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TBBA TEB Bancorp

Filed: 12 Feb 21, 2:00pm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2020

OR

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

For the transition period from _______________ to _______________

Commission File No. 000-56049

TEB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland

83-2040340

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

2290 N Mayfair Road, Wauwatosa, WI

53226

(Address of Principal Executive Offices)

(Zip Code)

414-476-6434

(Registrant’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

    

Trading
Symbol(s)

    

Name of each exchange on which registered

None

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

YES    NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES    NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES      NO

As of February 12, 2021, 2,624,343 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding.



Part I Financial Information

Item 1 Financial Statements

TEB BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of December 31, 2020 (Unaudited) and June 30, 2020

    

December 31, 2020

    

June 30, 2020

ASSETS 

Cash and due from banks

$

4,945,586

$

2,763,126

Federal funds sold

13,409,060

10,342,915

Cash and cash equivalents

 

18,354,646

 

13,106,041

Interest bearing deposits in banks

 

682,376

 

2,713,164

Available for sale securities - stated at fair value

 

22,775,918

 

20,297,595

Loans, less allowance for loan losses of $1,403,491 and $1,353,427 at December 31, 2020 and June 30, 2020, respectively

 

232,649,841

 

237,300,478

Loans held for sale

 

15,548,714

 

18,690,027

Other real estate owned, net

 

386,155

 

2,288,255

Premises and equipment, net

 

8,142,093

 

7,960,041

Federal Home Loan Bank stock

 

1,031,200

 

1,345,500

Accrued interest receivable and other assets

1,794,749

1,773,486

TOTAL ASSETS

$

301,365,692

$

305,474,587

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

 

  

 

  

Deposits

 

  

 

  

Demand

$

99,150,134

$

93,627,648

Savings and NOW

 

79,739,955

 

75,397,948

Certificates of deposit

76,936,804

87,045,935

Total Deposits

 

255,826,893

 

256,071,531

Federal Home Loan Bank borrowings

 

4,000,000

 

9,000,000

Advance payments by borrowers for property taxes and insurance

 

912,429

 

2,882,067

Accrued interest payable and other liabilities

13,428,220

14,008,786

Total Liabilities

274,167,542

281,962,384

STOCKHOLDERS’ EQUITY

 

  

 

  

Preferred stock ($0.01 par value, 5,000,000 authorized, no shares issued or outstanding as of December 31, 2020 and June 30, 2020, respectively)

 

 

Common stock ($0.01 par value, 20,000,000 authorized, 2,624,343 issued and outstanding as of December 31, 2020 and June 30, 2020)

 

26,243

 

26,243

Additional paid in capital

 

11,319,328

 

11,319,328

Retained earnings

 

20,738,853

 

17,002,468

Accumulated other comprehensive loss

(4,886,274)

 

(4,835,836)

Total Stockholders’ Equity

27,198,150

 

23,512,203

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

301,365,692

$

305,474,587

See accompanying notes to condensed consolidated financial statements

1


TEB BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended December 31, 2020 and 2019 (Unaudited)

Three months ended

Six months ended

December 31, 

December 31, 

    

2020

    

2019

    

2020

    

2019

INTEREST AND DIVIDEND INCOME

 

  

 

  

  

 

  

Interest and fees on loans

$

2,599,766

$

2,837,250

$

5,199,363

$

5,761,686

Interest and dividends on investment securities

 

149,355

 

167,581

 

301,345

 

331,080

Interest on federal funds sold

 

190

 

11,903

 

407

 

33,616

Interest on deposits in banks

 

222

 

1,978

 

564

 

7,502

Total Interest and Dividend Income

 

2,749,533

 

3,018,712

 

5,501,679

 

6,133,884

INTEREST EXPENSE

 

  

 

  

 

  

 

  

Interest on deposits

 

318,653

 

473,716

 

681,152

 

933,952

Interest on Federal Home Loan Bank borrowings

 

664

 

89,357

 

6,806

 

293,298

Interest on federal funds purchased

 

 

19

 

 

57

Total Interest Expense

 

319,317

 

563,092

 

687,958

 

1,227,307

Net interest income before provision for loan losses

 

2,430,216

 

2,455,620

 

4,813,721

 

4,906,577

Provision for loan losses

 

50,000

 

 

50,000

 

Net interest income after provision for loan losses

 

2,380,216

 

2,455,620

 

4,763,721

 

4,906,577

NON-INTEREST INCOME

 

  

 

  

 

 

  

Service fees on deposits

 

105,779

 

116,943

 

211,085

 

239,548

Service fees on loans

 

46,232

 

60,959

 

88,537

 

104,333

Gain on sales of mortgage loans

 

3,619,405

 

936,979

 

6,622,505

 

2,187,722

Income on sale of uninsured products

 

102,849

 

77,445

 

216,634

 

170,512

(Loss) Gain on sale of other real estate owned

 

(11,573)

 

104,890

 

(11,573)

 

109,708

Other income

 

5,253

 

5,225

 

13,841

 

12,598

Total Non-Interest Income

 

3,867,945

 

1,302,441

 

7,141,029

 

2,824,421

NON-INTEREST EXPENSES

 

  

 

  

 

  

 

  

Compensation and benefits

 

2,649,604

 

2,041,970

 

5,087,380

 

4,191,127

Occupancy

 

537,707

 

492,766

 

1,061,295

 

982,917

Advertising

 

37,545

 

53,422

 

77,590

 

134,198

Data processing services

 

291,498

 

266,395

 

560,316

 

571,814

FDIC assessment

 

26,570

 

51,285

 

66,810

 

23,826

Cost of operations for other real estate owned

 

159,564

 

11,782

 

176,675

 

23,096

Insurance expense

 

29,141

 

41,600

 

59,185

 

81,155

Professional fees

 

135,506

 

168,417

 

259,483

 

287,487

Other expenses

 

423,489

 

268,541

 

819,631

 

505,599

Total Non-Interest Expenses

 

4,290,624

 

3,396,178

 

8,168,365

 

6,801,219

Income before income taxes

 

1,957,537

 

361,883

 

3,736,385

 

929,779

Income tax benefit

 

 

 

 

NET INCOME

$

1,957,537

$

361,883

$

3,736,385

$

929,779

Basic income per share

$

0.75

$

0.14

$

1.42

 

0.35

Diluted income per share

$

0.75

$

0.14

$

1.42

 

0.35

See accompanying notes to condensed consolidated financial statements.

2


TEB BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Six Months Ended December 31, 2020 and 2019 (Unaudited)

For the three months ended

For the six months ended

December 31, 

December 31, 

December 31, 

December 31, 

    

2020

    

2019

    

2020

    

2019

Net income

 

$

1,957,537

$

361,883

$

3,736,385

$

929,779

Other comprehensive income, net of tax

Unrealized gains/losses on securities

Net unrealized holding gains (losses) arising during period

17,690

(87,138)

153,832

30,772

Tax effect

Change in pension obligation

(102,135)

(107,874)

(204,270)

(107,874)

Tax effect

Other comprehensive loss, net of tax

(84,445)

(195,012)

(50,438)

(77,102)

COMPREHENSIVE INCOME

 

$

1,873,092

$

166,871

$

3,685,947

$

852,677

See accompanying notes to condensed consolidated financial statements.

3


TEB BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended December 31, 2020 and 2019 (Unaudited)

Accumulated

Additional

Other

Number of 

Common

Paid- In

Retained

Comprehensive

    

Shares

    

Stock

    

Capital

    

Earnings

    

Loss

    

Total

June 30, 2019 (audited)

2,624,343

 

$

26,243

 

$

11,319,328

 

$

15,910,369

 

$

(2,848,365)

 

$

24,407,575

Net income

567,896

567,896

Other comprehensive income, net of tax

117,910

117,910

September 30, 2019

2,624,343

 

26,243

 

11,319,328

 

16,478,265

 

(2,730,455)

 

25,093,381

Net income

361,883

361,883

Other comprehensive loss, net of tax

(195,012)

(195,012)

December 31, 2019

2,624,343

$

26,243

$

11,319,328

$

16,840,148

$

(2,925,467)

$

25,260,252

June 30, 2020 (audited)

2,624,343

 

$

26,243

 

$

11,319,328

 

$

17,002,468

 

$

(4,835,836)

 

$

23,512,203

Net income

1,778,848

1,778,848

Other comprehensive income, net of tax

34,007

34,007

September 30, 2020

2,624,343

26,243

11,319,328

18,781,316

(4,801,829)

25,325,058

Net income

1,957,537

1,957,537

Other comprehensive loss, net of tax

(84,445)

(84,445)

December 31, 2020

2,624,343

 

$

26,243

 

$

11,319,328

 

$

20,738,853

 

$

(4,886,274)

 

$

27,198,150

See accompanying notes to condensed consolidated financial statements.

