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EX-32 - EX-32 - TEB Bancorp, Inc.tbba-20200630xex32.htm
EX-31.2 - EX-31.2 - TEB Bancorp, Inc.tbba-20200630ex3129bc1ad.htm
EX-31.1 - EX-31.1 - TEB Bancorp, Inc.tbba-20200630ex311dcd734.htm
EX-21 - EX-21 - TEB Bancorp, Inc.tbba-20200630ex218baa626.htm
EX-4.2 - EX-4.2 - TEB Bancorp, Inc.tbba-20200630ex4204b3f0c.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 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 Number: 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 North Mayfair Road, Wauwatosa, Wisconsin

    

53226

(Address of principal executive offices)

(Zip code)

(414) 476-6434

(Registrant’s telephone number including area code)

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

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes    No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes    No 

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 reports), and (2) has been subject to such filing 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 (§232.405 of this chapter) during the preceding 12 months (or 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 

The aggregate value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the common stock of $8.50 as of December 31, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $21.8 million.

As of October 1, 2020 there were 2,624,343 shares outstanding of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions of the Proxy Statement for the 2020 Annual Meeting of Stockholders. (Part III)


TABLE OF CONTENTS

PAGE

PART I

1

ITEM 1.

Business

1

ITEM 1A.

Risk Factors

34

ITEM 1B.

Unresolved Staff Comments

34

ITEM 2.

Properties

34

ITEM 3.

Legal Proceedings

35

ITEM 4.

Mine Safety Disclosures

35

PART II

35

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

35

ITEM 6.

Selected Financial Data

36

ITEM 7.

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

39

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

52

ITEM 8.

Financial Statements and Supplementary Data

52

ITEM 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

52

ITEM 9A.

Controls and Procedures

52

ITEM 9B.

Other Information

53

PART III

54

ITEM 10.

Directors, Executive Officers and Corporate Governance

54

ITEM 11.

Executive Compensation

54

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

54

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

54

ITEM 14.

Principal Accountant Fees and Services

54

PART IV

55

ITEM 15.

Exhibits and Financial Statement Schedules

55

ITEM 16.

Form 10-K Summary

55

SIGNATURES

56


PART I

ITEM 1.

Business

Forward Looking Statements

This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “potential,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Accordingly, you should not place undue reliance on such statements. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

general economic conditions, either nationally or in our market areas, that are worse than expected;
changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;
our ability to access cost-effective funding;
fluctuations in real estate values and both residential and commercial real estate market conditions;
demand for loans and deposits in our market area;
our ability to implement and change our business strategies;
competition among depository and other financial institutions;
inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or 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;

1


our ability to retain key employees;
the effects of any federal government shutdown;
changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and
the effect of the COVID-19 pandemic on the Company’s credit quality, revenue, and business operations.

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place at home. While jurisdictions in which we operate have gradually allowed the reopening of businesses and other organizations and removed the sheltering restrictions, it is premature to assess whether doing so will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, our forward-looking statements are subject to the following risks, uncertainties and assumptions:

Demand for our products and services may decline;
If the economy is unable to substantially and successfully reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase;
Collateral for loans, especially real estate, may decline in value;
Our allowance for credit losses on loans and leases may increase if borrowers experience financial difficulties;
The net worth and liquidity of loan guarantors may decline;
As a result of the decline in the Federal Reserve’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities;
A material decrease in net income or a net loss over several quarters could result in the elimination of or a decrease in the rate of our quarterly cash dividend;
Our cyber security risks are increased as a result of an increase in the number of employees working remotely; and
FDIC premiums may increase if the agency experiences additional resolution costs.

Because of these and other uncertainties, our future results may be materially different from the results indicated by these forward-looking statements.

TEB Bancorp, Inc.

TEB Bancorp, Inc., a Maryland corporation that was organized in 2018, is a bank holding company headquartered in Wauwatosa, Wisconsin. TEB Bancorp, Inc.’s common stock is traded on the OTC Pink Marketplace under the symbol “TBBA.” TEB Bancorp, Inc. conducts its operations primarily through its wholly owned subsidiary, The Equitable Bank, S.S.B., a Wisconsin-chartered savings bank (“The Equitable Bank”). TEB Bancorp, Inc. manages its operations as one unit, and thus does not have separate operating segments. At June 30, 2020, TEB Bancorp, Inc. had total assets of $305.5 million, net loans of $237.3 million, deposits of $256.1 million, and stockholders’ equity of $23.5 million.

