TEB BANCORP, INC The summary information presented below atDecember 31, 2020 andJune 30, 2020 and for the three and six months endedDecember 31, 2020 and 2019 is derived in part from the financial statements of TheEquitable Bank . The financial condition data atJune 30, 2020 is derived from the audited financial statements ofTEB Bancorp, Inc. The information as ofDecember 31, 2020 and for the three and six months endedDecember 31, 2020 and 2019 is derived from unaudited financial statements ofTEB Bancorp, Inc. forDecember 31, 2020 and TheEquitable Bank forDecember 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, 2020 and for the three and six months endedDecember 31, 2020 and 2019. The results of operations for the three and six months endedDecember 31, 2020 are not necessarily indicative of the results to be achieved for all of the year endingJune 30, 2021 .
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "assume," "plan," "seek," "expect," "will," "may," "should," "indicate," "would," "contemplate," "continue," "potential," "target" and words of similar meaning. These forward-looking statements include, but are not limited to:
? statements of our goals, intentions and expectations;
? statements regarding our business plans, prospects, growth and operating
strategies;
? statements regarding the quality of our loan and investment portfolios; and
? estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this quarterly report. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
adverse changes in the economy or business conditions, either nationally or in
? our markets, including, without limitation, the adverse effects of the COVID-19
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 33
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industry, the restaurant industry, and the retail industry. The following table shows the Company's exposure within these hard-hit industries.
Percentage of
Commercial Loan Type December 31, 2020 Portfolio Loans
Restaurant, food service, bar $ 1,579,931 0.68 %
Retail 2,133,363 0.91 %
Hospitality and tourism - - %
$ 3,713,294 1.59 %
The Company's allowance for loan losses increased $141,000 to $1.4 million at
December 31, 2020 compared to $1.3 million at December 31, 2019 . At December 31,
2020 and December 31, 2019 , the allowance for loan losses represented 0.60% and
0.50% of total loans, respectively. During 2020, the Company adjusted the
economic risk factor methodology to incorporate the current economic
implications and higher unemployment rate from the COVID-19 pandemic, leading to
the increase in the allowance for loan losses as a percentage of total loans. In
determining its allowance for loan loss level at December 31, 2020 , the Company
considered the health and composition of its loan portfolio going into the
COVID-19 pandemic. At December 31, 2020 , approximately 98.8% 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 called the Paycheck Protection Program ("PPP"). Although we were not already a qualified SBA lender, we enrolled in the PPP by completing the required documentation.
In
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 ofDecember 31, 2020 , the Company originated 17 PPP loans totaling$1.1 million and generated approximately$44,000 from the processing fees. All PPP loan originations occurred before the end of theDecember 31, 2020 reporting period. As ofDecember 31, 2020 , 14 PPP loans totaling$741,000 have been forgiven. To work with customers impacted by COVID-19, the Company is offering short-term loan modificatiosn (i.e., three months or less with the potential to extend up to six months, if necessary) on a case by case basis to borrowers who were current in their payments at the inception of the loan modification program. The Company additionally offers, to borrowers that qualify, loan deferrals 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 and therefore qualify for a loan deferral. A financial institution can then suspend the requirements underU.S. 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 eitherJanuary 1, 2021 or the 60th day after the end of the COVID-19 national emergency. Similarly, theFinancial Accounting Standards Board ("FASB") 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. OnDecember 27, 2020 , the President ofthe United States signed into law the Consolidated Appropriations Act, 2020 (the "CAA Act"), which both funds the federal government untilSeptember 30, 2021 and broadly addresses additional COVID-19 responses and relief. Amoung the additional relief measures included are certain extensions to 35