4


TEB BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended December 31, 2020 and 2019 (Unaudited)

For the six months ended December 31, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

  

Net income

$

3,736,385

$

929,779

Adjustments to reconcile net income to net cash flows provided by operating activities

 

 

  

Provision for loan losses

 

50,000

 

Depreciation

 

275,684

 

282,449

Amortization and accretion

 

19,585

 

29,245

Origination of mortgage loans held for sale

 

(289,881,006)

 

(150,995,339)

Proceeds from sales of mortgage loans held for sale

 

299,644,824

 

154,091,310

Gain on sale of mortgage loans held for sale

 

(6,622,505)

 

(2,187,722)

Loss (Gain) on sale of other real estate owned, net

 

11,573

 

(109,708)

(Gain) Loss on sale or disposal of assets, net

(7,510)

1,650

Changes in assets and liabilities:

 

 

Accrued interest receivable and other assets

 

(21,263)

 

(231,896)

Accrued interest payable and other liabilities

 

(784,834)

 

862,089

Net cash flows provided by operating activities

 

6,420,933

 

2,671,857

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Proceeds from maturities or calls of securities available for sale

 

1,470,923

 

348,168

Purchase of securities available for sale

 

(3,815,000)

 

(2,104,432)

Change in loans

 

4,600,637

 

7,276,779

Change from redemption of FHLB stock

 

314,300

 

1,026,000

Change in interest bearing deposits in banks

 

2,030,788

 

3,472,022

Proceeds from sale of other real estate owned

 

1,737,762

 

1,061,484

Charge-offs and (capital expenditures) on other real estate owned

 

152,765

 

(36,852)

Proceeds from sale of premises and equipment

26,400

8,000

Purchase of premises and equipment, net

 

(476,627)

 

(156,912)

Net cash flows provided by investing activities

 

6,041,948

 

10,894,257

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Net increase (decrease) in deposits

 

(244,638)

 

14,126,697

FHLB advance proceeds

 

45,500,000

 

847,200,000

FHLB advance repayments

 

(50,500,000)

 

(870,900,000)

Change in advance payments by borrowers for property taxes and insurance

 

(1,969,638)

 

(2,960,286)

Net cash flows used in financing activities

 

(7,214,276)

 

(12,533,589)

Net Change in Cash and Cash Equivalents

 

5,248,605

 

1,032,525

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR

 

13,106,041

 

5,630,770

CASH AND CASH EQUIVALENTS - END OF PERIOD

$

18,354,646

$

6,663,295

SUPPLEMENTAL CASH FLOW DISCLOSURES

 

  

 

  

Cash paid for interest

$

615,616

$

908,675

Loans transferred to other real estate owned

 

 

136,671

See accompanying notes to condensed consolidated financial statements.

5


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

NOTE 1 – Summary of Significant Accounting Policies

Organization

On April 30, 2019, The Equitable Bank, S.S.B. (the “Bank”) converted to a stock savings bank and is now organized in the mutual holding company structure. The Bank issued all of its outstanding stock to a new holding company, TEB Bancorp, Inc. (the “Company”), which 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 for gross proceeds of approximately $13.1 million. The net proceeds received were approximately $11.4 million after offering costs. TEB Bancorp, Inc. is organized as a corporation under the laws of the State of Maryland. The Bank utilized $100,000 of proceeds received from the offering as initial capitalization of TEB MHC. TEB MHC has been organized as a mutual holding company under the laws of the State of Wisconsin and owns 1,314,796 shares, or 50.1% of the outstanding common stock of TEB Bancorp, Inc.

The Bank is a state-chartered savings bank providing a full range of financial services. The Bank grants commercial, residential and consumer loans, and accepts deposits from customers primarily in the Metropolitan Milwaukee area, which is in southeastern Wisconsin. The Bank is subject to competition from other financial institutions and nonfinancial institutions providing financial products. Additionally, the Bank is subject to the regulations of certain regulatory agencies and undergoes periodic examination by those regulatory agencies.

All depositors who had liquidation rights with respect to the Bank as of the effective date of the reorganization continue to have such rights solely with respect to TEB MHC so long as they continue to hold their deposit accounts with the Bank. In addition, all persons who become depositors of the Bank subsequent to the reorganization will have such liquidation rights with respect to TEB MHC.

At December 31, 2020, the significant assets of TEB Bancorp, Inc. were the capital stock of the Bank and a deposit account held at the Bank. The liabilities of TEB Bancorp, Inc. were insignificant. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of TEB Bancorp, Inc. and its wholly-owned subsidiaries were prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of the Company as of and for the year ended June 30, 2020.

The interim condensed consolidated financial statements of the Company as of December 31, 2020, and for the three and six months ended December 31, 2020 and 2019 are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. Such adjustments are the only adjustments contained in the interim financial statements. The results of operations for the three and six months ended December 31, 2020, are not necessarily indicative of the results to be achieved for the year ending June 30, 2021 or any other period.

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Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements as of and for the periods ending December 31, 2020 and 2019 and June 30, 2020 and 2019 include the accounts and operations of TEB Bancorp, Inc. and its wholly-owned subsidiaries, the Bank, Equitable Investment Corp., and Equity Credit Corp. All significant intercompany accounts and transactions have been eliminated in consolidation.

Emerging Growth Company Status

Under the Jumpstart Our Business Startups Act (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". The Company qualifies as an emerging growth company and believes that it will continue to qualify as an emerging growth company.

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. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company. Accordingly, the financial statements may not be comparable to the financial statements of companies that comply with such new or revised accounting standards.

Use of Estimates

In preparing the unaudited condensed consolidated financial statements in conformity with U.S. GAAP, management of the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the pension actuarial assumptions, and the valuation of deferred tax assets.

Revenue Recognition

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including all interest and dividend income generated from financial instruments. Certain noninterest income items, including gain on sales of loans, gain on sales of securities, and other noninterest income have been evaluated and determined to not fall within the scope of ASC 606. Elements of noninterest income that fall within the scope of ASC 606 are as follows:

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Service charges and other fees The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements and determined that the agreements can be terminated at any time by either the Company or the account holder. Transaction fees, such as wires and overdraft charges, are settled the day the performance obligation is satisfied. The Company’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis and are considered a series of services that have the same pattern of transfer each month. The review of service charges assessed on deposit accounts included the amount of variable consideration that is a part of the monthly charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition for service charges and other fees.

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

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold, all of which mature within 90 days. The Company maintains amounts due from banks, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.

Interest Bearing Deposits in Banks

Interest bearing deposits in banks mature within one year and are carried at cost, which approximates fair value.

Securities

Available for sale securities are stated at fair value and unrealized holding gains and losses on available for sale securities are reported as accumulated other comprehensive income (loss), net of applicable deferred income tax and adjusted for any applicable valuation allowance, a separate component of equity. Available for sale securities are written down to market value through operations if an impairment of value is deemed other than temporary due to credit issues. Gains or losses on the sale of securities, if any, are determined on the specific identification method. Securities transactions are recorded on the trade date.

Loans

Loans are carried at the unpaid principal balance adjusted for deferred loan fees and costs and charge-offs. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amounts amortized as an adjustment of the related loan’s yield over the contractual life of the related loan.

Interest on loans is accrued on the unpaid principal balances as earned. Loans are normally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on a loan, it is management’s practice to place such loan on nonaccrual status immediately, rather than delaying such action until the loan becomes 90 days past due. When a loan is placed on nonaccrual, previously accrued and uncollected interest on

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

such loan is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that loan payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal.

A troubled debt restructuring (“TDR”) includes a loan modification where a borrower is experiencing financial difficulty and a concession is granted to that borrower that would not otherwise have been considered except for the borrower’s financial difficulties. All TDRs are classified as impaired loans. TDRs may be on accrual or nonaccrual status based upon the performance of the borrower and management’s assessment of collectability. Loans deemed nonaccrual may return to accrued status based on performance in accordance with terms of the restructuring, generally six months.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payment when due.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations. All sales are made without recourse.

Allowance for Loan Losses

The allowance for loan losses (“ALL”) is established as losses are estimated to have occurred through a provision for loan losses charged to expense. 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 ALL. The ALL 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 ALL 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 observable market price, or the fair value of the collateral if the loan is collateral dependent. The general reserve is based on the Company’s 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, nonaccrual, 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 ALL; some are quantitative while others require qualitative judgment. The ALL reflects management’s best estimate of the probable and inherent losses on loans. The adequacy of the ALL is reviewed and approved by the Company’s Board of Directors. Allocations of the ALL may be made for specific loans, but the entire ALL 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 ALL as well. Such agencies may require that changes in the ALL 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.

Premises and Equipment, Net

Premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization expense is provided on the straight-line method over the estimated useful life of the asset for financial

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

reporting purposes, and the straight-line and accelerated methods for income tax purposes. Amortization of leasehold improvements is provided on the straight-line method over the lesser of the term of the respective lease or the estimated economic life of the improvements.

Other Real Estate Owned, Net

Other real estate owned is initially recorded at the fair market value of the real estate acquired less the estimated costs to sell the real estate at the date title is received, establishing a new cost basis, with any write-down charged to the allowance for loan losses. Costs relating to development or improvement of property are capitalized up to the fair value of the property. Valuations are periodically performed by management and independent third parties and a charge to expense is taken if the carrying value of a property exceeds its fair value less estimated costs to sell. Income and expense related to the operations of other real estate owned is recorded net in “Cost of operations of other real estate owned” as a component of non-interest expenses on the condensed consolidated statements of operations. Gains and losses on the sale of other real estate owned are recorded in “Gain (loss) on sale of other real estate owned” as a component of non-interest income in the condensed consolidated statements of operations.

Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of FHLB stock based on the Bank’s level of borrowings from the FHLB and other factors, and may invest in additional amounts of FHLB stock. The Bank’s investment in FHLB of Chicago stock meets the minimum amount required by current regulations and is carried at cost, which approximates fair value. FHLB stock is evaluated quarterly for impairment. Based on management’s evaluation, no impairment has been recorded on these securities. Both cash and stock dividends are reported as income.

Defined Benefit Pension Plan

The Bank has a defined benefit pension plan (the “Plan”) covering substantially all of its employees hired prior to December 31, 2012. The benefits are based on years of service and the employee’s average monthly pay received during the five highest consecutive calendar years in the last 10 years of employment under the Plan. Management contributes annually the amounts necessary to provide for defined benefit payments upon retirement or death as determined by the Plan’s actuary. The Plan was frozen effective December 31, 2012 for all employees. No additional benefits are being accrued for active participants after that date and no new participants will be entered into the Plan.

