certain circumstances, including where, as is the case with TEB Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
In addition, federal regulations separately provide that no company may acquire control (as defined in the Bank Holding Company Act and Federal Reserve Board regulations) of a bank holding company without the prior approval of the Federal Reserve Board. Any company that acquires such control becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve Board.
Federal Securities Laws
TEB Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. TEB Bancorp, Inc. is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Emerging Growth Company Status
The JOBS Act, which was enacted in 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” TEB Bancorp, Inc. qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, TEB Bancorp, Inc. will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “non-accelerated filer” and a “smaller reporting company,” respectively, under Securities and Exchange Commission regulations (generally less than $75 million and $250 million, respectively, of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. TEB Bancorp, Inc. has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.07 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).

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ITEM 1A. RISK FACTORS
ITEM 1A.
Risk Factors
Not applicable, as TEB Bancorp, Inc. is a “smaller reporting company.”

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
ITEM 2.
Properties
As of June 30, 2021, the net book value of our office properties was $6.7 million. The following table sets forth information regarding our offices.
Net Book
Leased or
Year Acquired
Value of
Location
Owned
or Leased
Real Property
(In thousands)
Main Office:
2290 N. Mayfair Road Wauwatosa, Wisconsin 53226
Owned
$
1,580
Other Properties:
West Allis
7400 W. Oklahoma Avenue West Allis, Wisconsin 53219
Owned
$
Whitefish Bay
705 E. Silver Spring Drive Whitefish Bay, Wisconsin 53217
Leased
$
-
Hales Corner
5225 S. 108th Street Hales Corners, Wisconsin 53130
Owned
$
Waterford
701 Trailview Court Waterford, Wisconsin 53185
Owned
$
1,481
Delafield
N15 W30921 Golf Road Delafield, Wisconsin 53018
Owned
$
3,116
Cedarburg (Mortgage Lending Office)
W62 N244 Washington Avenue Suite A-101 Cedarburg, Wisconsin 53012
Leased
$
-
We believe that current facilities are adequate to meet our present and foreseeable needs, subject to possible future expansion.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
Legal Proceedings
Periodically, we are involved in claims and lawsuits, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the OTC Pink Marketplace under the symbol “TBBA.” As of September 23, 2021, we had 209 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 2,624,343 shares of common stock outstanding. The following table sets forth market price information for our common stock for the last two fiscal years. We did not declare a dividend for the period listed.
Price Per Share
High
Low
High
Low
Quarter ended June 30,
$
9.67
$
9.25
$
7.49
$
6.35
Quarter ended March 31,
$
9.70
$
7.50
$
8.50
$
6.00
Quarter ended December 31,
$
7.74
$
5.65
$
9.00
$
8.20
Quarter ended September 30,
$
6.61
$
5.20
$
9.45
$
8.05
We do not currently intend to pay cash dividends to our stockholders, and no assurances can be given that any such dividends will be paid in the future. The payment and amount of any dividend payments will be subject to statutory and regulatory limitations, and will depend upon a number of factors, including the following: regulatory capital requirements; our financial condition and results of operations; our other uses of funds for the long-term value of stockholders; tax considerations; the ability of mutual holding companies to waive of dividends; and general economic conditions.
We are subject to state law limitations and federal bank regulatory policy on any future payment of dividends. Maryland law generally limits dividends if the corporation would not be able to pay its debts in the usual course of business after giving effect to the dividend or if the corporation’s total assets would be less than the corporation’s total liabilities plus the amount needed to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.
The Federal Reserve Board has issued a policy statement providing that dividends should be paid only out of current earnings and only if our prospective rate of earnings retention is consistent with our capital needs, asset quality and overall financial condition. Regulatory guidance also provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the holding company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the holding company’s overall rate or earnings retention is inconsistent with its capital needs and overall financial condition. In addition, The Equitable Bank’s ability to pay dividends to TEB Bancorp, Inc. will be limited if The Equitable Bank does not have the capital conservation buffer required by regulatory capital rules, which may limit our ability to pay dividends to stockholders. See “Regulation and Supervision-Dividends.”
If TEB Bancorp, Inc. pays dividends to its stockholders, it will likely pay dividends to TEB MHC. The Federal Reserve Board’s current policy restricts the ability of mutual holding companies that are regulated as bank holding companies to waive dividends declared by their subsidiaries. Accordingly, we do not currently anticipate that TEB MHC will waive dividends paid by TEB Bancorp, Inc.
There were no sales of unregistered securities during the quarter ended June 30, 2021.