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elements of the CARES Act, including extension of temporary relief from TDRs established under Section 4013 of the CARES Act to the earlier of a)January 1, 2022 , or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. As ofDecember 31, 2020 , the Company had received requests to modify 93 loans aggregating$28.0 million , which excludes any loans that had been paid off subsequent to modification. Of these modifications,$27.7 million , or 98.9%, were performing in accordance with the accounting treatment under Section 4013 of the CARES Act and therefore did not qualify as TDRs. As ofDecember 31, 2020 , 84 of these modifications totaling$26.2 million have resumed monthly loan payments and nine modifications totaling$1.8 million remain in a deferred status. Three loans totaling$297,000 were modified and did not qualify for the favorable accounting treatment under Section 4013 of the CARES Act and therefore each loan was reported as a TDR, however one of the loans was transferred out of TDR status after receiving six consequtive monthly payments after the end of the deferral period. Management has evaluated the loans and determined that based on the liquidation value of the collateral, no specific reserve is necessary.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
the Company's Annual Report on Form 10-K for the year ended
Comparison of Financial Condition at
Total Assets. Total assets decreased$4.1 million , or 1.3%, to$301.4 million atDecember 31, 2020 from$305.5 million atJune 30, 2020 . The decrease in assets was primarily due to a decrease of$4.7 million in net loans held for investment and a$3.1 million decrease in loans held for sale, offset by an increase in cash and cash equivalents of$5.2 million . Cash and Cash Equivalents. Cash and cash equivalents increased$5.2 million , or 40.0%, to$18.4 million atDecember 31, 2020 from$13.1 million atJune 30, 2020 . This increase in cash and cash equivalents is as a result of loan payoffs as discussed below. Interest Bearing Deposits. Interest bearing deposits decreased$2.0 million , or 74.8%, to$682,000 atDecember 31, 2020 from$2.7 million atJune 30, 2020 . We have invested excess cash into securities to improve our yield on our assets.Available-for-Sale Securities . Available-for-sale securities increased$2.5 million , or 12.2%, to$22.8 million atDecember 31, 2020 from$20.3 million atJune 30, 2020 , due to the purchase of securities totaling$3.8 million , offset by maturities and calls of$1.5 million . Net Loans Held for Investment. Net loans held for investment decreased$4.7 million , or 2.0%, to$232.6 million atDecember 31, 2020 from$237.3 million atJune 30, 2020 , primarily reflecting a decrease in one- to four-family owner occupied residential real estate loans of$15.3 million , or 15.2%, from$100.5 million atJune 30, 2020 to$85.2 million atDecember 31, 2020 . The decrease in one- to four-family owner occupied residential real estate loans resulted from loan payoffs and loan refinances during the six months endedDecember 31, 2020 . This decrease was partially offset by an increase in multifamily loans of$12.3 million , or 16.1%, to$88.8 million atDecember 31, 2020 from$76.4 million atJune 30, 2020 . We currently sell the majority of the single family loans we originate. Loans Held for Sale. Loans held for sale decreased$3.1 million , or 16.8%, to$15.5 million atDecember 31, 2020 from$18.7 million atJune 30, 2020 , due to the typical seasonal decrease in loan origination volume.
Other Real Estate Owned. Other real estate owned decreased
Federal Home LoanBank Stock .Federal Home Loan Bank stock decreased$314,000 , or 23.4%, to$1.0 million atDecember 31, 2020 , from$1.3 million atJune 30, 2020 , 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. 36
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Deposits. Total deposits decreased$245,000 , or 0.1%, to$255.8 million atDecember 31, 2020 from$256.1 million atJune 30, 2020 . The decrease was due to a decrease in certificates of deposit of$10.1 million , or 11.6%, to$76.9 million atDecember 31, 2020 from$87.0 million atJune 30, 2020 . The decrease in certificates of deposits was offset partially by an increase in demand accounts of$5.5 million , or 5.9%, from$93.6 million atJune 30, 2020 to$99.2 million atDecember 31, 2020 and an increase in savings and NOW accounts of$4.3 million , or 5.8%, from$75.4 million atJune 30, 2020 to$79.7 million atDecember 31, 2020 . Borrowed Funds. Borrowed funds, consisting solely ofFederal Home Loan Bank advances, decreased$5.0 million , or 55.6%, to$4.0 million atDecember 31, 2020 from$9.0 million atJune 30, 2020 . Loan payments and payoffs and increases in deposits have reduced our need for borrowings to fund our operations.