The Bank records annual amounts relating to the Plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Bank reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends where appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (loss) and amortized to net periodic pension cost over future periods. The Bank believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

Comprehensive Income

U.S. GAAP generally requires that recognized revenue, expenses, gains, and losses be included in earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section and changes in the funded status of the pension plan, such items, along with net income are components of comprehensive income.

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

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.

The Company recognizes 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. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the 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. The Company recognizes interest and penalties accrued or released related to uncertain tax positions in current income tax expense or benefit.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Advertising

Advertising costs are accrued and expensed in the period incurred.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.

Significant Events

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 as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and how the economy may be reopened. In order to protect the health of employees and customers, the Company has temporarily limited lobby hours and transitioned as many employees to remote work as possible. Nonetheless, the Company has not incurred any significant disruptions to its business activities.

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020 and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small 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 became eligible to originate PPP loans by completing the required SBA documentation.

In October 2020, the SBA approved an extension of the deferment period without modifications on the PPP loans originated. The Company agreed to extend the deferment period for six months from the first payment date.

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. The Company receives a processing fee from the SBA ranging from 1% to 5% depending on the size of the loan, which is offset by a third-party servicing agent fee ranging from 0.25% to 1.0%.

As of December 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 the December 31, 2020 reporting period. As of December 31, 2020, 14 PPP loans totaling $741,000 had 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 of December 31, 2019 are considered current for COVID-19 modifications and therefore qualify for a loan deferral. A financial institution can then suspend the requirements under U.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 between March 1, 2020 and the earlier of either January 1, 2021 or the 60th day after the end of the COVID-19 national emergency. Similarly, the Financial 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. On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2020 (the “CAA Act”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief. Amoung the additional relief measures included are certain extensions to 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 of December 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 of December 31, 2020, 84 of these modifications totaling $26.2 million have resumed monthly

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

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. Details with respect to loan modification requests are as follows:

As of December 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 of December 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. Details with respect to loan modification requests are as follows:

    

As of December 31, 2020

Payments Resumed

Payments Deferred

Loan Classification

Number of Loans

    

Balance

 

Number of Loans

    

Balance

Construction, land, development

2

$

115,294

0

$

1-4 family owner occupied

 

47

 

7,041,514

 

7

 

522,773

1-4 family non-owner occupied

 

15

 

2,239,902

 

1

 

115,088

Multifamily

 

12

 

10,566,128

 

0

 

Commercial owner occupied

 

2

 

311,979

 

1

 

1,157,876

Commercial non-owner occupied

 

3

 

5,899,095

 

0

 

Consumer and installment loans

 

3

 

42,697

 

0

 

Total loan modification requests

84

$

26,216,609

9

$

1,795,737


The Company’s allowance for loan losses was $1.4 million at December 31, 2020 and June 30, 2020. At December 31, 2020 and June 30, 2020, the allowance for loan losses represented 0.60% and 0.57% of total loans, respectively. During 2020, the Company adjusted the economic risk factor methodology to incorporate the current economic implications and the higher unemployment rate from the COVID-19 pandemic. In determining its allowance for loan loss level at December 31, 2020, the Company considered the health and composition of its loan portfolio during 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.

Subsequent Events

Management has reviewed the Company's operations for potential disclosure or financial statement impacts related to events occurring after December 31, 2020, other than those discussed above in “Significant Events”, but prior to the release of these financial statements. Based on the results of this review, no subsequent event disclosure or financial statement impacts to these financial statements are required as of February 12, 2021.

NOTE 2 – Recent Accounting Pronouncements

The FASB issues Accounting Standards Updates (“ASU”s) to the FASB Accounting Standards Codification (“ASC”). This section provides a summary description of recent ASUs that had or that management expects may have an impact on the consolidated financial statements issued upon adoption. The Company is classified as an emerging growth company and has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Effective dates reflect this election.

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Recently Adopted Accounting Pronouncements

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on certain purchased callable debt securities to the earliest call date. ASU 2017-08 is effective for annual periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted ASU 2017-08 effective July 1, 2020 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, including the removal, modification to, and addition of certain disclosure requirements. This ASU will be effective for fiscal years beginning after December 15, 2019 with early adoption permitted. Although this ASU impacts the Company’s fair value disclosures, there is no additional impact to the financial statements.

Recently Issued, But Not Yet Effective Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Topic 842 was subsequently amended by ASU 2018-10, “Codification Improvements to Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842)”. The amendments in this update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For leases with a term of 12 months or less, the amendments permit lessees to make an accounting policy election by class of underlying assets not to recognize lease assets and lease liabilities. For finance leases, the amendments in this update require a lessee to (1) recognize a right-of-use asset and lease liability, initially measured at the present value of the lease payments, on the balance sheet; (2) recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of operations; (3) classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the least liability and variable lease payments within operating activities in the statement of cash flows. For operating leases, the amendments in this update require a lessee to (1) recognized a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, on the balance sheet; (2) recognized a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; (3) classify all cash payments within operating activities in the statement of cash flows. On October 16, 2019, the FASB approved the proposal to delay the effective date for this standard for private and all other entities. Due to the Company’s extended transition period election, the amendments are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company’s leases are operating leases and ASU 2016-02 will require the Company to add them to its consolidated balance sheet. The Company’s operating leases are predominately related to real estate. Management is currently evaluating other impacts this guidance will have on the consolidated results of operations, financial presentation, and cash flows of the Company.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” Topic 326 was subsequently amended by ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses; ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”; and ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief.” This ASU replaces the current incurred loss impairment methodology with a methodology that reflected expected credit losses measured at amortized cost and certain other instruments, including loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures. On October 16, 2019, the FASB approved the proposal to delay the effective date for this standard for private and all other entities. Due to the Company’s extended transition period election, the update is effective for fiscal years beginning after December 15,

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

2022, including interim periods within those fiscal years. Management is currently evaluating the potential impact on its consolidated results of operations, financial position, and cash flows; however, due to the significant differences in the revised guidance from existing U.S. GAAP, the implementation of this guidance may result in material changes in the Company’s accounting for credit losses on financial instruments.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU 2018-14 applies to all employers that sponsor defined benefit pension or other postretirement plans. The amendments require that an employer disclose an explanation of the reasons for significant gains and losses related to changes in the net benefit obligation for the period. Multiple disclosure requirements are also removed with this amendment, including: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; (2) the amount and timing of plan assets expected to be returned to the employer; (3) related party disclosures about significant transactions between the employer or related parties and the plan; and (4) the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs. Additional disclosure requirements contained within Subtopic 715-20 are also clarified. The amendments are effective for fiscal years ending after December 15, 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the consolidated results of operations, financial position, or cash flows of the Company.

NOTE 3 – Earnings Per Share

Earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Earnings per share is presented for the three and six month periods ended December 31, 2020 and 2019.

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended

December 31, 2020

    

December 31, 2019

    

December 31, 2020

    

December 31, 2019

Net income

$

1,957,537

361,883

$

3,736,385

 

929,779

Basic potential common shares

 

 

  

 

  

Weighted average shares outstanding

 

2,624,343

2,624,343

 

2,624,343

 

2,624,343

Basic weighted average shares outstanding

 

2,624,343

2,624,343

 

2,624,343

 

2,624,343

Diluted potential common shares

 

 

 

Diluted weighted average shares outstanding

 

2,624,343

2,624,343

 

2,624,343

 

2,624,343

Basic earnings per share

$

0.75

0.14

$

1.42

 

0.35

Diluted earnings per share

$

0.75

0.14

$

1.42

 

0.35

NOTE 4 – Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer liabilities in an orderly transaction between market participants at the measurement date (exit price) and establishes a framework for measuring fair value.

To determine fair value the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

>     Level 1 - Fair value is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as listed equities and U.S. Treasury securities.

>     Level 2 - Fair value is based upon quoted prices for similar, but not identical, assets and liabilities in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. This also includes quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

>     Level 3 - Fair value is based upon financial models using primarily unobservable inputs. Unobservable inputs reflect the Company's own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Assets

Available for sale securities Where quoted prices for securities are available in an active market, those securities are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of securities with similar characteristics, which would generally be classified within Level 2 of the valuation hierarchy, include certain AAA-rated U.S. government sponsored agency securities, municipal obligations, and mortgage-backed securities. A security using financial models based upon primarily unobservable inputs, such as commercial paper, would generally be classified within Level 3 of the valuation hierarchy.

Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceeds the recorded investments in such loans and for which carrying amount will remain at amortized cost. Impaired loans where an allowance is established based on the fair value of collateral or expected cash flows require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, less selling costs, the Company records the impaired loan as a non-recurring Level 3 valuation. At December 31, 2020 and June 30, 2020, substantially all of the impaired loans were evaluated based on the fair value of the collateral with adjustments to their appraised values ranging from 5% to 15% for selling costs.

Other real estate owned, net Assets on which the underlying collateral has been repossessed are initially recorded at the fair market value of the real estate acquired less estimated costs to sell, establishing a new cost basis.

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TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Subsequently, other real estate owned is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, less selling costs, the Company records the repossessed asset as a non-recurring Level 3 valuation. At December 31, 2020 and June 30, 2020 substantially all of the other real estate owned was evaluated based on the fair value of the collateral with adjustments to their appraised values ranging from 5% to 15% for selling costs.

