TEB BANCORP, INC The summary information presented below atMarch 31, 2020 andJune 30, 2019 and for the three and nine months endedMarch 31, 2020 and 2019 is derived in part from the financial statements of TheEquitable Bank . The financial condition data atJune 30, 2019 is derived from the audited financial statements of TEB Bancorp, Inc. The information as ofMarch 31, 2020 and for the three and nine months endedMarch 31, 2020 and 2019 is derived from unaudited financial statements ofTEB Bancorp, Inc. forMarch 31, 2020 and TheEquitable Bank forMarch 31, 2019 and reflects only normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period presented. The following information is only a summary, and should be read in conjunction with our audited financial statements and notes as of and for the year endedJune 30, 2019 and for the three and nine months endedMarch 31, 2020 and 2019. The results of operations for the three and nine months endedMarch 31, 2020 are not necessarily indicative of the results to be achieved for all of the year endingJune 30, 2020 .
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "contemplate," "continue," "potential," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
· statements of our goals, intentions and expectations;
· statements regarding our business plans, prospects, growth and operating
strategies;
· statements regarding the quality of our loan and investment portfolios; and
· estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· adverse changes in the economy or business conditions, either nationally or in
our markets, including, without limitation, the adverse effects of the COVID-19
pandemic on the global, national, and local economy;
· the effect of the COVID-19 pandemic on the Company's credit quality, revenue,
and business operations;
· general economic conditions, either nationally or in our market areas, that are
worse than expected;
· changes in the level and direction of loan delinquencies and write-offs and
changes in estimates of the adequacy of the allowance for loan losses;
· our ability to access cost-effective funding;
· fluctuations in real estate values and both residential and commercial real
estate market conditions;
· demand for loans and deposits in our market area;
· our ability to implement and change our business strategies;
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· competition among depository and other financial institutions;
· inflation and changes in the interest rate environment that reduce our margins
and yields, our mortgage banking revenues, the fair value of financial
instruments or our level of loan originations, or increase the level of
defaults, losses and prepayments on loans we have made and make;
· adverse changes in the securities or secondary mortgage markets;
· changes in laws or government regulations or policies affecting financial
institutions, including changes in regulatory fees and capital requirements;
· changes in the quality or composition of our loan or investment portfolios;
· technological changes that may be more difficult or expensive than expected, or
the failure or breaches of information technology security systems;
· the inability of third-party providers to perform as expected;
· our ability to manage market risk, credit risk and operational risk in the
current economic environment;
· our ability to enter new markets successfully and capitalize on growth
opportunities;
· our ability to successfully integrate into our operations any assets,
liabilities, customers, systems and management personnel we may acquire and our
ability to realize related revenue synergies and cost savings within expected
time frames, and any goodwill charges related thereto;
· changes in consumer spending, borrowing and savings habits;
· changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the
and
· our ability to retain key employees; and
· changes in the financial condition, results of operations or future prospects
of issuers of securities that we own.
COVID-19 Outbreak
InDecember 2019 , a coronavirus (COVID-19) was reported inChina , and, inMarch 2020 , theWorld Health Organization declared it a pandemic. OnMarch 12, 2020 the President ofthe United States declared the COVID-19 outbreak inthe United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation inthe United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 outbreak, theFederal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality 31 Table of Contents
industry, the restaurant industry, and the retail industry. The following table shows the Company's exposure within these hard-hit industries.