Stockholders' Equity. Total stockholders' equity increased
Comparison of Operating Results for the Three Months Ended
General. Net income was$2.0 million for the three months endedDecember 31, 2020 , compared to$362,000 for the three months endedDecember 31, 2019 . The change was primarily due to a$2.7 million increase in gain on sales of mortgage loans, offset by a$608,000 increase in compensation and benefits expense, described in more detail below. Interest Income. Interest income decreased$269,000 , or 8.9%, to$2.7 million for the three months endedDecember 31, 2020 compared to$3.0 million for the three months endedDecember 31, 2019 . Interest income on loans, which is our primary source of interest income, decreased$237,000 , or 8.4%, to$2.6 million for the three months endedDecember 31, 2020 compared to$2.8 million for the three months endedDecember 31, 2019 . Our annualized average yield on loans decreased nine basis points to 4.44% for the three months endedDecember 31, 2020 from 4.53% for the three months endedDecember 31, 2019 , primarily due to the decrease in interest rates. The average balance of loans decreased$16.6 million , or 6.6%, to$234.1 million for the three months endedDecember 31, 2020 from$250.8 million for the three months endedDecember 31, 2019 . Interest Expense. Interest expense decreased$244,000 , or 43.3%, to$319,000 for the three months endedDecember 31, 2020 compared to$563,000 for the three months endedDecember 31, 2019 , due primarily to decreases in market interest rates. Interest expense on deposits decreased$155,000 , or 32.7%, to$319,000 for the three months endedDecember 31, 2020 from$474,000 for the three months endedDecember 31, 2019 . Specifically, interest expense on certificates of deposit decreased$157,000 , or 34.9%, to$293,000 for the three months endedDecember 31, 2020 from$450,000 for the three months endedDecember 31, 2019 . The decrease resulted from a 41 basis point decrease in the annualized average rate we paid on certificates of deposit to 1.47% for the three months endedDecember 31, 2020 from 1.88% for the three months endedDecember 31, 2019 , reflecting a decrease in market rates. Additionally, there was a$16.1 million decrease in the average balance of certificates of deposits to$79.5 million atDecember 31, 2020 from$95.6 million for the three months endedDecember 31, 2019 . Interest expense on FHLB borrowings decreased$89,000 to$700 for the three months endedDecember 31, 2020 from$89,000 for the three months endedDecember 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$13.9 million , or 72.8%, to$5.2 million for the three months endedDecember 31, 2020 from$19.1 million for the three months endedDecember 31, 2019 , and the annualized average rate we paid on borrowings decreased 183 basis points to 0.05% for the three months endedDecember 31, 2020 from 1.88% for the three months endedDecember 31, 2019 . As described above, loan payments and payoffs and increases in deposits have reduced our need for borrowings to fund our operations. Net Interest Income. Net interest income remained relatively stable, decreasing$25,000 , or 1.0%, for the three months endedDecember 31, 2020 from the three months endedDecember 31, 2019 . In addition, our net interest rate spread 37
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increased by 16 basis points to 3.58% for the three months endedDecember 31, 2020 from 3.42% for the three months endedDecember 31, 2019 , and our net interest margin increased by 13 basis points to 3.67% for the three months endedDecember 31, 2020 from 3.54% for the three months endedDecember 31, 2019 , due to the decreases in market interest rates. Provision for Loan Losses. Provisions for loan losses are charged to operations to establish an allowance for loan losses at a level necessary to absorb known and inherent losses in our loan portfolio that are both probable and reasonably estimated at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See "Summary of Significant Accounting Policies" for additional information. After an evaluation of these factors, and based on management's current assessment of the increased inherent risk in the loan portfolio due to COVID-19, we recorded a$50,000 provision for loan losses for the three months endedDecember 31, 2020 , and did not record a provision for the three months endedDecember 31, 2019 . Our allowance for loan losses was$1.4 million atDecember 31, 2020 andJune 30, 2020 . The allowance for loan losses to total loans was 0.60% atDecember 31, 2020 and 0.57% atJune 30, 2020 , while the allowance for loan losses to non-performing loans was 109.58% atDecember 31, 2020 and 100.91% atJune 30, 2020 . The increase in the allowance for loan losses as a percentage of non-performing loans is due to a$58,000 loan classified as a non-accrual atJune 30, 2020 becoming current as ofDecember 31, 2020 . To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 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$2.6 million , or 197.0%, to$3.9 million for the three months endedDecember 31, 2020 compared to$1.3 million for the three months endedDecember 31, 2019 . The gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) increased$2.7 million , or 286.3%, to$3.6 million for the three months endedDecember 31, 2020 compared to$937,000 for the three months endedDecember 31, 2019 . The increase in the gain on sale of motgage loans was due primarily to the increase in the originations for sale of$147.4 million of mortgage loans during the 2020 period compared to$63.9 million of such originations during the 2019 period. Non-interest Expenses. Non-interest expenses increased$894,000 , or 26.3%, to$4.3 million for the three months endedDecember 31, 2020 from$3.4 million for the three months endedDecember 31, 2019 . Compensation and benefits expense increased$608,000 , or 29.8%, to$2.6 million for the three months endedDecember 31, 2020 from$2.0 million for the three months endedDecember 31, 2019 , as as we experienced an increase in payroll expense due to higher loan officer compensation as a result of increased loan origination volume. Cost of operations of other real estate owned increased$148,000 , or 1,254.3%, to$160,000 for the three months endedDecember 31, 2020 compared to$12,000 as ofDecember 31, 2019 due to write-downs of property values. Other expenses increased$155,000 or 57.7% to$423,000 for the three months endedDecember 31, 2020 compared to$269,000 as ofDecember 31, 2019 due to increased sold loan volume and the associated loan origination costs that are recognized over the life of the loan.