TEB Bancorp, Inc. was formed as part of the mutual holding company reorganization of The Equitable Bank, S.S.B., which was completed in April 2019. In connection with the reorganization, TEB Bancorp, Inc. sold 1,309,547 shares of common stock to the public at $10.00 per share, representing 49.9% of its outstanding shares of common stock. TEB MHC has been organized as a mutual holding company under the laws of the State of Wisconsin and owns the remaining 50.1% of the outstanding common stock of TEB Bancorp, Inc.

2


The executive offices of TEB Bancorp, Inc. are located at 2290 North Mayfair Road, Wauwatosa, Wisconsin 53226, and its telephone number is (414) 476-6434. Our website address is www.tebbancorp.com. Information on our website is not and should not be considered a part of this annual report.

TEB Bancorp, Inc. is subject to comprehensive regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

TEB MHC

TEB MHC was formed as a Wisconsin mutual holding company and will, for as long as it is in existence, own a majority of the outstanding shares of TEB Bancorp, Inc.’s common stock.

TEB MHC’s principal assets are the common stock of TEB Bancorp, Inc. it received in the reorganization and offering and $100,000 cash in initial capitalization, which was contributed from the net proceeds of the stock offering. Presently, the only business activity of TEB MHC is owning a majority of TEB Bancorp, Inc.’s common stock. TEB MHC is authorized, however, to engage in any other business activities that are permissible for mutual holding companies under state and federal law, including investing in loans and securities.

The Equitable Bank, S.S.B.

The Equitable Bank is a Wisconsin-chartered savings bank headquartered in Wauwatosa, Wisconsin. The Equitable Bank was originally chartered in 1927 as a Wisconsin-chartered mutual building and loan association under the name The Equitable Savings Building and Loan Association. In 1990, we changed our name to “The Equitable Bank, S.S.B.” and in 1993 we converted to a Wisconsin-chartered mutual savings bank.

We conduct our business from our main office and five branch offices, which are located in Milwaukee, Racine and Waukesha Counties, Wisconsin, and a loan production office, which is located in Ozaukee County, Wisconsin. Our primary market area is broadly defined as the Milwaukee, Wisconsin metropolitan area, which is geographically located in the southeast corner of the state. Our primary market area for deposits includes the communities in which we maintain our banking office locations, while our primary lending market area is broader, and also includes Ozaukee County, where we maintain our loan production office, as well as Washington County, Wisconsin, which borders both Ozaukee County and Waukesha County.

Our business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations, in one- to four-family residential real estate loans (both owner occupied and non-owner occupied), multifamily residential real estate loans and commercial real estate loans, and, to a lesser extent, consumer loans (primarily home equity lines of credit), construction, land and development loans, and commercial and industrial loans. Subject to market conditions, we expect to increase our focus on originating multifamily residential real estate, owner-occupied commercial real estate and non-owner occupied one- to four-family residential real estate loans in an effort to further diversify our overall loan portfolio, increase the overall yield earned on our loans and assist in managing interest rate risk. We also invest in securities, which have historically consisted primarily of obligations of states and political subdivisions. We offer a variety of deposit accounts, including checking accounts, savings accounts and certificate of deposit accounts. We borrow funds, primarily from the Federal Home Loan Bank of Chicago, to fund our operations as necessary.

The Equitable Bank is subject to comprehensive regulation and examination by the Wisconsin Department of Financial Institutions (the “WDFI”) and the Federal Deposit Insurance Corporation.

Our executive office is located at 2290 North Mayfair Road, Wauwatosa, Wisconsin 53226, and our telephone number at this address is (414) 476-6434.