There were no repurchases of shares of TEB Bancorp, Inc.’s common stock during the quarter ended June 30, 2021.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
Selected Financial Data
The summary information presented below at each date or for each of the periods presented is derived in part from the financial statements of TEB Bancorp, Inc. and The Equitable Bank, S.S.B. The financial condition data at June 30, 2021 and 2020, and the operating data for the fiscal years ended June 30, 2021 and 2020 were derived from the audited consolidated financial statements of TEB Bancorp, Inc. included elsewhere in this annual report. The information at and for the year ended June 30, 2019, the nine months ended June 30, 2018 and June 30, 2017 and for the year ended September 30, 2017 was derived in part from audited financial statements that are not included in this annual report. The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes included in this annual report.
At June 30,
At September 30,
(In thousands)
Selected Financial Condition Data:
Total assets
$
315,702
$
305,475
$
312,248
$
313,424
$
307,840
Cash and cash equivalents
49,377
13,106
5,631
6,134
5,618
Available for sale securities
32,869
20,298
20,542
20,906
20,650
Loans, net of allowance for loan losses
215,420
237,300
259,873
263,999
262,073
Loans held for sale
6,867
18,690
7,080
6,416
4,062
Other real estate owned, net
2,288
4,080
3,957
4,371
Premises and equipment, net
7,912
7,960
8,165
8,252
8,328
Federal Home Loan Bank stock
1,031
1,346
2,061
2,070
1,141
Deposits
269,886
256,072
234,561
244,463
260,511
Borrowings
5,000
9,000
44,200
46,000
22,700
Deferred tax asset valuation allowance
8,243
11,046
10,868
10,503
14,353
Total equity
33,124
23,512
24,408
14,102
14,390
For the Years Ended
For the Nine Months
For the Year Ended
June 30,
Ended June 30,
September 30,
(In thousands)
Selected Operating Data:
Interest income
$
10,489
$
11,879
$
12,530
$
8,822
$
8,760
$
11,736
Interest expense
1,271
2,222
2,673
1,256
1,265
Net interest income before provision for loan losses
9,218
9,657
9,857
7,566
7,824
10,471
Provision for loan losses
-
-
-
Net interest income after provision for loan losses
9,068
9,522
9,857
7,141
7,824
10,471
Non-interest income
13,227
6,247
2,598
1,895
1,946
2,612
Non-interest expenses
15,909
14,677
12,909
10,063
9,794
12,871
Income (loss) before income tax expense (benefit)
6,386
1,092
(454)
(1,027)
(24)
Income tax expense (benefit)
-
-
(55)
(425)
-
-
Net income (loss)
$
6,386
$
1,092
$
(399)
$
(602)
$
(24)
$
At or For the Nine
At or For the
At or For the Years Ended
Months Ended
Years Ended
June 30,
June 30, (1)
September 30,
Performance Ratios:
Return (loss) on average assets
2.11
%
0.36
%
(0.13)
%
(0.27)
%
(0.01)
%
0.07
%
Return (loss) on average equity
23.81
%
4.30
%
(2.5)
%
(5.72)
%
(0.24)
%
1.60
%
Interest rate spread (2)
3.30
%
3.36
%
3.37
%
3.57
%
3.65
%
3.68
%
Net interest margin (3)
3.39
%
3.48
%
3.44
%
3.61
%
3.68
%
3.71
%
Non-interest expenses to average assets
5.26
%
4.84
%
4.21
%
4.48
%
4.33
%
4.26
%
Efficiency ratio (4)
70.88
%
92.28
%
103.64
%
106.37
%
100.25
%
98.39
%
Average interest-earning assets to average interest-bearing liabilities
119.50
%
114.57
%
107.59
%
106.10
%
106.35
%
106.15
%
Earnings per share
$
2.43
$
0.42
$
(0.15)
N/A
N/A
N/A
Dividend payout ratio
-
%
-
%
-
%
N/A
N/A
N/A
Capital Ratios:
Average equity to average assets
8.87
%
8.37
%
5.20
%
4.68
%
4.38
%
4.38
%
Tangible capital equity to total assets
10.49
%
7.70
%
7.82
%
4.50
%
4.27
%
4.67
%
Total capital to risk weighted assets
18.84
%
15.02
%
14.01
%
8.90
%
9.10
%
9.24
%
Tier 1 capital to risk weighted assets
18.09
%
14.32
%
13.36
%
8.23
%
8.15
%
8.29
%
Common equity tier 1 capital to risk weighted assets
18.09
%
14.32
%
13.36
%
8.23
%
8.15
%
8.29
%
Tier 1 capital to average assets
11.26
%
9.30
%
8.55
%
5.46
%
5.37
%
5.46
%
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans
0.65
%
0.57
%
0.50
%
0.50
%
0.73
%
0.71
%
Allowance for loan losses as a percentage of non-performing loans
178.09
%
100.91
%
84.86
%
91.68
%
130.32
%
106.47
%
Net (charge-offs) recoveries to average outstanding loans during the period
(0.04)
%
(0.03)
%
(0.01)
%
(0.51)
%
(1.78)
%
(1.01)
%
Non-performing loans as a percentage of total loans
0.37
%
0.56
%
0.58
%
0.54
%
0.56
%
0.67
%
Non-performing loans as a percentage of total assets
0.25
%
0.44
%
0.49
%
0.46
%
0.48
%
0.57
%
Total non-performing assets as a percentage of total assets
0.30
%
1.19
%
1.80
%
1.72
%
2.06
%
1.99
%
Other:
Number of banking offices
Number of loan production offices
Number of full-time equivalent employees
(1) Annualized.