Income Tax Expense. We recognized no income tax expense or benefits for the
three months ended
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Average Balance Sheets
The following table sets forth average balance sheets, average yields and costs,
and certain other information at and for the periods indicated. No
tax-equivalent yield adjustments have been made, as the effects would be
immaterial. All average balances are daily average balances. Non-accrual loans
were included in the computation of average balances. The yields set forth below
include the effect of deferred fees, discounts, and premiums that are amortized
or accreted to interest income or interest expense. Loan balances exclude loans
held for sale.
For the Three Months Ended December 31,
2020 2019
Average Average Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
Interest-earning assets:
Loans $ 234,133,228 $ 2,599,766 4.44 % $ 250,759,871 $ 2,837,250 4.53 %
Securities 21,079,141 141,555 2.69 % 21,804,777 152,457 2.80 %
Federal Home Loan Bank of
Chicago stock 1,054,857 7,800 2.96 % 1,115,516 15,124 5.42 %
Other 8,964,115 412 0.02 % 3,805,111 13,881 1.46 % Total interest-earning assets 265,231,341 2,749,533 4.15 % 277,485,275 3,018,712 4.35 % Non-interest-earning assets
40,640,934 26,152,436
Total assets $ 305,872,275 $ 303,637,711
Interest-bearing liabilities:
Demand deposits $ 61,181,871 $ 8,944 0.06 % $ 49,897,476 $ 7,554 0.06 %
Savings and NOW deposits 80,693,210 16,659 0.08 % 76,457,585 16,166 0.08 %
Certificates of deposit 79,510,456 293,050 1.47 % 95,616,025 449,996 1.88 %
Total interest-bearing deposits 221,385,537 318,653 0.58 % 221,971,086 473,716 0.85 %
Borrowings 5,178,494 664 0.05 % 19,056,846 89,376 1.88 %
Total interest-bearing
liabilities 226,564,031 319,317 0.56 % 241,027,932 563,092 0.93 % Non-interest-bearing liabilities 53,099,102
37,239,268
Total liabilities 279,663,133 278,267,200
Total equity 26,209,142 25,370,511
Total liabilities and equity $ 305,872,275 $ 303,637,711
Net interest income $ 2,430,216 $ 2,455,620
Net interest rate spread (2) 3.58 % 3.42 %
Net interest-earning assets (3) $ 38,667,310 $ 36,457,343
Net interest margin (4) 3.67 % 3.54 %
Average interest-earning assets
to interest-bearing liabilities 117.07 % 115.13 %
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(1) Annualized
Net interest spread represents the difference between the weighted average (2) yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Comparison of Operating Results for the Six Months Ended
General. Net income was$3.7 million for the six months endedDecember 31, 2020 , compared to$930,000 for the six months endedDecember 31, 2019 . The change was primarily due to a$4.4 million increase in gain on sales of mortgage loans, partially offset by a$896,000 increase in compensation and benefits expense, described in more detail below. 39
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Interest Income. Interest income decreased$632,000 , or 10.3%, and was$5.5 million for the six months endedDecember 31, 2020 and$6.1 million for the six months endedDecember 31, 2019 . Interest income on loans, which is our primary source of interest income, decreased$562,000 , or 9.8%, to$5.2 million for the six months endedDecember 31, 2020 compared to$5.8 million for the six months endedDecember 31, 2019 . Our annualized average yield on loans decreased nine basis point to 4.46% for the six months endedDecember 31, 2020 from 4.55% for the six months endedDecember 31, 2019 , primarily due to the decrease in interest rates. The average balance of loans decreased$20.1 million , or 7.9%, to$233.4 million for the six months endedDecember 31, 2020 from$253.5 million for the six months endedDecember 31, 2019 .