Commercial Loan Type March 31, 2020 Percentage of Portfolio Loans Restaurant, food service, bar$ 1,964,423 0.80 % Retail 1,929,582 0.78 % Hospitality and tourism - - %$ 3,894,005 1.58 % The Company's allowance for loan losses increased$85,000 to$1.3 million atMarch 31, 2020 compared to$1.3 million atDecember 31, 2019 . AtMarch 31, 2020 andDecember 31, 2019 , the allowance for loan losses represented 0.53% and 0.50% of total loans, respectively. In the first quarter of 2020, the Company adjusted the economic risk factor methodology to incorporate the current economic implications and rising unemployment rate from the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of total loans. In determining its allowance for loan loss level atMarch 31, 2020 , the Company considered the health and composition of its loan portfolio going into the COVID-19 pandemic. AtMarch 31, 2020 , approximately 99.2% of the Company's loan portfolio is collateralized by real estate. Approximately 1.6% 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. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events, and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners. 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 may be reopened. 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 substantially reopen, and high levels of
unemployment continue for an extended period of time, loan delinquencies,
problem assets, and foreclosures may increase, resulting in increased charges
and reduced income;
· collateral for loans, especially real estate, may decline in value, which could
cause loan losses to increase;
· our allowance for loan losses may have to be increased if borrowers experience
financial difficulties beyond forbearance periods, which will adversely affect
our net income;
· the net worth and liquidity of loan guarantors may decline, impairing their
ability to honor commitments to us;
· as the result of the decline in the
funds rate to near 0%, the yield on our assets may 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;
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· we rely on third party vendors for certain services and the unavailability of a
critical service due to the COVID-19 outbreak could have an adverse effect on
us; and
·
experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to 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.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law onMarch 27, 2020 and provides over$2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized theSmall Business Administration ("SBA") to temporarily guarantee loans under a new 7(a) loan program call the Paycheck Protection Program ("PPP"). Although we were not already a qualified SBA lender, we enrolled in the PPP by completing the required documentation. An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly "payroll costs"; or (2)$10.0 million . PPP loans will have: (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 will guarantee 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 are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.
As of
To work with customers impacted by COVID-19, the Company is offering short-term (i.e., three months or less with the potential to extend up to six months, if necessary) loan modifications on a case by case basis to borrowers who were current in their payments at the inception of the loan modification program. Under Section 4013 of the CARES Act, loans less than 30 days past due as ofDecember 31, 2019 are considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election, which applies to any COVID-19 modification made betweenMarch 1, 2020 and the earlier of eitherDecember 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Similarly, theFinancial Accounting Standards Board has confirmed that short-term modifications made on a good faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs. Lastly, prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. As ofMay 8, 2020 , the Company had received requests to modify 88 loans aggregating$27.9 million . As ofMay 8, 2020 , the Company had modified 56 loans aggregating$12.9 million , primarily consisting of the deferral of principal and interest payments and the extension of the maturity date. Of these modifications,$12.7 million , or 98.5%, were performing in accordance with the accounting treatment under Section 4013 of the CARES Act and therefore did not qualify as TDRs. One loan totaling$194,000 was modified subsequent toMarch 31, 2020 and did not qualify for the 33
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favorable accounting treatment under Section 4013 of the CARES Act and therefore will be reported as a TDR. As conditions requiring the need for the loan modification as well as the modification request were received subsequent toMarch 31, 2020 , this loan was not reported as a TDR as of quarter end. Management has evaluated the loan and determined that based on the liquidation value of the collateral, no specific reserve will be necessary. The Company elected to make provisions to the loan loss reserve totaling$85,000 as ofMarch 31, 2020 . The provision increased the net reserve as a percentage of total loans from 0.50% as ofDecember 31, 2019 to 0.53% as ofMarch 31, 2020 . The provisions equate to a 6.98% increase to the general reserve as ofMarch 31, 2020 . The Company determined the provisions made inMarch 2020 to be an adequate response to COVID-19 because of an excess in the allowance for loan losses that had accumulated due to the historical loss history showing significant decreases in loss percentages within the non-owner-occupied commercial real estate category as ofMarch 31, 2020 . The historical loss percentage decreased from 4.15% as ofDecember 31, 2019 to 1.13% as ofMarch 31, 2020 . This reduction created an addition to the general reserve of$589,000 . In addition to the provisions made inMarch 2020 , the Company directly allocated more than$500,000 across the loan portfolio to safeguard against deterioration to the portfolio that could occur as a result of COVID-19. The re-allocation of the excess was done by increasing portfolio-wide qualitative factors based on trends in the national and local economy, industry trends, and other external factors.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