(2) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3) Represents net interest income as a percentage of average interest-earning assets.
(4) Represents non-interest expenses divided by the sum of net interest income and non-interest income.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis reflects our consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the consolidated financial statements, which appear elsewhere in this annual report. You should read the information in this section in conjunction with the other business and financial information provided in this annual report.
Overview
Total assets increased $10.2 million, or 3.3%, to $315.7 million at June 30, 2021 from $305.5 million at June 30, 2020, primarily reflecting increases in cash and cash equivalents and available for sale securities offset by decreases in loans held for investment and loans held for sale. Total deposits increased $13.8 million, or 5.4%, to $269.9 million at June 30, 2021 from $256.1 million at June 30, 2020. This resulted from an increase in interest-bearing savings and NOW accounts, which increased $12.8 million, or 16.9%, to $88.2 million at June 30, 2021 from $75.4 million at June 30, 2020, and an increase in demand deposits, which increased $15.4 million, or 16.4%, to $109.0 million at June 30, 2021 from $93.6 million at June 30, 2020.
Borrowed funds, consisting solely of Federal Home Loan Bank of Chicago (“FHLB”) advances, decreased $4.0 million, or 44.4%, to $5.0 million at June 30, 2021 from $9.0 million at June 30, 2020. Increased levels of deposits and cash during the year reduced our reliance on borrowed funds.
Net income was $6.4 million for the year ended June 30, 2021, compared to $1.1 million for the year ended June 30, 2020. The increase in income was due to an increase in non-interest income during the year ended June 30, 2021, offset by a decrease in net interest income and an increase in non-interest expense. Net interest income after provision for loan losses decreased $454,000, or 4.8%, to $9.1 million for the year ended June 30, 2021 from $9.5 million for the year ended June 30, 2020, primarily as a result of a lower average balance of loans. Non-interest income increased by $7.0 million, or 111.7%, to $13.2 million for the year ended June 30, 2021 from $6.2 million for the year ended June 30, 2020, primarily resulting from a $6.9 million, or 135.0%, increase in gain on sales of mortgage loans. Non-interest expenses increased $1.2 million, or 8.4%, to $15.9 million for the year ended June 30, 2021 compared to $14.7 million for the year ended June 30, 2020. The increase in non-interest expenses was due to an increase in compensation and benefits expense during the year ended June 30, 2021.
Change in Fiscal Year
The Equitable Bank changed its fiscal year to June 30 from September 30, effective with the June 30, 2018 fiscal year.
Summary of Significant Accounting Policies
The discussion and analysis of the financial condition and results of operations are based on our financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. We consider the accounting policies discussed below to be significant accounting policies. The estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We determined to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.
The following represent our significant accounting policies:
Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses consists of specific reserves on certain impaired loans from analyses developed through specific credit allocations for individual loans. The specific reserve relates to all loans for which the allowance for loan losses is estimated on a loan by loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The general reserve is based on our historical loss experience along with consideration of certain qualitative factors such as (i) changes in the nature, volume and terms of loans, (ii) changes in lending personnel, (iii) changes in the quality of the loan review function, (iv) changes in nature and volume of past-due, non-accrual and/or classified loans, (v) changes in concentration of credit risk, (vi) changes in economic and industry conditions, (vii) changes in legal and regulatory requirements, (viii) unemployment and inflation statistics, and (ix) changes in underlying collateral values.