Interest Expense. Interest expense decreased
Interest expense on deposits decreased$253,000 , or 27.1%, to$681,000 for the six months endedDecember 31, 2020 from$934,000 for the six months endedDecember 31, 2019 . Specifically, interest expense on certificates of deposit decreased$256,000 , or 28.9%, to$631,000 for the six months endedDecember 31, 2020 from$887,000 for the six months endedDecember 31, 2019 . The decrease resulted from a 35 basis point decrease in the annualized average rate we paid on certificates of deposit to 1.53% for the six months endedDecember 31, 2020 from 1.88% for the six months endedDecember 31, 2019 , reflecting recent decreases in market rates. The decrease was also due to a decrease in the average balance of certificates of deposit, which decreased$12.0 million , or 12.7%, to$82.4 million for the six months endedDecember 31, 2020 from$94.4 million for the six months endedDecember 31, 2019 . Interest expense on FHLB borrowings decreased$286,000 to$7,000 for the six months endedDecember 31, 2020 from$293,000 for the six months endedDecember 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$20.3 million , or 75.5%, to$6.6 million for the six months endedDecember 31, 2020 from$26.8 million for the six months endedDecember 31, 2019 , and the annualized average rate we paid on borrowings decreased 198 basis points to 0.21% for the six months endedDecember 31, 2020 from 2.19% for the six months endedDecember 31, 2019 . As described above, loan payments and payoffs and increases in deposits have reduced our need for borrowings to fund our operations. Net Interest Income. Net interest income decreased$93,000 , or 1.9%, to$4.8 million for the six months endedDecember 31, 2020 from$4.9 million for the six months endedDecember 31, 2019 , primarily as a result of our interest income decreasing faster than our interest expense, as discussed above. In addition, our net interest rate spread increased by 18 basis points to 3.55% for the six months endedDecember 31, 2020 from 3.37% for the six months endedDecember 31, 2019 , and our net interest margin increased by 14 basis points to 3.64% for the six months endedDecember 31, 2020 from 3.50% for the six months endedDecember 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 estimated at the date of the financial statements. In evaluating the level of the allowance for loan losses, management analyzes several qualitative loan portfolio risk factors including, but not limited to, management's ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses. See "Summary of Significant Accounting Policies" for additional information. After an evaluation of these factors, and based on management's current assessment of the increased inherent risk in the loan portfolio due to COVID-19, we recorded a$50,000 provision for loan losses for the six months endedDecember 31, 2020 , and did not record a provision for the six months endedDecember 31, 2019 . Our allowance for loan losses was$1.4 million atDecember 31, 2020 andJune 30, 2020 . The allowance for loan losses to total loans was 0.60% atDecember 31, 2020 and 0.57% atJune 30, 2020 , while the allowance for loan losses to non-performing loans was 109.58% atDecember 31, 2020 and 100.91% atJune 30, 2020 . 40
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To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate atDecember 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$4.3 million , or 152.8%, to$7.1 million for the six months endedDecember 31, 2020 compared to$2.8 million for the six months endedDecember 31, 2019 . The gain on sale of mortgage loans (consisting solely of one- to four-family residential real estate loans) increased$4.4 million , or 202.7%, to$6.6 million for the six months endedDecember 31, 2020 compared to$2.2 million for the six months endedDecember 31, 2019 . The increase in the gain on sale od mortgage loans was due primarily to the increase in the originations for sale of$289.9 million of mortgage loans during the six months endedDecember 31, 2020 compared to$151.0 million of such originations during the six months endedDecember 31, 2019 . Non-interest Expenses. Non-interest expenses increased$1.4 million , or 20.1%, to$8.2 million for the six months endedDecember 31, 2020 from$6.8 million for the six months endedDecember 31, 2019 . Compensation and benefits expense increased$896,000 , or 21.4%, to$5.1 million for the six months endedDecember 31, 2020 from$4.2 million for the six months endedDecember 31, 2019 , as as we experienced an increase in payroll expense due to higher loan officer