the Company's Annual Report on Form 10K for the year ended
Comparison of Financial Condition at
Total assets decreased$14.7 million , or 4.7%, to$297.5 million atMarch 31, 2020 from$312.2 million atJune 30, 2019 . The decrease in assets was due to a decrease of$14.6 million in net loans held for investment and a$3.2 million decrease in interest bearing deposits in banks, offset by an increase in available-for-sale securities of$1.8 million . Cash and cash equivalents decreased$547,000 , or 9.7%, to$5.1 million atMarch 31, 2020 from$5.6 million atJune 30, 2019 . This fluctuation in cash and cash equivalents is a normal part of business operations. Net loans held for investment decreased$14.6 million , or 5.6%, to$245.2 million atMarch 31, 2020 from$259.9 million atJune 30, 2019 , primarily reflecting a decrease in one- to four-family owner occupied residential real estate loans of$15.6 million , or 12.5%, from$124.8 million atJune 30, 2019 to$109.2 million atMarch 31, 2020 . The decrease in one- to four-family owner occupied residential real estate loans resulted from loan payoffs and loan refinances during the nine months endedMarch 31, 2020 . We currently sell the majority of the single family loans we originate. This decrease was partially offset by an increase in multifamily loans of$4.9 million , or 6.7%, to$78.2 million atMarch 31, 2020 from$73.2 million atJune 30, 2019 . Loans held for sale increased$3.1 million , or 43.9%, to$10.2 million atMarch 31, 2020 from$7.1 million atJune 30, 2019 , due to the increased origination and sale of single family loans. The increase in the origination of these loans is a result of the decrease in interest rates related to the function of the yield curve due to the economic conditions. Other real estate owned decreased$778,000 , or 19.1% to$3.3 million atMarch 31, 2020 from$4.1 million atJune 30, 2019 , due to the sale of five properties totaling$1.0 million , offset by three new properties added to other real estate owned totaling$220,000 . Interest bearing deposits decreased$3.2 million , or 87.6%, to$457,000 atMarch 31, 2020 from$3.7 million atJune 30, 2019 . We have invested excess cash into securities to improve our yield on our assets. Available-for-sale securities increased$1.8 million , or 8.9%, to$22.4 million atMarch 31, 2020 from$20.5 million atJune 30, 2019 , due to the purchase of securities totaling$2.7 million , offset by maturities of$1.1 million . 34
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Total deposits increased$5.2 million , or 2.2%, to$239.8 million atMarch 31, 2020 from$234.6 million atJune 30, 2019 . The increase was due to an increase in certificates of deposit of$8.0 million , or 9.2%, to$94.7 million atMarch 31, 2020 from$86.8 million atJune 30, 2019 . In recent periods prior to the termination of our amended Consent Order, we generally experienced certificate of deposit runoff at maturity because of our inability to pay competitive rates on deposits due to our classification as "adequately capitalized" for regulatory capital purposes, instead funding our operations with borrowings from theFederal Home Loan Bank of Chicago . Our classification as "adequately capitalized" (rather than "well-capitalized") for regulatory capital purposes restricted our ability to accept, renew or roll over brokered deposits, and further restricted us from paying interest rates on deposits that exceed 75 basis points above national rates, as posted by theFederal Deposit Insurance Corporation . Although we had received a waiver from theFederal Deposit Insurance Corporation that permitted us to use local market area rates instead of national rates as the baseline in determining interest rates we could pay on deposits, this restriction limited our ability to compete for deposits in our market area, based on interest rates, in the current market rate environment. As the amended Consent Order was terminated onJune 19, 2019 , we were able to pay competitive rates starting in the quarter endedSeptember 30, 2019 . Certificate of deposit specials were run during the last nine months, contributing to the increase in certificates of deposit. The increase in certificates of deposits was offset by a decrease in demand accounts of$2.3 million , or 3.0%, from$77.4 million atJune 30, 2019 to$75.1 million atMarch 31, 2020 . Borrowed funds, consisting solely ofFederal Home Loan Bank advances, decreased$19.7 million , or 44.6%, to$24.5 million atMarch 31, 2020 from$44.2 million atJune 30, 2019 . We had to rely on borrowings to fund our operations in recent periods as a result of deposit runoff, described above. As we generated certificate of deposit growth, the excess cash was used to repay borrowings. Federal home loan bank stock decreased$824,000 , or 40.0%, to$1.2 million atMarch 31, 2020 , from$2.1 million atJune 30, 2019 , as a result of the decrease in borrowed funds as described above. As the balance of borrowed funds decreased, the amount of stock required also decreased. Total stockholders' equity increased$1.1 or 4.5%, to$25.5 million atMarch 31, 2020 from$24.4 million atJune 30, 2019 . The increase was due primarily to net income of$999,000 during the nine months endedMarch 31, 2020 .