There are many factors affecting the allowance for loan losses, some are quantitative while others require qualitative judgment. The allowance for loan losses reflects management’s best estimate of the probable and inherent losses on loans. The adequacy of the allowance for loan losses is reviewed and approved by our board of directors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off.
As an integral part of their examination process, various regulatory agencies review the allowance for loan losses as well. Such agencies may require that changes in the allowance for loan losses be recognized when such regulatory credit evaluations differ from those of management based on information available to the regulators at the time of their examinations.
Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
We recognize the tax effects from an uncertain tax position in the consolidated financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized, upon ultimate settlement with the relevant tax authority. We recognize interest and penalties accrued or released related to uncertain tax positions in current income tax expense or benefit.
COVID-19 Outbreak
In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020 was declared a national emergency in the United States. The COVID-19 pandemic has caused significant economic dislocation in the 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.
Commercial Loan Type
June 30, 2021
Percentage of Portfolio Loans
Restaurant, food service, bar
$
1,572,457
0.73
%
Retail
2,255,298
1.04
%
Hospitality and tourism
-
-
%
$
3,827,755
1.77
%
The Company’s allowance for loan losses increased $59,000 to $1.4 million at June 30, 2021 compared to $1.4 million at June 30, 2020. Provisions were booked totaling $150,000 during the year ended June 30, 2021, compared to $135,000 during the year ended June 30, 2020. At June 30, 2021 and June 30, 2020, the allowance for loan losses represented 0.65% and 0.57% of total loans, respectively. In determining its allowance for loan loss level at June 30, 2021, the Company considered the health and composition of its loan portfolio going into the COVID-19. At June 30, 2021, approximately 98.8% of the Company’s loan portfolio was collateralized by real estate. Approximately 1.8% 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 when 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 continue to reopen, and/or high levels of unemployment return, 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 Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may 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 with continuing market turmoil;
● our cyber security risks are increased as the result of 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
● Federal Deposit Insurance Corporation premiums may increase if the agency 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 the 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.
As of June 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 the June 30, 2021 reporting period. As of June 30, 2021, 18 PPP loans totaling $1.1 million have been forgiven.
As of June 30, 2021, the Company had modified 88 loans aggregating $22.9 million, primarily consisting of the deferral of principal and interest payments and the extension of the maturity date. Of these modifications, $22.8 million, or 99.5%, were performing in accordance with the accounting treatment under Section 4013 of the CARES Act and therefore did not qualify as TDRs. As of June 30, 2021, all of these modifications have resumed monthly loan payments and no modifications remain in a deferred status. Three loans totaling $294,000 that were modified 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, one of the loans was transferred out of TDR status after receiving six consecutive 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.
As of June 30, 2021
Payments Resumed
Payments Deferred
Loan Classification
Number of Loans
Balance
Number of Loans
Balance
Construction, land, development
$
113,324
-
$
-
1-4 family owner occupied
6,928,668
-
-
1-4 family non-owner occupied
2,255,510
-
-
Multifamily
10,716,179
-
-
Commercial owner occupied
1,419,056
-
-
Commercial non-owner occupied
1,408,571
-
-
Consumer and installment loans
40,655
-
-
Total loan modification requests
$
22,881,963
-
$
-
Comparison of Financial Condition at June 30, 2021 and June 30, 2020
Total assets increased $10.2 million, or 3.3%, to $315.7 million at June 30, 2021 from $305.5 million at June 30, 2020, primarily reflecting increases in cash and cash equivalents and available for sale securities offset by decreases in loans held for investment and loans held for sale.
Cash and cash equivalents increased $36.3 million, or 276.8%, to $49.4 million at June 30, 2021 from $13.1 million at June 30, 2020 due to the increased balance in deposit accounts and decrease in total loans outstanding during the year.
Available-for-sale securities increased $12.6 million, or 61.9%, to $32.9 million at June 30, 2021 from $20.3 million at June 30, 2020, due to utilizing excess cash to purchase securities totaling $16.9 million, offset by maturities and calls of $4.3 million.
Loans held for investment decreased $21.8 million, or 9.1%, to $216.8 million at June 30, 2021 from $238.7 million at June 30, 2020, primarily reflecting a decrease in one- to four-family owner occupied loans of $28.5 million, or 28.4%, to $72.0 million at June 30, 2021 from $100.5 million at June 30, 2020. The decrease in one- to four-family owner occupied loans resulted from increased refinances and loan paydowns. These decreases were partially offset by an increase in multifamily loans of $15.4 million, or 20.2%, to $91.9 million at June 30, 2021 from $76.4 million at June 30, 2020, as we continue to focus on originating this type of loan.