The following tables set forth, by level within the fair value hierarchy, the Company's financial assets that were accounted for at fair value on a recurring and non-recurring basis as of December 31, 2020 and June 30, 2020, respectively. According to fair value guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

The following table presents assets measured at fair value on a recurring basis:

Fair Value as of December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Securities classified as available for sale:

 

  

 

  

 

  

 

  

Obligations of states and political subdivisions

$

$

20,572,232

$

$

20,572,232

Mortgage-backed securities

 

 

1,360,250

 

 

1,360,250

Certificates of deposit

 

 

843,436

 

 

843,436

Total

$

$

22,775,918

$

$

22,775,918

Fair Value as of June 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Securities classified as available for sale:

 

  

 

  

 

  

 

  

Obligations of states and political subdivisions

$

$

18,005,082

$

$

18,005,082

Mortgage-backed securities

 

 

1,443,643

 

 

1,443,643

Certificates of deposit

 

 

848,870

 

 

848,870

Total

$

$

20,297,595

$

$

20,297,595

Assets measured at fair value on non-recurring basis:

Fair Value as of December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans with a valuation allowance, net

$

$

$

191,923

$

191,923

Other real estate owned, net

 

 

 

386,155

 

386,155

Total

$

$

$

578,078

$

578,078

Fair Value as of June 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans with a valuation allowance, net

$

$

$

248,930

$

248,930

Other real estate owned, net

 

 

 

2,288,255

 

2,288,255

Total

$

$

$

2,537,185

$

2,537,185

17


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Loans with a carrying amount of $372,000 and $455,000 were considered impaired as of December 31, 2020 and June 30, 2020 and a specific allowance for loan losses of $180,000 and $206,000, respectively, was established against these loans.

Other real estate owned with carrying amounts of $386,000 and $2.3 million were determined to be at their fair value as of December 31, 2020 and June 20, 2020, respectively.

18


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The following presents quantitative information about nonrecurring Level 3 fair value measurements:

As of December 31, 2020

    

Fair Value

    

Valuation Technique

    

Unobservable Input(s)

    

Range/Weighted Average

Impaired loans with a valuation allowance, net

$

191,923

Market price or appraised value

Management discount on appraised values

5% - 15%

Other real estate owned, net

$

386,155

Market price or appraised value

Management discount on appraised values

5% - 15%

As of June 30, 2020

    

Fair Value

    

Valuation Technique

    

Unobservable Input(s)

    

Range/Weighted Average

Impaired loans with a valuation allowance, net

$

248,930

Market price or appraised value

Management discount on appraised values

5% - 15%

Other real estate owned, net

$

2,288,255

Market price or appraised value

Management discount on appraised values

5% - 15%

NOTE 5 – Cash and Due From Banks

In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, the Bank had no required reserves with the Federal Reserve Bank of Chicago at December 31, 2020 and June 30, 2020.

NOTE 6 – Available for Sale Securities

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

December 31, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

    

Cost

    

Gains

    

Losses

    

Fair Value

Obligations of states and political subdivisions

$

19,958,955

$

632,907

$

19,630

$

20,572,232

Mortgage-backed securities

 

1,300,987

59,263

 

1,360,250

Certificates of deposit

 

800,000

43,436

 

843,436

$

22,059,942

$

735,606

$

19,630

$

22,775,918

June 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

    

Cost

    

Gains

    

Losses

    

Fair Value

Obligations of states and political subdivisions

$

17,563,698

$

457,440

$

16,056

$

18,005,082

Mortgage-backed securities

 

1,371,753

 

71,890

 

 

1,443,643

Certificates of deposit

 

800,000

 

48,870

 

 

848,870

$

19,735,451

$

578,200

$

16,056

$

20,297,595

19


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The following tables present the portion of the Company's available for sale securities portfolio which has gross unrealized losses, reflecting the length of time that individual securities have been in a continuous unrealized loss position:

December 31, 2020

Continuous Unrealized

Continuous Unrealized

Losses Existing for Less

Losses Existing for 12 Months

Than 12 Months

or Greater

Total

 

Unrealized

 

Unrealized

 

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Obligations of states and political subdivisions

$

918,725

$

11,275

$

298,170

$

8,355

$

1,216,895

$

19,630

Management does not believe any individual unrealized loss as of December 31, 2020 represents other than temporary impairment. The Bank holds $298,170, comprised of four securities, in obligations of states and political subdivisions, at December 31, 2020 that have an unrealized loss existing for 12 months or greater of $8,355. Management believes the temporary impairment in fair value was caused by market fluctuations in interest rates. Although these securities are classified as available for sale, management does not have the intent to sell the security and it is more likely than not it will be able to hold the security through a recovery period or until maturity.

    

June 30, 2020

Continuous Unrealized

Continuous Unrealized

Losses Existing for Less

Losses Existing for 12 Months

Than 12 Months

or Greater

Total

 

Unrealized

 

Unrealized

 

Unrealized

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Obligations of states and political subdivisions

$

$

$

693,687

$

16,056

$

693,687

$

16,056

Management does not believe any individual unrealized loss as of June 30, 2020 represents other than temporary impairment. The Bank holds $693,687, comprised of two securities, in obligations of states and political subdivisions at June 30, 2020 that have an unrealized loss existing for 12 months or greater. Management believes the temporary impairment in fair value was caused by market fluctuations in interest rates. Although these securities are classified as available for sale, management does not have the intent to sell the security and it is more likely than not it will be able to hold the security through a recovery period or until maturity.

The amortized cost and fair value of available for sale securities as of December 31, 2020 are shown below by contractual maturity. Expected maturities of mortgage-backed securities will differ from contractual maturities since the anticipated maturities are not readily determinable.

Amortized

    

Cost

    

Fair Value

Due in one year or less

$

866,680

$

868,877

Due after one year through 5 years

 

9,718,935

 

9,973,308

Due after 5 years through 10 years

 

5,753,340

 

6,015,696

Due after 10 years

 

4,420,000

 

4,557,787

Subtotal

 

20,758,955

 

21,415,668

Mortgage backed securities

 

 

  

Due after one year through 5 years

 

 

Due after 5 years through 10 years

 

1,300,987

 

1,360,250

Total

$

22,059,942

$

22,775,918

20


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

During the three months ended December 31, 2020 and 2019, the Bank did not sell any available for sale securities. The Bank did not have any available for sale securities pledged at December 31, 2020 and June 30, 2020.

NOTE 7 – Loans and Allowance for Loan Losses

Major classifications of loans are as follows:

    

December 31, 2020

    

June 30, 2020

Construction, land, development

$

3,460,986

$

4,598,382

1-4 family owner occupied

85,247,077

100,506,311

1-4 family non-owner occupied

 

22,592,637

 

21,213,680

Multifamily

 

88,769,856

 

76,444,156

Commercial owner occupied

 

6,474,308

 

6,733,183

Commercial non-owner occupied

 

19,679,205

 

20,237,534

Consumer and installment loans

 

7,829,263

 

8,920,659

Total loans

 

234,053,332

 

238,653,905

Less:

 

  

 

  

Allowance for loan losses

 

(1,403,491)

 

(1,353,427)

Loans, net

$

232,649,841

$

237,300,478

In the table above, outstanding loan balances are presented net of deferred loan origination fees of $162,000 at December 31, 2020 and $184,000 at June 30, 2020.

Non-performing loans are as follows:

    

December 31, 2020

    

June 30, 2020

Nonaccrual Loans

$

1,280,793

$

1,341,174

Total non-performing loans

$

1,280,793

$

1,341,174

Restructured loans, accruing

$

$

Total impaired loans

$

1,280,793

$

1,341,174

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Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Impaired loans are as follows as of and for the following periods ended:

December 31, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Development

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

With related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

93,110

$

$

$

182,853

$

$

95,763

$

371,726

Unpaid principal balance

 

 

93,110

 

 

 

182,853

 

 

95,763

 

371,726

Related allowance

 

 

61,491

 

 

 

64,430

 

 

53,882

 

179,803

With no related allowance recorded

 

  

 

 

  

 

  

 

  

 

  

 

 

  

Recorded investment

$

$

799,428

$

79,265

$

$

$

$

30,374

$

909,067

Unpaid principal balance

 

 

799,428

 

79,265

 

 

 

 

30,374

 

909,067

Related allowance

 

 

 

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

892,538

$

79,265

$

$

182,853

$

$

126,137

$

1,280,793

Unpaid principal balance

 

 

892,538

 

79,265

 

 

182,853

 

 

126,137

 

1,280,793

Related allowance

 

 

61,491

 

 

 

64,430

 

 

53,882

 

179,803

Three Months Ended December 31, 2020

Average recorded balance

$

$

911,182

$

19,816

$

$

180,387

$

$

130,024

$

1,241,409

Interest income recognized while impaired

$

$

$

$

$

$

$

$

Interest income recognized on a cash basis while impaired

 

 

5,021

 

 

 

2,207

 

 

 

7,228

Total interest on impaired loans

$

$

5,021

$

$

$

2,207

$

$

$

7,228

Six Months Ended December 31, 2020

Average recorded balance

$

$

934,319

$

19,548

$

$

181,222

$

$

129,846

$

1,264,935

Interest income recognized while impaired

$

$

$

$

$

$

$

$

Interest income recognized on a cash basis while impaired

 

 

8,409

 

 

 

13,659

 

 

 

22,068

Total interest on impaired loans

$

$

8,409

$

$

$

13,659

$

$

$

22,068

June 30, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Development

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

With related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

161,931

$

$

$

189,249

$

$

103,673

$

454,853

Unpaid principal balance

 

 

161,931

 

 

 

189,249

 

 

103,673

 

454,853

Related allowance

 

 

64,780

 

 

 