Comparison of Operating Results for the Three Months Ended
General. Net income was$69,000 for the three months endedMarch 31, 2020 , compared to net loss of$281,000 for the three months endedMarch 31, 2019 . The change was primarily due to a$576,000 increase in gain on sales of mortgage loans, offset by a$199,000 increase in compensation and benefits expense, described in more detail below. Interest Income. Interest income decreased$212,000 , or 6.8%, to$2.9 million for the three months endedMarch 31, 2020 compared to$3.1 million for the three months endedMarch 31, 2019 . Interest income on loans, which is our primary source of interest income, decreased$194,000 , or 6.6%, to$2.7 million for the three months endedMarch 31, 2020 compared to$2.9 million for the three months endedMarch 31, 2019 . Our annualized average yield on loans decreased nine basis points to 4.39% for the three months endedMarch 31, 2020 from 4.48% for the three months endedMarch 31, 2019 , primarily due to the decrease in interest rates related to the function of the yield curve due to the economic conditions. The average balance of loans decreased$12.0 million , or 4.6%, to$249.1 million for the three months endedMarch 31, 2020 from$261.1 million for the three months endedMarch 31, 2019 . Interest Expense. Interest expense decreased$177,000 , or 24.5%, to$547,000 for the three months endedMarch 31, 2020 compared to$724,000 for the three months endedMarch 31, 2019 , due to decreases in market interest rates during the period. Interest expense on deposits increased$95,000 , or 25.1%, to$473,000 for the three months endedMarch 31, 2020 from$378,000 for the three months endedMarch 31, 2019 . Specifically, interest expense on certificates of deposit increased$96,000 , or 27.1%, to$452,000 for the three months endedMarch 31, 2020 from$355,000 for the three months endedMarch 31, 2019 . The increase resulted from a 23 basis point increase in the annualized average rate we paid on certificates of deposit to 1.84% for the three months endedMarch 31, 2020 from 1.61% for the three months endedMarch 31, 2019 , reflecting our ability to pay competitive rates and run certificate of deposit specials due to the 35
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termination of the amended Consent Order. Additionally, there was a$10.1 million increase in the average balance of certificates of deposits to$98.4 million atMarch 31, 2020 from$88.3 million for the three months endedMarch 31, 2019 . Interest expense on FHLB borrowings decreased$272,000 to$74,000 for the three months endedMarch 31, 2020 from$346,000 for the three months endedMarch 31, 2019 . This decrease resulted from decreases in both the average balance of FHLB borrowings and the average rate we paid on FHLB borrowings. The average balance of borrowings decreased$34.2 million , or 62.9%, to$20.2 million for the three months endedMarch 31, 2020 from$54.5 million for the three months endedMarch 31, 2019 , and the annualized average rate we paid on borrowings decreased 107 basis points to 1.47% for the three months endedMarch 31, 2020 from 2.54% for the three months endedMarch 31, 2019 . As described above, in the past, we have relied on borrowings to fund our operations as a result of certificate of deposit runoff, but in the current quarter we generated more certificates of deposit and were able to reduce our borrowings. Net Interest Income. Net interest income remained relatively stable, decreasing$35,000 , or 1.4%, for the three months endedMarch 31, 2020 from the three months endedMarch 31, 2019 . In addition, our net interest rate spread increased by three basis points to 3.31% for the three months endedMarch 31, 2020 from 3.28% for the three months endedMarch 31, 2019 , and our net interest margin increased by nine basis points to 3.43% for the three months endedMarch 31, 2020 from 3.34% for the three months endedMarch 31, 2019 , due to changes in market interest rates. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably 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, and based on management's current assessment of the increased inherent risk in the loan portfolio due to COVID-19, we recorded an additional$85,000 provision for loan losses for the three months endedMarch 31, 2020 , but did not record a provision for the three months endedMarch 31, 2019 . Our allowance for loan losses was$1.3 million atMarch 31, 2020 andDecember 31, 2019 . The allowance for loan losses to total loans was 0.53% atMarch 31, 2020 and 0.50% atDecember 31, 2019 , while the allowance for loan losses to non-performing loans was 102.83% atMarch 31, 2020 and 113.45% atDecember 31, 2019 . The decrease in allowance for loan losses as a percentage of non-performing loans was largely due to the addition of a first and second mortgage from a customer totaling$202,000 that are estimated to be in a gain position and did not require an additional provision. To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atMarch 31, 2020 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFederal Deposit Insurance Corporation , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. Non-interest Income. Non-interest income increased$631,000 , or 133.3%, to$1.1 million for the three months endedMarch 31, 2020 compared to$473,000 for the three months endedMarch 31, 2019 . Gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) increased$576,000 , or 221.0%, to$837,000 for the three months endedMarch 31, 2020 compared to$261,000 for the three months endedMarch 31, 2019 . We originated for sale$55.4 million of mortgage loans during the 2020 period compared to$17.1 million of such originations during the 2019 period. Non-interest Expenses. Non-interest expenses increased$161,000 , or 5.1%, to$3.3 million for the three months endedMarch 31, 2020 from$3.1 million for the three months endedMarch 31, 2019 . Compensation and benefits expense 36
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increased$199,000 , or 10.7%, to$2.1 million for the three months endedMarch 31, 2020 from$1.9 million for the three months endedMarch 31, 2019 , as we experienced an increase in payroll expense due to higher loan officer compensation as a result of increased loan origination volume. The increase in compensation and benefits expense was offset by a decrease inFDIC assessment costs of$68,000 , or 58.8%, to$48,000 for the three months endedMarch 31, 2020 from$116,000 for the three months endedMarch 31, 2019 , as we are no longer subject to the Amended Order and ourFDIC insurance premium decreased, our accrual has also decreased to$55,000 for the three months endedMarch 31, 2020 from$120,000 for the three months endedMarch 31, 2019 . Other expenses increased$87,000 or 52.3% to$254,000 for the three months endedMarch 31, 2020 compared to$167,000 as ofMarch 31, 2019 due to increased costs of being a public company. Income Tax Expense. We recognized no income tax expense or benefits for the three months endedMarch 31, 2020 and for the three months endedMarch 31, 2019 due to a full valuation allowance being recorded against the Company's deferred tax assets. Average Balance Sheets The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale. 37 Table of Contents For the Three Months Ended March 31, 2020 2019 Average Average Average Average Outstanding Yield/ Outstanding Yield/ Balance Interest Rate (1) Balance Interest Rate (1) Interest-earning assets: Loans$ 249,111,298 $ 2,731,711
4.39 %
22,465,022 154,598
2.75 % 21,363,687 150,007 2.81 %
1,090,984 13,457 4.93 % 2,526,596 33,768 5.35 % Other
2,539,861 7,036 1.11 % 1,670,250 9,206 2.20 % Total interest-earning assets 275,207,165 2,906,802 4.22 % 286,709,448 3,118,541 4.35 % Non-interest-earning assets
21,303,405 18,680,892
Total assets $ 296,510,570 $ 305,390,340
Interest-bearing liabilities:
Demand deposits $ 49,079,228 $ 7,013 0.06 % $ 47,322,824 $ 6,785 0.06 %
Savings and NOW deposits 71,749,368 14,264 0.08 % 80,405,466 16,050 0.08 %
Certificates of deposit 98,412,453 451,522 1.84 % 88,314,708 355,181 1.61 %
Total interest-bearing deposits 219,241,049 472,799 0.86 % 216,042,998 378,016 0.70 %
Borrowings 20,231,387 74,297 1.47 % 54,471,144 346,217 2.54 %
Total interest-bearing
liabilities 239,472,436 547,096 0.91 % 270,514,142 724,233 1.07 % Non-interest-bearing liabilities 31,666,844
20,853,791
Total liabilities 271,139,280 291,367,933
Total equity 25,371,290 14,022,407
Total liabilities and equity $ 296,510,570 $ 305,390,340
Net interest income $ 2,359,706 $ 2,394,308
Net interest rate spread (2) 3.31 % 3.28 %
Net interest-earning assets (3) $ 35,734,729 $ 16,195,306
Net interest margin (4) 3.43 % 3.34 %
Average interest-earning assets
to interest-bearing liabilities 114.92 % 105.99 %
--------------------------------------------------------------------------------
(1) Annualized
(2) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Comparison of Operating Results for the Nine Months Ended
General. Net income was$999,000 for the nine months endedMarch 31, 2020 , compared to net loss of$469,000 for the nine months endedMarch 31, 2019 . The change was primarily due to a$2.1 million increase in gain on sales of mortgage loans, offset by a$748,000 increase in compensation and benefits expense, described in more detail below. Interest Income. Interest income decreased$297,000 , or 3.2%, and was$9.0 million for the nine months endedMarch 31, 2020 and$9.3 million for the nine months endedMarch 31, 2019 . Interest income on loans, which is our primary source of interest income, decreased$292,000 , or 3.3%, to$8.5 million for the nine months endedMarch 31, 2020 compared to$8.8 million for the nine months endedMarch 31, 2019 . Our annualized average yield on loans increased one basis point to 4.49% for the nine months endedMarch 31, 2020 from 4.48% for the nine months endedMarch 31, 2019 , primarily due to an increase in interest income received on loans held for sale. The average balance of loans decreased$9.4 million , or 3.6%, to$252.0 million for the nine months endedMarch 31, 2020 from$261.5 million for the nine months endedMarch 31, 2019 . 38
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Interest Expense. Interest expense decreased$181,000 , or 9.3%, to$1.8 million for the nine months endedMarch 31, 2020 from$2.0 million for the nine months endedMarch 31, 2019 . Interest expense on deposits increased$305,000 , or 27.7%, to$1.4 million for the nine months endedMarch 31, 2020 from$1.1 million for the nine months endedMarch 31, 2019 . Specifically, interest expense on certificates of deposit increased$309,000 , or 30.0%, to$1.3 million for the nine months endedMarch 31, 2020 from$1.0 million for the nine months endedMarch 31, 2019 . The increase resulted from a 38 basis point increase in the annualized average rate we paid on certificates of deposit to 1.87% for the nine months endedMarch 31, 2020 from 1.49% for the nine months endedMarch 31, 2019 , reflecting our ability to pay competitive rates and run certificate of deposit specials due to the termination of the amended Consent Order. The increase was also due to an increase in the average balance of certificates of deposit, which increased$3.7 million , or 4.0%, to$95.7 million for the nine months endedMarch 31, 2020 from$92.0 million for the nine months endedMarch 31, 2019 . Interest expense on FHLB borrowings decreased$487,000 to$368,000 for the nine months endedMarch 31, 2020 from$854,000 for the nine months endedMarch 31, 2019 . This decrease resulted from decreases in both the average balance of FHLB borrowings and the average rate we paid on FHLB borrowings. The average balance of borrowings decreased$22.6 million , or 47.8%, to$24.6 million for the nine months endedMarch 31, 2020 