Loans held for sale decreased $11.8 million, or 63.3%, to $6.9 million at June 30, 2021 from $18.7 million at June 30, 2020. We currently sell a majority of the fixed-rate one- to four-family residential real estate loans that we originate. The balances at any month end vary based on the timing and volume of loan originations and sales. The decrease in mortgage interest rates due to COVID-19 resulted in a greater volume of loans originated and sold in the last quarter of the fiscal year ended June 30, 2020.
Total deposits increased $13.8 million, or 5.4%, to $269.9 million at June 30, 2021 from $256.1 million at June 30, 2020. The increase was due to increases in demand deposits of $15.4 million, or 16.4%, to $109.0 million at June 30, 2021, from $93.6 million at June 30, 2020 and interest-bearing savings and NOW accounts of $12.8 million, or 16.9%, to $88.2 million at June 30, 2021 from $75.4 million at June 30, 2020, offset by a decrease in certificates of deposit of $14.3 million, or 16.4%, to $72.7 million at June 30, 2021 from $87.0 million at June 30, 2020. These increases are largely due to increased economic stimulus payments with decreases in certificates of deposit balances resulting from decreases in interest rates offered.
Borrowed funds, consisting solely of FHLB advances, decreased $4.0 million, or 44.4%, to $5.0 million at June 30, 2021 from $9.0 million at June 30, 2020. During the year, deposits increased and assets decreased, which allowed us to pay down borrowings.
Total equity increased $9.6 million, or 40.9%, to $33.1 million at June 30, 2021 from $23.5 million at June 30, 2020 as a result of net income for the year. Accumulated other comprehensive loss decreased as a result of higher yields on our pension investments, resulting in a net positive funded status as of June 30, 2021.
Average Balance Sheet
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 Year Ended June 30, 2021
For the Year Ended June 30, 2020
Average
Average
Outstanding
Average
Outstanding
Average
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
(Dollars in thousands)
Interest-earning assets:
Loans
$
229,258
$
9,879
4.31
%
$
249,657
$
11,173
4.48
%
Securities
21,867
2.64
%
21,719
2.78
%
Federal Home Loan Bank of Chicago stock
1,116
2.69
%
1,288
4.12
%
Other
19,602
0.01
%
4,688
1.05
%
Total interest-earning assets
271,843
10,489
3.86
%
277,352
11,879
4.28
%
Non-interest-earning assets
30,707
25,971
Total assets
$
302,550
$
303,323
Interest-bearing liabilities:
Demand deposits
$
61,442
0.06
%
$
49,837
0.06
%
Savings and NOW deposits
82,191
0.08
%
74,453
0.08
%
Certificates of deposit
78,629
1,158
1.47
%
94,481
1,733
1.84
%
Total interest-bearing deposits
222,262
1,264
0.57
%
218,771
1,824
0.83
%
Borrowings
5,215
0.14
%
23,300
1.71
%
Total interest-bearing liabilities
227,477
1,271
0.56
%
242,071
2,222
0.92
%
Non-interest-bearing liabilities
48,249
35,852
Total liabilities
275,726
277,923
Total equity
26,824
25,400
Total liabilities and equity
$
302,550
$
303,323
Net interest income
$
9,218
$
9,657
Net interest rate spread (1)
3.30
%
3.36
%
Net interest-earning assets (2)
$
44,366
$
35,281
Net interest margin (3)
3.39
%
3.48
%
Average interest-earning assets to interest-bearing liabilities
119.50
%
114.57
%
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
Year Ended June 30, 2021 vs.
Year Ended June 30, 2020 vs.
Increase (Decrease)
Total
Increase (Decrease)
Total
Due to
Increase
Due to
Increase
Volume
Rate
(Decrease)
Volume
Rate
(Decrease)
(In thousands)
Interest-earning assets:
Loans
$
(879)
$
(415)
$
(1,294)
$
(508)
$
(81)
$
(589)
Securities
(30)
(26)
(7)
Federal Home Loan Bank of Chicago stock
(5)
(18)
(23)
(38)
(31)
(69)
Other
(49)
(47)
(28)
(6)
Total interest-earning assets
(878)
(512)
(1,390)
(504)
(147)
(651)
Interest-bearing liabilities:
Demand deposits
(1)
Savings and NOW deposits
(6)
(4)
Certificates of deposit
(233)
(342)
(575)
Total interest-bearing deposits
(220)
(340)
(560)
Borrowings
(25)
(366)
(391)
(415)
(360)
(775)
Total interest-bearing liabilities
(245)
(706)
(951)
(346)
(105)
(451)
Change in net interest income
$
(633)
$
$
(439)
$
(158)
$
(42)
$
(200)
Comparison of Operating Results for the Years Ended June 30, 2021 and 2020
General. Net income was $6.4 million for the year ended June 30, 2021, compared to $1.1 million for year ended June 30, 2020. The increase in income was due to an increase in non-interest income offset by a decrease in net interest income and an increase in non-interest expense, described in more detail below.