79,351

 

 

61,792

 

205,923

With no related allowance recorded

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

803,803

$

57,574

$

$

$

$

24,944

$

886,321

Unpaid principal balance

 

 

803,803

 

57,574

 

 

 

 

24,944

 

886,321

Related allowance

 

 

 

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

965,734

$

57,574

$

$

189,249

$

$

128,617

$

1,341,174

Unpaid principal balance

 

 

965,734

 

57,574

 

 

189,249

 

 

128,617

 

1,341,174

Related allowance

 

 

64,780

 

 

 

79,351

 

 

61,792

 

205,923

Average recorded balance

$

$

1,020,175

$

14,948

$

$

191,166

$

$

132,521

$

1,358,810

Interest income recognized while impaired

$

$

$

$

$

$

$

$

Interest income recognized on a cash basis while impaired

 

 

16,071

 

298

 

 

4,382

 

 

712

 

21,463

Total interest on impaired loans

$

$

16,071

$

298

$

$

4,382

$

$

712

$

21,463

22


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

December 31, 2019

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Development

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

With related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

97,774

$

$

$

191,014

$

$

108,728

$

397,516

Unpaid principal balance

 

 

97,774

 

 

 

191,014

 

 

108,728

 

397,516

Related allowance

 

 

43,470

 

 

 

76,086

 

 

66,848

 

186,404

With no related allowance recorded

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

715,327

$

$

$

$

$

$

715,327

Unpaid principal balance

 

 

715,327

 

 

 

 

 

 

715,327

Related allowance

 

 

 

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Recorded investment

$

$

813,101

$

$

$

191,014

$

$

108,728

$

1,112,843

Unpaid principal balance

 

 

813,101

 

 

 

191,014

 

 

108,728

 

1,112,843

Related allowance

 

 

43,470

 

 

 

76,086

 

 

66,848

 

186,404

Three Months Ended December 31, 2019

Average recorded balance

$

$

875,987

$

$

$

191,651

$

$

122,114

$

1,189,752

Interest income recognized while impaired

$

$

$

$

$

$

$

$

Interest income recognized on a cash basis while impaired

 

 

4,012

 

 

 

1,079

 

 

 

5,091

Total interest on impaired loans

$

$

4,012

$

$

$

1,079

$

$

$

5,091

Six Months Ended December 31, 2019

Average recorded balance

$

$

1,070,070

$

2,829

$

$

192,294

$

$

123,339

$

1,388,532

Interest income recognized while impaired

$

$

$

$

$

$

$

$

Interest income recognized on a cash basis while impaired

 

 

8,803

 

298

 

 

4,382

 

 

 

13,483

Total interest in impaired loans

$

$

8,803

$

298

$

$

4,382

$

$

$

13,483

Loans are individually evaluated for impairment once a weakness or adverse trend is identified that may jeopardize the repayment of the loan in accordance with the terms of the loan.

The following are the Company's risk rating definitions:

Pass: Loans in this category are to persons or entities that span from having financial characteristics of unquestioned strength to entities that have potential risks that if left uncorrected could at some point result in deterioration of the Bank’s credit position. Loans in this category are rated “1” through “4” with the lower risk being identified with a lower numerical rating. General characteristics that are monitored include borrower net worth, liquidity and entity profitability.

Special Mention: Loans in this category contain some weakness or potential weakness that if left uncorrected may result in the deterioration of the repayment capacity. Loans in this category are rated as a “5”.

Substandard: Loans in this category exhibit the same characteristics as “5” rated credits and are inadequately protected by the current net worth and paying capacity of the obligor and/or of the collateral pledged as security for the asset. Loans in this category are rated as a “6”.

Real Estate in Judgement: Loans in this category have been placed in non-accrual and the Bank has taken legal action to preserve its position. Loans in this category are rated as a “7”.

23


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The following is a summary of loans by risk rating:

December 31, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

1-4

$

3,460,986

$

84,249,325

$

22,513,372

$

88,769,856

$

5,133,579

$

11,903,756

$

7,703,126

$

223,734,000

5

 

 

105,214

 

 

1,157,876

 

7,775,449

 

 

9,038,539

6

 

 

456,331

 

79,265

 

 

182,853

 

 

28,024

 

746,473

7

 

 

436,207

 

 

 

 

 

98,113

 

534,320

Total

$

3,460,986

$

85,247,077

$

22,592,637

$

88,769,856

$

6,474,308

$

19,679,205

$

7,829,263

$

234,053,332

June 30, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Development

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

1-4

$

4,598,382

$

99,344,653

$

21,156,106

$

76,444,156

$

6,543,934

$

12,313,923

$

8,792,042

$

229,193,196

5

 

 

195,924

 

 

 

7,923,611

 

 

8,119,535

6

 

 

851,208

 

57,574

 

 

189,249

 

 

52,448

 

1,150,479

7

 

 

114,526

 

 

 

 

 

76,169

 

190,695

Total

$

4,598,382

$

100,506,311

$

21,213,680

$

76,444,156

$

6,733,183

$

20,237,534

$

8,920,659

$

238,653,905

The following is a summary of past due loans:

December 31, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

 

Development

 

Occupied

 

Occupied

Multifamily

 

Occupied

 

Occupied

Installment

Total

30‑59 days, accruing

$

 

$

743,432

$

$

$

$

$

40,792

$

784,224

60‑89 days, accruing

 

 

41,797

 

 

 

 

 

 

41,797

90 days & over or nonaccrual

 

 

892,538

 

79,265

 

 

182,853

 

 

126,137

 

1,280,793

Total

$

$

1,677,767

$

79,265

$

$

182,853

$

$

166,929

$

2,106,814

June 30, 2020

    

Construction,

    

1-4 Family

    

1-4 Family

    

    

Commercial

    

Commercial

    

    

Land,

Owner

Non-Owner

Owner

Non-Owner

Consumer and

Development

Occupied

Occupied

Multifamily

Occupied

Occupied

Installment

Total

30‑59 days, accruing

$

69,174

$

1,274,585

$

$

$

$

$

63,765

$

1,407,524

60‑89 days, accruing

 

 

114,338

 

 

 

 

 

 

114,338

90 days & over or nonaccrual

 

 

965,734

 

57,574

 

 

189,249

 

 

128,617

 

1,341,174

Total

$

69,174

$

2,354,657

$

57,574

$

$

189,249

$

$

192,382

$

2,863,036

TDRs involve the granting of some concession to a distressed borrower resulting in a loan modification such as; payment schedule changes, interest rate reductions, or principal charge-offs.There were two new TDRs during the six months ending December 31, 2020, totaling $104,000. There were also no TDRs that defaulted during the period that were modified within the previous six months as of December 31, 2020. One TDR was transferred out of TDR status during the six months ended December 30, 2020. There were two TDRs as of December 31, 2020 and one TDR as of June 30, 2020. As discussed within Note 1, under Section 4013 of the CARES Act, a financial institution can suspend the requirements under U.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. Management has evaluated the loans and determined that based on the liquidation value of the collateral, no specific reserve is necessary.

24


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Loans that have previously been restructured in a troubled debt restructuring and are no longer impaired based on the terms specified in their restructuring agreement and are now at a rate equal to or greater than a rate the Bank is willing to accept for a loan with comparable risk are transferred out of TDR status. One loan was transferred out of TDR status during the six months ended December 31, 2020.

The following is a summary of TDRs as of December 31, 2020:

 Construction,

1-4 Family

1-4 Family

Commercial

Commercial 

 Land,

Owner 

 Non-Owner 

Owner

Non-Owner 

Consumer &

    

 Development 

    

 Occupied

    

Occupied

    

Multifamily

    

  Occupied

    

Occupied

    

 Installment

    

Total

Accruing

  

  

  

  

  

  

  

  

Beginning balance June 30, 2020

$

$

195,924

$

$

$

$

$

$

195,924

Transfer to other loan category

 

 

 

 

 

 

 

 

Principal payments

 

 

(3,791)

 

 

 

 

 

 

(3,791)

Charge-offs

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

New restructureds

 

 

104,375

 

 

��

 

 

 

 

104,375

Transfers out of TDR status

 

 

(191,294)

 

 

 

 

 

 

(191,294)

Transfers to foreclosed properties

 

 

 

 

 

 

 

 

Transfers to nonaccrual

 

 

 

 

 

 

 

 

Transfers out of nonaccrual

 

 

 

 

 

 

 

 

Ending balance

$

$

105,214

$

$

$

$

$

$

105,214

Nonaccrual

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

$

$

$

$

$

$

$

Principal payments

 

 

 

 

 

 

 

 

Charge-offs

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

Transfers to foreclosed properties

 

 

 

 

 

 

 

 

Transfers from accrual

 

 

 

 

 

 

 

 

Transfers to accrual

 

 

 

 

 

 

 

 

Ending balance

$

$

$

$

$

$

$

$

Totals

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

$

195,924

$

$

$

$

$

$

195,924

Transfer to other loan category

 

 

 

 

 

 

 

 

Principal payments

 

 

(3,791)

 

 

 

 

 

 

(3,791)

Charge-offs

 

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

 

New restructureds

 

 

104,375

 

 

 

 

 

 

104,375

Transfers out of TDR status

 

 

(191,294)

 

 

 

 

 

 

(191,294)

Transfers to foreclosed properties

 

 

 

 

 

 

 

 

Transfers to nonaccrual

 

 

 

 

 

 

 

 

Transfers from accrual

 

 

 

 

 

 

 

 

Transfers out of nonaccrual

 

 

 

 

 

 

 

 