from$47.2 million for the nine months endedMarch 31, 2019 , and the annualized average rate we paid on borrowings decreased 42 basis points to 1.99% for the nine months endedMarch 31, 2020 from 2.41% for the nine months endedMarch 31, 2019 . As described above, in the past, we have relied on borrowings to fund our operations as a result of certificate of deposit runoff, but in the current period we generated more certificates of deposit and were able to reduce our borrowings. Net Interest Income. Net interest income decreased$116,000 , or 1.6%, to$7.3 million for the nine months endedMarch 31, 2020 from$7.4 million for the nine months endedMarch 31, 2019 , primarily as a result of higher rates paid on certificates of deposit, as discussed above. In addition, our net interest rate spread decreased by three basis points to 3.35% for the nine months endedMarch 31, 2020 from 3.38% for the nine months endedMarch 31, 2019 , and our net interest margin increased by three basis points to 3.47% for the nine months endedMarch 31, 2020 from 3.44% for the nine months endedMarch 31, 2019 , due to changes in market interest rates. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably 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, and based on management's current assessment of the increased inherent risk in the loan portfolio due to COVID-19, we recorded an$85,000 provision for loan losses for the nine months endedMarch 31, 2020 , and did not record a provision for the nine months endedMarch 31, 2019 . Our allowance for loan losses was$1.3 million atMarch 31, 2020 andJune 30, 2019 . The allowance for loan losses to total loans was 0.53% atMarch 31, 2020 and 0.50% atJune 30, 2019 , while the allowance for loan losses to non-performing loans was 102.83% atMarch 31, 2020 and 84.86% atJune 30, 2019 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atMarch 31, 2020 . However, future changes in the factors described above, including, but not limited to, actual loss experience with respect to our loan portfolio, could result in material increases in our provision for loan losses. In addition, the WDFI and theFederal Deposit Insurance Corporation , as an integral part of their examination process, will periodically review our allowance for loan losses, and as a result of such reviews, we may have to adjust our allowance for loan losses. 39
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Non-interest Income. Non-interest income increased$2.3 million , or 137.5%, to$3.9 million for the nine months endedMarch 31, 2020 compared to$1.7 million for the nine months endedMarch 31, 2019 . Gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) increased$2.1 million , or 242.7%, to$3.0 million for the nine months endedMarch 31, 2020 compared to$883,000 for the nine months endedMarch 31, 2019 . We originated for sale$206.4 million of mortgage loans during the nine months endedMarch 31, 2020 compared to$62.6 million of such originations during the nine months endedMarch 31, 2019 . Non-interest Expenses. Non-interest expenses increased$606,000 , or 6.4%, to$10.1 million for the nine months endedMarch 31, 2020 from$9.5 million for the nine months endedMarch 31, 2019 . Compensation and benefits expense increased$748,000 , or 13.6%, to$6.2 million for the nine months endedMarch 31, 2020 from$5.5 million for the nine months endedMarch 31, 2019 , as we experienced an increase in payroll expense due to higher loan officer compensation as a result of increased loan origination volume. The increase in compensation and benefits expense was offset by a decrease inFDIC assessment costs of$281,000 , or 79.7%, to$72,000 for the nine months endedMarch 31, 2020 from$353,000 for the nine months endedMarch 31, 2019 , as a result of$79,000 in Small Bank Assessment Credits from theFDIC . Additionally, as we are no longer subject to the Amended Order and ourFDIC insurance premium decreased, our