Interest Income. Interest income decreased $1.4 million, or 11.7%, to $10.5 million for the year ended June 30, 2021 compared to $11.9 million for the year ended June 30, 2020. Interest income on loans, which is our primary source of interest income, decreased $1.3 million, or 11.6%, to $9.9 million for the year ended June 30, 2021 compared to $11.2 million for the year ended June 30, 2020. Our average yield on loans decreased 17 basis points to 4.31% for the year ended June 30, 2021 from 4.48% for the year ended June 30, 2020, reflecting recent decreases in market interest rates. The average balance of loans also decreased by $20.4 million, or 8.2%, to $229.3 million for the year ended June 30, 2021 from $249.7 million for the year ended June 30, 2020.
Interest Expense. Interest expense decreased $951,000, or 42.8%, to $1.3 million for the year ended June 30, 2021 compared to $2.2 million for the year ended June 30, 2020, due to decreases in interest expense on borrowings and decreases in interest rates paid on deposits.
Interest expense on borrowings decreased $391,000 to $7,000 for the year ended June 30, 2021 from $398,000 for the year ended June 30, 2020. This decrease resulted from the decreases in both the average balance of borrowings and the average rate we paid on borrowings. The average balance of borrowings decreased $18.1 million to $5.2 million for the year ended June 30, 2021 from $23.3 million for the year ended June 30, 2020, and the annualized average rate we paid on borrowings decreased 157 basis points to 0.14% for the year ended June 30, 2021, from 1.71% for the year ended June 30, 2020. As described above, increased levels of deposits and cash during the year ended June 30, 2021 reduced our reliance on borrowed funds. The decrease in rates paid on borrowings reflects recent decreases in market interest rates.
Interest expense on deposits decreased $560,000, or 30.7%, to $1.3 million for the year ended June 30, 2021 from $1.8 million for the year ended June 30, 2020. Specifically, interest expense on certificates of deposit decreased $575,000, or 33.2%, to $1.2 million for the year ended June 30, 2021 from $1.7 million for the year ended June 30, 2020. This decrease resulted from an decrease in the annualized average rate we paid on certificates of deposit, which decreased 37
basis points to 1.47% for the year ended June 30, 2021 from 1.84% for the year ended June 30, 2020. The decrease in rates paid on certificates of deposit reflects decreases in market interest rates during the year ended June 30, 2021.
Net Interest Income. Net interest income decreased $454,000, or 4.8%, to $9.1 million for the year ended June 30, 2021 from $9.5 million for the year ended June 30, 2020, primarily as a result of the decreased interest income from loans. Our net interest rate spread decreased by six basis points to 3.30% for the year ended June 30, 2021 from 3.36% for the year ended June 30, 2020, and our net interest margin decreased by nine basis points to 3.39% for the year ended June 30, 2021 from 3.48% for the year ended June 30, 2020.
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 estimable 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, we recorded a $150,000 provision for the year ended June 30, 2021 and $135,000 for the year ended June 30, 2020. Our allowance for loan losses increased $59,000, or 4.4%, to $1.4 million at June 30, 2021 from $1.4 million at June 30, 2020. The allowance for loan losses to total loans increased to 0.65% at June 30, 2021 from 0.57% at June 30, 2020, and the allowance for loan losses to non-performing loans increased to 178.09% at June 30, 2021 from 100.91% at June 30, 2020.
To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at June 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 the Federal 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 information is as follows.
Year Ended June 30,
Change
Amount
Percent
(Dollars in thousands)
Service fees on deposits
$
$
$
(21)
(4.9)
%
Service fees on loans
(14)
(5.9)
Gain on sale of mortgage loans
12,033
5,120
6,913
135.0
Income on sale of uninsured products
56.7
Gain (loss) on sale of other real estate owned
(85)
(72.0)
Other
25.0
Total non-interest income
$
13,227
$
6,247
$
6,980
111.7
%
Gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) increased as we earned a higher servicing release premium in addition to selling $496.5 million of mortgage loans during the year ended June 30, 2021 compared to $334.9 million of such sales during the year ended June 30, 2020. Gain on sale of other real estate owned decreased as we made one sale of other real estate during the year eneded June 30, 2021 in excess of the principal balance and four sales of other real estate during the year ended June 30, 2020 in excess of the principal balance.