compensation as a result of increased loan origination volume. Cost of operations of other real estate owned increased$154,000 , or 665.0%, to$177,000 for the six months endedDecember 31, 2020 compared to$23,000 as ofDecember 31, 2019 due to write-downs of property values. Other expenses increased$314,000 or 62.1% to$820,000 for the six months endedDecember 31, 2020 compared to$506,000 as ofDecember 31, 2019 due to increased sold loan volume and the associated loan origination costs that are recognized over the life of the loan. Income Tax Expense. We recognized no income tax expense or benefits for the six months endedDecember 31, 2020 and for the six months endedDecember 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. 41
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For the Six Months Ended December 31,
2020 2019
Average Average Average Average
Outstanding Yield/ Outstanding Yield/
Balance Interest Rate (1) Balance Interest Rate (1)
Interest-earning assets:
Loans $ 233,384,443 $ 5,199,363 4.46 %
20,690,387 281,941
2.73 % 21,324,670 299,777 2.81 %
1,200,179 19,404 3.23 % 1,372,469 31,303 4.56 % Other
9,258,760 971 0.02 % 4,527,447 41,118 1.82 % Total interest-earning assets 264,533,769 5,501,679 4.16 % 280,744,275 6,133,884 4.37 % Non-interest-earning assets
38,045,622 26,150,138
Total assets $ 302,579,391 $ 306,894,413
Interest-bearing liabilities:
Demand deposits $ 58,574,106 $ 17,259 0.06 % $ 48,951,864 $ 14,289 0.06 %
Savings and NOW deposits 79,577,028 32,904 0.08 % 75,708,873 32,303 0.09 %
Certificates of deposit 82,394,103 630,989 1.53 % 94,358,720 887,360 1.88 %
Total interest-bearing deposits 220,545,237 681,152 0.62 % 219,019,457 933,952 0.85 %
Borrowings 6,567,025 6,806 0.21 % 26,834,247 293,355 2.19 %
Total interest-bearing
liabilities 227,112,262 687,958 0.61 % 245,853,704 1,227,307 1.00 % Non-interest-bearing liabilities 50,402,217
35,964,495
Total liabilities 277,514,479 281,818,199
Total equity 25,064,912 25,076,214
Total liabilities and equity $ 302,579,391 $ 306,894,413
Net interest income $ 4,813,721 $ 4,906,577
Net interest rate spread (2) 3.55 % 3.37 %
Net interest-earning assets (3) $ 37,421,507 $ 34,890,571
Net interest margin (4) 3.64 % 3.50 %
Average interest-earning assets
to interest-bearing liabilities 116.48 % 114.19 %
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(1) Annualized
Net interest spread represents the difference between the weighted average (2) yield on interest-earning assets and the weighted average rate of
interest-bearing liabilities.
(3) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
Liquidity and Capital Resources
Liquidity describes our ability to meet the financial obligations that arise in the ordinary course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of our customers and to fund current and planned expenditures. Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, and proceeds from maturities of securities. We also have the ability to borrow from theFederal Home Loan Bank of Chicago and fromU.S. Bank . AtDecember 31, 2020 , we had a$118.7 million line of credit with theFederal Home Loan Bank of Chicago , and had$4.0 million of borrowings outstanding as of that date. We also had a$5.0 million line of credit withU.S. Bank , with no borrowings outstanding as of that date. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-bearing demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period. Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was$6.4 million for the six months endedDecember 31, 2020 and$2.7 million for the six months endedDecember 31, 2019 . Net cash provided by investing activities, which consists primarily disbursements for loan originations and the purchase of securities, offset by principal collections on 42
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loans, and proceeds from maturing securities and pay downs on securities, was$6.0 million and$10.9 million for the six months endedDecember 31, 2020 and the six months endedDecember 31, 2019 , respectively. Net cash used in financing activities, consisting of activity in deposit accounts and borrowings, was$7.2 million and$12.5 million for the six months endedDecember 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, we anticipate that a substantial portion of maturing time deposits will be retained, though we also noted an increase in non-maturity deposits, assisting in liquitidy management. In the event that maturing time deposits run off at maturity, we can also supplement our funding with borrowings.
At
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