accrual has also decreased to$173,600 for the nine months endedMarch 31, 2020 from$364,500 for the nine months endedMarch 31, 2019 . Other expenses increased$205,000 or 37.0% to$760,000 for the nine months endedMarch 31, 2020 compared to$554,000 as ofMarch 31, 2019 due to increased costs of being a public company. Income Tax Expense. We recognized no income tax expense or benefits for the nine months endedMarch 31, 2020 and for the nine months endedMarch 31, 2019 due to a full valuation allowance being recorded against the Company's deferred tax assets. Average Balance Sheets The following table sets forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments have been made, as the effects would be immaterial. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Loan balances exclude loans held for sale. 40 Table of Contents For the Nine Months Ended March 31, 2020 2019 Average Average Average Average Outstanding Yield/ Outstanding Yield/ Balance Interest Rate (1) Balance Interest Rate (1) Interest-earning assets: Loans$ 252,049,901 $ 8,493,397
4.49 %
21,704,787 454,375
2.79 % 21,076,456 446,717 2.83 %
1,278,641 44,760 4.67 % 2,189,296 82,941 5.05 % Other
3,864,914 48,154 1.66 % 1,496,766 22,561 2.01 % Total interest-earning assets 278,898,243 9,040,686 4.32 % 286,238,947 9,337,913 4.35 % Non-interest-earning assets
24,534,959 19,557,479
Total assets $ 303,433,202 $ 305,796,426
Interest-bearing liabilities:
Demand deposits $ 48,994,319 $ 21,394 0.06 % $ 46,841,678 $ 20,810 0.06 %
Savings and NOW deposits 74,389,038 46,429 0.08 % 82,148,962 50,932 0.08 %
Certificates of deposit 95,709,964 1,338,929 1.87 % 91,997,136 1,029,599 1.49 %
Total interest-bearing deposits 219,093,321 1,406,752 0.86 % 220,987,776 1,101,341 0.66 %
Borrowings 24,633,294 367,652 1.99 % 47,227,395 854,249 2.41 %
Total interest-bearing
liabilities 243,726,615 1,774,404 0.97 % 268,215,171 1,955,590 0.97 % Non-interest-bearing liabilities 34,532,378
23,581,472
Total liabilities 278,258,993 291,796,643
Total equity 25,174,209 13,999,783
Total liabilities and equity $ 303,433,202 $ 305,796,426
Net interest income $ 7,266,282 $ 7,382,322
Net interest rate spread (2) 3.35 % 3.38 %
Net interest-earning assets (3) $ 35,171,628 $ 18,023,776
Net interest margin (4) 3.47 % 3.44 %
Average interest-earning assets
to interest-bearing liabilities 114.43 % 106.72 %
--------------------------------------------------------------------------------
(1) Annualized
(2) Net interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Chicago and fromU.S. Bank . AtMarch 31, 2020 , we had a$130.0 million line of credit with theFederal Home Loan Bank of Chicago , and had$24.5 million of borrowings outstanding as of that date. We also had a$5.0 million line of credit withU.S. Bank , with no borrowings outstanding as of that date. 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 used in operating activities was$2.0 million for the nine months endedMarch 31, 2020 and net cash provided by operating activities was$1.4 million for the nine months endedMarch 31, 2019 . Net cash provided by investing activities, which consists primarily disbursements for loan originations and the purchase of 41 Table of Contents securities, offset by principal collections on loans, and proceeds from maturing securities and pay downs on securities, was$17.6 million and$1.8 million for the nine months endedMarch 31, 2020 and the nine months endedMarch 31, 2019 , respectively. Net cash used in financing activities, consisting of activity in deposit accounts and borrowings, was$16.1 million and$5.5 million for the nine months endedMarch 31, 2020 and 2019, respectively. We are committed to maintaining a strong liquidity position. We monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. Based on our deposit retention experience, 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
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