Non-interest Expenses. Non-interest expenses information is as follows.
Year Ended June 30,
Change
Amount
Percent
(Dollars in thousands)
Compensation and benefits
$
10,000
$
8,503
$
1,497
17.6
%
Occupancy
2,121
1,969
7.7
Advertising
(63)
(27.8)
Data processing services
1,067
1,096
(29)
(2.6)
FDIC assessment
(22)
(19.6)
Cost of operations of other real estate owned
1,047
(873)
(83.4)
Insurance
(40)
(25.6)
Professional Fees
7.4
Other
1,652
1,078
53.2
Total non-interest income
$
15,909
$
14,677
$
1,232
8.4
%
Compensation and benefits expense increased primarily as a result of the increased commissions from greater loan volume. Advertising expenses decreased due to the large volume of applications received without the need to advertise. FDIC assessments decreased due to improved financial condition. Cost of operations of other real estate owned decreased due to a large write off on other real estate loans during the year ending June 30, 2020. Insurance expenses decreased as we were able to renegotiate our contract and lock in a multi-year term. Other expenses increased due the increase in sold loan commsion fees offset due to the increased volume in loans sold, which are offset within compensation and benefits once the loans are sold.
Income Tax Expense. We recognized no income tax expense or benefit for the years ended June 30, 2021 and June 30, 2020 due to a full valuation allowance being recorded against the Company’s deferred tax assets.
Management of Market Risk
General. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee, consisting of members of our senior management, is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our board of directors. The board of directors receives a monthly report from the Asset/Liability Management Committee. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changes in interest rates.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The following represent our primary strategies to manage our interest rate risk:
● selling a majority of our longer-term, fixed-rate loans into the secondary market;
● limiting our reliance on non-core/wholesale funding sources;
● growing our volume of transaction deposit accounts; and
● diversifying our loan portfolio by adding more commercial-related loans, which typically have shorter maturities and/or balloon payments.
By following these strategies, we believe that we are better positioned to react to increases in market interest rates.
We do not engage in hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a 12-month period. We then calculate what the net interest income would be for the same period under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below.
The tables below set forth, as of June 30, 2021, the calculation of the estimated changes in our net interest income that would result from the designated immediate changes in the United States Treasury yield curve.
June 30, 2021
Change in Interest Rates
Net Interest Income
Year 1 Change
(basis points) (1)
Year 1 Forecast
from Level
(Dollars in thousands)
+400
$
11,198
25.97
%
+200
10,160
14.29
%
Level
8,889
-
%
8,284
(6.81)
%
8,052
(9.42)
%
(1) Assumes an immediate uniform change in interest rates at all maturities.
The table above indicates that at June 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 14.29% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced an 6.81% decrease in net interest income. At June 30, 2020 in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 7.33% increase in net interest income, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 4.69% decrease in net interest income.
Net Economic Value. We also compute amounts by which the net present value of our assets and liabilities (net economic value or “NEV”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance sheet contract under the assumptions that the United States Treasury yield curve increases or decreases instantaneously by 200 and 400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The tables below set forth, as of June 30, 2021, the calculation of the estimated changes in our NEV that would result from the designated immediate changes in the United States Treasury yield curve.
At June 30, 2021
NEV as a Percentage of Present
Value of Assets (3)
Change in
Rates (basis
Estimated Increase (Decrease) in
Increase
Interest points)
Estimated
NEV
NEV
(Decrease)
(1)
NEV (2)
Amount
Percent
Ratio (4)
(basis points)
(Dollars in thousands)
+400
$
54,555
$
6,557
13.66
%
19.11
%
+200
53,122
5,124
10.68
%
17.58
%
-
47,998
-
-
%
15.04
%
-
38,872
(9,126)
(19.01)
%
11.64
%
(340)
44,460
(3,538)
(7.37)
%
13.00
%
(204)
(1) Assumes an immediate uniform change in interest rates at all maturities.
(2) NEV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) NEV Ratio represents NEV divided by the present value of assets.
The table above indicates that at June 30, 2021, in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 10.68% increase in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 19.01% decrease in net economic value. At June 30, 2020 in the event of an instantaneous parallel 200 basis point increase in interest rates, we would have experienced a 14.97% increase in net economic value, and in the event of an instantaneous 200 basis point decrease in interest rates, we would have experienced a 6.41% decrease in net economic value.