Ending balance

$

$

105,214

$

$

$

$

$

$

105,214

25


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The allowance for loan losses reflected in the accompanying condensed consolidated financial statements represents the allowance available to absorb probable and inherent loan losses in the loan portfolio. An analysis of changes in the allowance is presented in the following tabulation for the three and six months ended December 31, 2020 and 2019 and the year ended June 30, 2020:

Three Months Ended December 31, 2020

Construction,

1-4 Family

1-4 Family

Commercial

Commercial

Land,

Owner

Non-Owner

Owner

Non-Owner

 

    

Development

    

Occupied

    

Occupied

    

Multifamily

    

Occupied

    

Occupied

    

Consumer

    

Unallocated

    

Total

Allowance

Balance at 9/30/20

$

10,859

$

335,391

$

75,827

$

350,641

$

75,184

$

328,902

$

89,941

$

86,739

$

1,353,484

Charge-offs

Recoveries

 

 

 

 

 

 

7

 

 

7

Provision

 

389

 

(16,619)

 

11,525

48,824

 

11,266

 

11,745

 

(3,096)

 

(14,034)

 

50,000

Balance at 12/31/20

$

11,248

$

318,772

$

87,352

$

399,465

$

86,450

$

340,647

$

86,852

$

72,705

$

1,403,491

Six Months Ended December 31, 2020

Construction,

1-4 Family

1-4 Family

Commercial

Commercial

Not

Land,

Owner

Non-Owner

Owner-

Non-Owner

Specifically

 

    

Development

    

Occupied

    

Occupied

    

Multifamily

    

Occupied

    

Occupied

    

Consumer

    

Allocated

    

Total

Allowance

Balance at 6/30/20

$

13,795

$

356,434

$

77,220

$

286,665

$

95,711

$

312,670

$

97,312

$

113,620

$

1,353,427

Charge-offs

(325)

(325)

Recoveries

 

 

 

 

 

 

 

389

 

 

389

Provision

 

(2,547)

 

(37,662)

 

10,132

 

112,800

 

(9,261)

 

27,977

 

(10,524)

 

(40,915)

 

50,000

Balance at 12/31/20

$

11,248

$

318,772

$

87,352

$

399,465

$

86,450

$

340,647

$

86,852

$

72,705

$

1,403,491

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance

Ending balance individually evaluated for impairment

$

$

61,491

$

$

$

64,430

$

$

53,882

$

$

179,803

Ending balance collectively evaluated for impairment

 

11,248

 

257,281

 

87,352

 

399,465

 

22,020

 

340,647

 

32,970

 

72,705

 

1,223,688

Ending balance

$

11,248

$

318,772

$

87,352

$

399,465

$

86,450

$

340,647

$

86,852

$

72,705

$

1,403,491

Loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Ending balance individually evaluated for impairment

$

$

892,538

$

79,265

$

$

182,853

$

$

126,137

$

$

1,280,793

Ending balance collectively evaluated for impairment

 

3,460,986

 

84,354,539

 

22,513,372

 

88,769,856

 

6,291,455

 

19,679,205

 

7,703,126

 

 

232,772,539

Total loans

$

3,460,986

$

85,247,077

$

22,592,637

$

88,769,856

$

6,474,308

$

19,679,205

$

7,829,263

$

$

234,053,332

Less allowance

$

11,248

$

318,772

$

87,352

$

399,465

$

86,450

$

340,647

$

86,852

$

72,705

$

1,403,491

Total loans, net

$

3,449,738

$

84,928,305

$

22,505,285

$

88,370,391

$

6,387,858

$

19,338,558

$

7,742,411

$

(72,705)

$

232,649,841

26


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

June 30, 2020

Construction,

1-4 Family

1-4 Family

Commercial

Commercial

Not

Land,

Owner

Non-Owner

Owner-

Non-Owner

Specifically

 

    

Development

    

Occupied

    

Occupied

    

Multifamily

    

Occupied

    

Occupied

    

Consumer

    

Allocated

    

Total

Allowance

Balance at 6/30/19

$

4,319

$

67,593

$

26,630

$

109,870

$

61,193

$

738,366

$

70,058

$

215,936

$

1,293,965

Charge-offs

(57,572)

(45,157)

(102,729)

Recoveries

 

 

5,155

 

 

 

 

 

22,036

 

 

27,191

Provision

 

9,476

 

341,258

 

50,590

 

176,795

 

34,518

 

(425,696)

 

50,375

 

(102,316)

 

135,000

Balance at 6/30/20

$

13,795

$

356,434

$

77,220

$

286,665

$

95,711

$

312,670

$

97,312

$

113,620

$

1,353,427

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance

Ending balance individually evaluated for impairment

$

$

64,780

$

$

$

79,351

$

$

61,792

$

$

205,923

Ending balance collectively evaluated for impairment

 

13,795

 

291,654

 

77,220

 

286,665

 

16,360

 

312,670

 

35,520

 

113,620

 

1,147,504

Ending balance

$

13,795

$

356,434

$

77,220

$

286,665

$

95,711

$

312,670

$

97,312

$

113,620

$

1,353,427

Loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Ending balance individually evaluated for impairment

$

$

965,734

$

57,574

$

$

189,249

$

$

128,617

$

$

1,341,174

Ending balance collectively evaluated for impairment

 

4,598,382

 

99,540,577

 

21,156,106

 

76,444,156

 

6,543,934

 

20,237,534

 

8,792,042

 

 

237,312,731

Total loans

$

4,598,382

$

100,506,311

$

21,213,680

$

76,444,156

$

6,733,183

$

20,237,534

$

8,920,659

$

$

238,653,905

Less allowance

$

13,795

$

356,434

$

77,220

$

286,665

$

95,711

$

312,670

$

97,312

$

113,620

$

1,353,427

Total loans, net

$

4,584,587

$

100,149,877

$

21,136,460

$

76,157,491

$

6,637,472

$

19,924,864

$

8,823,347

$

(113,620)

$

237,300,478

27


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

Three Months Ended December 31, 2019

Construction,

1-4 Family

1-4 Family

Commercial

Commercial

Land,

Owner

Non-Owner

Owner

Non-Owner

 

    

Development

    

Occupied

    

Occupied

    

Multifamily

    

Occupied

    

Occupied

    

Consumer

    

Unallocated

    

Total

Allowance

Balance at 9/30/19

$

5,670

$

56,804

$

26,027

$

111,112

$

91,077

$

773,186

$

72,508

$

150,290

$

1,286,674

Charge-offs

(18,846)

(32,012)

(50,858)

Recoveries

 

 

4,820

 

 

 

 

 

21,836

 

 

26,656

Provision

 

5,193

 

57,197

 

(3,859)

 

5,788

 

(10,987)

 

36,536

 

23,682

 

(113,550)

 

Balance at 12/31/19

$

10,863

$

99,975

$

22,168

$

116,900

$

80,090

$

809,722

$

86,014

$

36,740

$

1,262,472

Six Months Ended December 31, 2019

Construction,

1-4 Family

1-4 Family

Commercial

Commercial

Not

Land,

Owner

Non-Owner

Owner-

Non-Owner

Specifically

 

    

Development

    

Occupied

    

Occupied

    

Multifamily

    

Occupied

    

Occupied

    

Consumer

    

Allocated

    

Total

Allowance

Balance at 6/30/19

$

4,319

$

67,593

$

26,630

$

109,870

$

61,193

$

738,366

$

70,058

$

215,936

$

1,293,965

Charge-offs

(18,846)

(39,838)

(58,684)

Recoveries

 

 

5,155

 

 

 

 

 

22,036

 

 

27,191

Provision

 

6,544

 

46,073

 

(4,462)

 

7,030

 

18,897

 

71,356

 

33,758

 

(179,196)

 

Balance at 12/31/19

$

10,863

$

99,975

$

22,168

$

116,900

$

80,090

$

809,722

$

86,014

$

36,740

$

1,262,472

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance

Ending balance individually evaluated for impairment

$

$

43,470

$

$

$

76,086

$

$

66,848

$

$

186,404

Ending balance collectively evaluated for impairment

 

10,863

 

56,505

 

22,168

 

116,900

 

4,004

 

809,722

 

19,166

 

36,740

 

1,076,068

Ending balance

$

10,863

$

99,975

$

22,168

$

116,900

$

80,090

$

809,722

$

86,014

$

36,740

$

1,262,472

Loans

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Ending balance individually evaluated for impairment

$

$

813,101

$

$

$

191,014

$

$

108,728

$

$

1,112,843

Ending balance collectively evaluated for impairment

 

7,242,065

 

110,793,849

 

20,152,740

 

77,933,467

 

8,007,747

 

19,265,342

 

9,214,372

 

 

252,609,582

Total loans

$

7,242,065

$

111,606,950

$

20,152,740

$

77,933,467

$

8,198,761

$

19,265,342

$

9,323,100

$

$

253,722,425

Less allowance

$

10,863

$

99,975

$

22,168

$

116,900

$

80,090

$

809,722

$

86,014

$

36,740

$

1,262,472

Total loans, net

$

7,231,202

$

111,506,975

$

20,130,572

$

77,816,567

$

8,118,671

$

18,455,620

$

9,237,086

$

(36,740)

$

252,459,953

NOTE 8 – Loan Servicing

The unpaid principal balance of loans serviced for others, which is not included in the condensed consolidated financial statements, was $7,585,313 and $2,696,078 at December 31, 2020 and June 30, 2020, respectively. The Bank did not maintain any custodial balances at December 31, 2020 and June 30, 2020, respectively, in connection with the foregoing loan servicing.

NOTE 9 – Borrowings

Borrowings consist of the following:

    

December 31, 2020

    

June 30, 2020

FHLB fixed rate advance (0.61%, matured 9/11/20)

 

$

 

$

5,000,000

FHLB fixed rate advance (0.00%, matures 5/3/21)

4,000,000

4,000,000

$

4,000,000

$

9,000,000

28


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The Bank has a master contract agreement with the FHLB, which provides for borrowing up to a maximum $118,717,298 at December 31, 2020. The FHLB provides both fixed and floating rate advances. Within the master contract agreement, the Bank also has an open line of credit with the FHLB with a variable interest rate. There were no outstanding advances on the open line of credit as of December 31, 2020 and June 30, 2020.

Additionally, the Bank had $4,000,000 and $9,000,000 outstanding in term advances at December 31, 2020 and June 30, 2020, respectively. The advances are collateralized by a security agreement pledging a majority of the Bank’s one- to four-family and multifamily mortgages.

The Bank has an agreement with U.S. Bank, which provides for borrowing up to the maximum of $5,000,000. There were no amounts outstanding as of December 31, 2020 or June 30, 2020.

NOTE 10 – Income Taxes

The Company recognized no income tax expense for each of the three and six months ended December 31, 2020 and 2019. At the end of each interim period, management estimates the effective tax rate expected to be applicable for the full fiscal year and this rate is applied to the results for the year to date period, and adjusted for any items that are considered discrete in accordance with ASC 740-270. The primary difference between the statutory tax rate and the effective rate for the period ending December 31, 2020 would be the anticipated change in valuation allowance. Management records a valuation allowance for deferred tax assets that are more likely than not to not be realized.

NOTE 11 – Defined Benefit Pension Plan

The Plan covers substantially all employees hired prior to March 31, 2012. The benefits are based on years of service and the employee’s average monthly pay received during the five highest consecutive calendar years in the last 10 years of employment under the Plan. Management contributes annually the amounts necessary to provide for defined benefit payments upon retirement or death as determined by the Plan’s actuary. The defined benefit pension plan was frozen effective March 31, 2012 for all employees. No additional benefits are being accrued for active participants after this date, and no new participants will be entered into the Plan.

In accordance with accounting guidance for defined benefit plans, the Bank recognizes the funded status of defined benefit pension and other post-retirement plans as a net asset or liability on its consolidated balance sheet.

The Bank recognized pension expense of $26,250 and $52,500 for the three and six months ended December 31, 2020, respectively, and pension income of $21,174 and $42,348 for the three and six months ended December 31, 2019, respectively.

The Bank had a valuation of the Plan completed at fiscal year ending June 30, 2020, which included estimated amortizations from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year of $408,547. The change in pension obligation reported in the condensed consolidated balance sheet, condensed consolidated statements of comprehensive income (loss), and in the condensed consolidated statements of changes in stockholders’ equity as of December 31, 2020 reflect this estimation.

NOTE 12 – Commitments and Contingencies

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the consolidated financial statements.

29


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, financial guarantees, and standby letters of credit. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments.

A summary of the contract or notional amount of the Company's exposure to off-balance-sheet risk is as follows:

    

December 31, 2020

    

June 30, 2020

Financial instruments whose contract amounts represent credit risk:

  

  

Commitments to extend credit to borrowers

$

19,975,193

$

15,853,034

Sold loan commitments

 

83,255,414

 

105,961,238

Credit card commitments

 

539,803

 

567,763

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Credit card commitments are unsecured.

As of December 31, 2020 and June 30, 2020, the Company does not engage in the use of interest rate swaps, futures or option contracts.

NOTE 13 – Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

On November 13, 2019, the federal regulators finalized and adopted a regulatory capital rule establishing a new community bank leverage ratio (“CBLR”), which became effective on January 1, 2020. The intent of the CBLR is to provide a simple alternative measure of capital adequacy for electing qualifying depository institutions as directed under the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the CBLR, if a qualifying depository institution elects to use such measure, such institutions will be considered well capitalized if its ratio of Tier 1 capital to average total consolidated assets (i.e. leverage ratio) exceeds a 9% threshold, subject to a limited two quarter grace period, during which the leverage ratio cannot go 100 basis points below the then applicable threshold, and will not be required to calculate and report risk-based capital ratios.

30


Table of Contents

TEB BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

As of December 31, 2020 (Unaudited) and June 30, 2020 and for The Three and Six Months Ended

December 31, 2020 and 2019 (Unaudited)

In April 2020, under the CARES Act, the 9% leverage ratio threshold was temporarily reduced to 8% in response to the COVID-19 pandemic. The threshold will increase to 8.5% in 2021 and return to 9% in 2022. The Bank elected to begin using the CBLR for the first quarter of 2020 and intends to utilize this measure for the foreseeable future. Eligibility criteria to utilize the CBLR includes the following:

Total assets of less than $10 billion,
Total trading assets plus liabilities of 5% or less of consolidated assets,
Total off-balance sheet exposures of 25% or less of consolidated assets,
Cannot be an advanced approaches banking organization, and
Leverage ratio greater than 9%, or temporarily prescribed threshold established in response to COVID-19.


As of December 31, 2020 and June 30, 2020, the Bank was categorized as well capitalized. Listed in the table below is a comparison of the Bank’s actual capital amounts with the minimum requirements for well capitalized banks, as defined above.

For Capital Adequacy

 

To be Considered

 

Actual

Purposes

 

Well Capitalized

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Amount

    

Ratio

 

As of December 31, 2020 (unaudited)

CBLR Framework

Tier 1 capital (to average assets)
(i.e., leverage ratio)

$

31,404,154

10.48

%  

*

*

$

23,969,441

8.00

%

As of June 30, 2020

Total capital (to risk weighted assets)

$

28,928,180

15.02

%  

$

15,408,708

8.00

%  

$

19,260,885

10.00

%

Tier 1 capital (to risk weighted assets)

27,574,753

14.32

11,556,531

6.00

15,408,708

8.00

Common Equity Tier 1 (to risk weighted assets)

27,574,753

14.32

8,667,398

4.50

12,519,575

6.50

Tier 1 capital (to average assets)

27,574,753

9.30

11,857,514

4.00

14,821,893

5.00

CBLR Framework

Tier 1 capital (to average assets)
(i.e., leverage ratio)

27,574,753

9.30

*

*

23,715,029

8.00

*

Under the CBLR Framework, capital adequacy amounts and ratios are not applicable as qualifying depositary institutions are evaluated solely on whether or not they are well capitalized.

A Wisconsin state-chartered savings bank is required by state law to maintain minimum net worth in an amount equal to at least 6.0% of its total assets. At December 31, 2020 and June 30, 2020, the Bank’s net worth was $26,305,524 with general loan loss reserve of $1,223,688 and $22,472,487 with general loan loss reserve of $1,147,504, totaling 9.1% and 7.7% of total assets, respectively, which meets the state of Wisconsin’s minimum net worth requirements.

31


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

The summary information presented below at December 31, 2020 and June 30, 2020 and for the three and six months ended December 31, 2020 and 2019 is derived in part from the financial statements of The Equitable Bank. The financial condition data at June 30, 2020 is derived from the audited financial statements of TEB Bancorp, Inc. The information as of December 31, 2020 and for the three and six months ended December 31, 2020 and 2019 is derived from unaudited financial statements of TEB Bancorp, Inc. for December 31, 2020 and The Equitable Bank for December 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 ended June 30, 2020 and for the three and six months ended December 31, 2020 and 2019. The results of operations for the three and six months ended December 31, 2020 are not necessarily indicative of the results to be achieved for all of the year ending June 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;

32


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; and
changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

COVID-19 Outbreak

In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the 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, the Federal 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


industry, the restaurant industry, and the retail industry. The following table shows the Company’s exposure within these hard-hit industries.

Commercial Loan Type

    

December 31, 2020

    

Percentage of 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 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;

34


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.

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 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 the Small 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 October 2020, the SBA approved an extension of the deferment period without modifications on the PPP loans originated. The Company agreed to extend the deferment period for six months from the first payment date.

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 December 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 the December 31, 2020 reporting period. As of December 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 of December 31, 2019 are considered current for COVID-19 modifications and therefore qualify for a loan deferral. A financial institution can then suspend the requirements under U.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 between March 1, 2020 and the earlier of either January 1, 2021 or the 60th day after the end of the COVID-19 national emergency. Similarly, the Financial 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. On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2020 (the “CAA Act”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief. Amoung the additional relief measures included are certain extensions to

35


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 of December 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 of December 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 June 30, 2020.

Comparison of Financial Condition at December 31, 2020 and June 30, 2020

Total Assets. Total assets decreased $4.1 million, or 1.3%, to $301.4 million at December 31, 2020 from $305.5 million at June 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 at December 31, 2020 from $13.1 million at June 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 at December 31, 2020 from $2.7 million at June 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 at December 31, 2020 from $20.3 million at June 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 at December 31, 2020 from $237.3 million at June 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 at June 30, 2020 to $85.2 million at December 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 ended December 31, 2020. This decrease was partially offset by an increase in multifamily loans of $12.3 million, or 16.1%, to $88.8 million at December 31, 2020 from $76.4 million at June 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 at December 31, 2020 from $18.7 million at June 30, 2020, due to the typical seasonal decrease in loan origination volume.

Other Real Estate Owned. Other real estate owned decreased $1.9 million, or 83.1% to $386,000 at December 31, 2020 from $2.3 million at June 30, 2020, due to the sale of one property totaling $1.9 million at a loss of $12,000.