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net interest income and net economic value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net interest income and NEV tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and NEV and will differ from actual results. Furthermore, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates both on a short-term basis and over the life of the asset.
Interest rate risk calculations also may not reflect the fair values of financial instruments. For example, decreases in market interest rates can increase the fair values of our loans, deposits and borrowings.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from the FHLB and from U.S. Bank. At June 30, 2021, we had a $121.4 million line of credit with the FHLB, and had $5.0 million of borrowings outstanding as of that date, and we also had a $5.0 million line of credit with U.S. Bank, with no borrowings outstanding as of that date.
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 (used in) operating activities was $12.4 million and ($4.7) million for the year ended June 30, 2021 and the year ended June 30, 2020. Net cash 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 $13.5 million and $26.2 million for the year ended June 30, 2021, and the year ended June 30, 2020. Net cash provided by (used in) financing activities, consisting of activity in deposit accounts, borrowings, and advance payments by borrowers for property taxes and insurance, was $10.4 million and ($14.0) million for the year ended June 30, 2021 and the year ended June 30, 2020.
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, current pricing strategy and regulatory restrictions, we anticipate that a substantial portion of maturing time deposits will be retained, and that we can supplement our funding with borrowings in the event that we allow these deposits to run off at maturity.
At June 30, 2021, we exceeded all of our regulatory capital requirements, and we were categorized as well capitalized at June 30, 2021. Management is not aware of any conditions or events since the most recent notification that would change our category.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At June 30, 2021, we had outstanding commitments to originate loans of $20.9 million, and outstanding commitments to sell loans of $41.0 million. We anticipate that we will have sufficient funds available to meet our current lending commitments. Time deposits that are scheduled to mature in one year or less from June 30, 2021 totaled $32.1 million. Management expects that a substantial portion of the maturing time deposits will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLB advances or other borrowings to offset projected portfolio loan production.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
Please refer to Note 1 to the Financial Statements included as Item 8 in this Annual Report for a description of recent accounting pronouncements that may affect our financial condition and results of operations.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant
impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, including supplemental data, of TEB Bancorp, Inc. begin on page of this Annual Report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management of TEB Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.
TEB Bancorp, Inc.’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. TEB Bancorp, Inc.’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of TEB Bancorp, Inc.; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of TEB Bancorp, Inc. are being made only in accordance with authorizations of management and directors of TEB Bancorp, Inc.; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of TEB Bancorp, Inc.’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There were no changes made in our internal controls during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, TEB Bancorp, Inc.’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. Directors, Executive Officers and Corporate Governance
TEB Bancorp, Inc. has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. A copy of the Code is available on TEB Bancorp, Inc.’s website at www.theequitablebank.com under “About Us - Investor Relations - Governance - Governance Documents.”
The information contained under the sections captioned “Proposal I - Election of Directors” in TEB Bancorp, Inc.’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. Executive Compensation
The information contained under the section captioned “Proposal I - Election of Directors - Executive Compensation” in the definitive Proxy Statement is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Securities Authorized for Issuance under Stock-Based Compensation Plans
TEB Bancorp, Inc. has no compensation plans under which equity securities are authorized for issuance.
(b) Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Principal Holders” in the Proxy Statement.
(c) Security Ownership of Management
The information required by this item is incorporated herein by reference to the section captioned “Voting Securities and Principal Holders” in the Proxy Statement.
(d) Changes in Control
Management of TEB Bancorp, Inc. knows of no arrangements, including any pledge by any person of securities of TEB Bancorp, Inc., the operation of which may at a subsequent date result in a change in control of the registrant.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the sections captioned “Proposal I - Election of Directors - Transactions with Certain Related Persons,” “- Board Independence” and “- Meetings and Committees of the Board of Directors” of the Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section captioned “Proposal II - Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. Exhibits and Financial Statement Schedules
3.1
Articles of Incorporation of TEB Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of TEB Bancorp, Inc. (File No. 333-227307), initially filed with the Securities and Exchange Commission on September 12, 2018)
3.2
Bylaws of TEB Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of TEB Bancorp, Inc. (File No. 333-227307), initially filed with the Securities and Exchange Commission on September 12, 2018)
4.1
Form of Common Stock Certificate of TEB Bancorp, Inc. (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 of TEB Bancorp, Inc. (File No. 333-227307), initially filed with the Securities and Exchange Commission on September 12, 2018)
4.2
Descriptions of Registrant’s Securities
Subsidiaries of Registrant
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from TEB Bancorp, Inc.’s Annual Report on Form 10-K, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial Statements
†
Management contract or compensation plan or arrangement.