Federal Home Loan Bank Stock. Federal Home Loan Bank stock decreased $314,000, or 23.4%, to $1.0 million at December 31, 2020, from $1.3 million at June 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


Deposits. Total deposits decreased $245,000, or 0.1%, to $255.8 million at December 31, 2020 from $256.1 million at June 30, 2020. The decrease was due to a decrease in certificates of deposit of $10.1 million, or 11.6%, to $76.9 million at December 31, 2020 from $87.0 million at June 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 at June 30, 2020 to $99.2 million at December 31, 2020 and an increase in savings and NOW accounts of $4.3 million, or 5.8%, from $75.4 million at June 30, 2020 to $79.7 million at December 31, 2020.

Borrowed Funds. Borrowed funds, consisting solely of Federal Home Loan Bank advances, decreased $5.0 million, or 55.6%, to $4.0 million at December 31, 2020 from $9.0 million at June 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 $3.7 million or 15.7%, to $27.2 million at December 31, 2020 from $23.5 million at June 30, 2020. The increase was due primarily to net income of $3.7 million during the six months ended December 31, 2020.

Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019

General. Net income was $2.0 million for the three months ended December 31, 2020, compared to $362,000 for the three months ended December 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 ended December 31, 2020 compared to $3.0 million for the three months ended December 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 ended December 31, 2020 compared to $2.8 million for the three months ended December 31, 2019. Our annualized average yield on loans decreased nine basis points to 4.44% for the three months ended December 31, 2020 from 4.53% for the three months ended December 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 ended December 31, 2020 from $250.8 million for the three months ended December 31, 2019.

Interest Expense. Interest expense decreased $244,000, or 43.3%, to $319,000 for the three months ended December 31, 2020 compared to $563,000 for the three months ended December 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 ended December 31, 2020 from $474,000 for the three months ended December 31, 2019. Specifically, interest expense on certificates of deposit decreased $157,000, or 34.9%, to $293,000 for the three months ended December 31, 2020 from $450,000 for the three months ended December 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 ended December 31, 2020 from 1.88% for the three months ended December 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 at December 31, 2020 from $95.6 million for the three months ended December 31, 2019.

Interest expense on FHLB borrowings decreased $89,000 to $700 for the three months ended December 31, 2020 from $89,000 for the three months ended December 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 ended December 31, 2020 from $19.1 million for the three months ended December 31, 2019, and the annualized average rate we paid on borrowings decreased 183 basis points to 0.05% for the three months ended December 31, 2020 from 1.88% for the three months ended December 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 ended December 31, 2020 from the three months ended December 31, 2019. In addition, our net interest rate spread

37


increased by 16 basis points to 3.58% for the three months ended December 31, 2020 from 3.42% for the three months ended December 31, 2019, and our net interest margin increased by 13 basis points to 3.67% for the three months ended December 31, 2020 from 3.54% for the three months ended December 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 ended December 31, 2020, and did not record a provision for the three months ended December 31, 2019. Our allowance for loan losses was $1.4 million at December 31, 2020 and June 30, 2020. The allowance for loan losses to total loans was 0.60% at December 31, 2020 and 0.57% at June 30, 2020, while the allowance for loan losses to non-performing loans was 109.58% at December 31, 2020 and 100.91% at June 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 at June 30, 2020 becoming current as of December 31, 2020.

To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 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 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 increased $2.6 million, or 197.0%, to $3.9 million for the three months ended December 31, 2020 compared to $1.3 million for the three months ended December 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 ended December 31, 2020 compared to $937,000 for the three months ended December 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 ended December 31, 2020 from $3.4 million for the three months ended December 31, 2019. Compensation and benefits expense increased $608,000, or 29.8%, to $2.6 million for the three months ended December 31, 2020 from $2.0 million for the three months ended December 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 ended December 31, 2020 compared to $12,000 as of December 31, 2019 due to write-downs of property values. Other expenses increased $155,000 or 57.7% to $423,000 for the three months ended December 31, 2020 compared to $269,000 as of December 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 December 31, 2020 and for the three months ended December 31, 2019 due to a full valuation allowance being recorded against the Company’s deferred tax assets.

38


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

%

  

 

  


(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 Six Months Ended December 31, 2020 and 2019

General. Net income was $3.7 million for the six months ended December 31, 2020, compared to $930,000 for the six months ended December 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


Interest Income. Interest income decreased $632,000, or 10.3%, and was $5.5 million for the six months ended December 31, 2020 and $6.1 million for the six months ended December 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 ended December 31, 2020 compared to $5.8 million for the six months ended December 31, 2019. Our annualized average yield on loans decreased nine basis point to 4.46% for the six months ended December 31, 2020 from 4.55% for the six months ended December 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 ended December 31, 2020 from $253.5 million for the six months ended December 31, 2019.

Interest Expense. Interest expense decreased $539,000, or 43.9%, to $688,000 for the six months ended December 31, 2020 from $1.2 million for the six months ended December 31, 2019.

Interest expense on deposits decreased $253,000, or 27.1%, to $681,000 for the six months ended December 31, 2020 from $934,000 for the six months ended December 31, 2019. Specifically, interest expense on certificates of deposit decreased $256,000, or 28.9%, to $631,000 for the six months ended December 31, 2020 from $887,000 for the six months ended December 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 ended December 31, 2020 from 1.88% for the six months ended December 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 ended December 31, 2020 from $94.4 million for the six months ended December 31, 2019.

Interest expense on FHLB borrowings decreased $286,000 to $7,000 for the six months ended December 31, 2020 from $293,000 for the six months ended December 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 ended December 31, 2020 from $26.8 million for the six months ended December 31, 2019, and the annualized average rate we paid on borrowings decreased 198 basis points to 0.21% for the six months ended December 31, 2020 from 2.19% for the six months ended December 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 ended December 31, 2020 from $4.9 million for the six months ended December 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 ended December 31, 2020 from 3.37% for the six months ended December 31, 2019, and our net interest margin increased by 14 basis points to 3.64% for the six months ended December 31, 2020 from 3.50% for the six months ended December 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 ended December 31, 2020, and did not record a provision for the six months ended December 31, 2019. Our allowance for loan losses was $1.4 million at December 31, 2020 and June 30, 2020. The allowance for loan losses to total loans was 0.60% at December 31, 2020 and 0.57% at June 30, 2020, while the allowance for loan losses to non-performing loans was 109.58% at December 31, 2020 and 100.91% at June 30, 2020.

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To the best of our knowledge, we have recorded all loan losses that are both probable and reasonable to estimate at December 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 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 increased $4.3 million, or 152.8%, to $7.1 million for the six months ended December 31, 2020 compared to $2.8 million for the six months ended December 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 ended December 31, 2020 compared to $2.2 million for the six months ended December 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 ended December 31, 2020 compared to $151.0 million of such originations during the six months ended December 31, 2019.

Non-interest Expenses. Non-interest expenses increased $1.4 million, or 20.1%, to $8.2 million for the six months ended December 31, 2020 from $6.8 million for the six months ended December 31, 2019. Compensation and benefits expense increased $896,000, or 21.4%, to $5.1 million for the six months ended December 31, 2020 from $4.2 million for the six months ended December 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 ended December 31, 2020 compared to $23,000 as of December 31, 2019 due to write-downs of property values. Other expenses increased $314,000 or 62.1% to $820,000 for the six months ended December 31, 2020 compared to $506,000 as of December 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 ended December 31, 2020 and for the six months ended December 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


    

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

%

$

253,519,689

$

5,761,686

4.55

%

Securities

20,690,387

281,941

2.73

%

21,324,670

299,777

2.81

%

Federal Home Loan Bank stock

 

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

%

  

 

  


(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 the Federal Home Loan Bank of Chicago and from U.S. Bank. At December 31, 2020, we had a $118.7 million line of credit with the Federal 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 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 operating activities was $6.4 million for the six months ended December 31, 2020 and $2.7 million for the six months ended December 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


loans, and proceeds from maturing securities and pay downs on securities, was $6.0 million and $10.9 million for the six months ended December 31, 2020 and the six months ended December 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 ended December 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 December 31, 2020, The Equitable Bank was classified as “well capitalized” for regulatory capital purposes.

Item 3    Quantitative and Qualitative Disclosures About Market Risk.

Not applicable as the Company is a smaller reporting company.

Item 4    Controls and Procedures.

The Company’s management, with the participation of the Company’s President/Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report and, based on this evaluation, the Company’s President/Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are operating in an effective manner.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1    Legal Proceedings.

In the ordinary course of business, there are legal proceedings against the Company and its subsidiaries. Management considers that the aggregate liabilities, if any, resulting from such actions would not have a material, adverse effect on the consolidated financial position of the Company.

Item 1A  Risk Factors.

Not applicable as the Company is a smaller reporting company.

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

Not applicable.

Item 3    Defaults Upon Senior Securities.

None.

Item 4    Mine Safety Disclosures.

Not applicable.

43


Item 5    Other Information.

None.

Item 6    Exhibits.

The following exhibits are filed with this report:

Exhibit 31.1

Certification of Principal Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included herein as an exhibit to this Report.

Exhibit 31.2

Certification of Principal Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 is included herein as an exhibit to this Report.

Exhibit 32.1

Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report.

Exhibit 32.2

Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) is included herein as an exhibit to this Report.

Exhibit 101

The following financial statements from the TEB Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in Extensive Business Reporting Language (XBRL); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Unaudited Condensed Consolidated Financial Statements are included herein as an exhibit to this report.

44


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TEB BANCORP, INC.

Date:

February 12, 2021

 

    

By:

/s/ Jennifer L. Provancher

Jennifer L. Provancher, President and Chief Executive Officer

Date:

February 12, 2021

By:

/s/ Lauren Poppen

Lauren Poppen, Chief Financial Officer

45