3


Mutual Holding Company Ownership Structure

Public stockholders own a minority of the outstanding shares of TEB Bancorp, Inc.’s common stock. As a result, stockholders other than TEB MHC are not be able to exercise voting control over most matters put to a vote of stockholders. TEB MHC owns a majority of TEB Bancorp, Inc.’s common stock and, through its board of directors, is able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage The Equitable Bank also manage TEB Bancorp, Inc. and TEB MHC. The board of directors of TEB MHC must ensure that the interests of depositors of The Equitable Bank (as members of TEB MHC) are represented and considered in matters put to a vote of stockholders of TEB Bancorp, Inc. Therefore, TEB MHC may take action that the public stockholders believe to be contrary to their interests. For example, TEB MHC may exercise its voting control to defeat a stockholder nominee for election to the board of directors of TEB Bancorp, Inc.

In addition, stockholders are not able to force a merger or second-step conversion transaction without the consent of TEB MHC since such transactions also require the approval of a majority of all of the outstanding voting stock of TEB Bancorp, Inc., which can only be achieved if TEB MHC voted to approve such transactions. Some stockholders may desire a sale or merger transaction, since stockholders typically receive a premium for their shares, or a second-step conversion transaction, since, on a fully converted basis, most full stock institutions tend to trade at higher multiples than mutual holding companies. Stockholders could, however, prevent a second-step conversion or the implementation of equity incentive plans as under current regulations and policies, such matters also require the separate approval of the stockholders other than TEB MHC.

Market Area

We conduct our business from our main office and five branch offices, which are located in Milwaukee, Racine and Waukesha Counties, Wisconsin, and a loan production office, which is located in Ozaukee County, Wisconsin. Our primary market area is broadly defined as the Milwaukee, Wisconsin metropolitan area, which is geographically located in the southeast corner of the state. Our primary market area for deposits includes the communities in which we maintain our banking office locations, while our primary lending market area is broader, and also includes Ozaukee County, where we maintain our loan production office, as well as Washington County, Wisconsin, which borders both Ozaukee County and Waukesha County. The following discusses the demographics of the counties where our offices are located.

According to information from S&P Global Market Intelligence as of August 2020, from 2015 to 2020, the population decreased in Milwaukee County by 1.5%, and experienced increases in Racine, Waukesha and Ozaukee Counties of 1.1%, 2.5% and 2.9%, respectively, compared to 1.2% for Wisconsin and 3.4% for the United States as a whole. Projections indicate that through 2025, the population will remain fairly stable in Milwaukee County, with modest increases (less than 2.5%) for Racine, Waukesha and Ozaukee Counties, as well as for Wisconsin, compared to projected United States population growth of more than 3%. Trends in numbers of households in our market area, Wisconsin and the United States as a whole were consistent with trends in population, and projections for the numbers of households are also consistent with the projections for population changes.

The median household income for 2020 was $52,205, $67,125, $90,164 and $89,895 for Milwaukee, Racine, Waukesha and Ozaukee Counties, respectively, compared to $65,076 in Wisconsin and $66,010 for the United States as a whole. By 2025, the projected annual growth rates in median household income are expected to be 2.2%, 2.1%, 1.7% and 1.9% in Milwaukee, Racine, Waukesha and Ozaukee Counties, respectively, compared to 2.0% for Wisconsin and 1.9% for the United States as a whole.

Unemployment rates as of June 2020 and 2019 are set forth in the following table.

4


Region

    

June 2020

    

June 2019

 

United States

11.1

%  

3.8

%

Wisconsin

8.5

%  

3.5

%

Milwaukee County

 

11.5

%  

4.3

%

Racine County

 

9.3

%  

4.1

%

Waukesha County

 

8.0

%  

3.3

%

Ozaukee County

 

7.9

%  

3.3

%

While our primary market area has a diversified local economy, for 2020, in each of Milwaukee, Racine, Waukesha and Ozaukee Counties, as well as the State of Wisconsin, the three largest employment sectors consisted of education/healthcare/social services, the service sector and manufacturing, with manufacturing being the largest employment sector in Racine County.

We believe that we have developed products and services that will meet the financial needs of our current and future customer base; however, we plan, and believe it is necessary, to expand the range of products and services that we offer to be more competitive in our market area. Our marketing strategies focus on the strength of our knowledge of local consumer and small business markets, as well as expanding relationships with current customers and reaching out to develop new, profitable business relationships.

Competition

We face competition within our market area both in making loans and attracting deposits. Our market area has a concentration of financial institutions that include large money center and regional banks, community banks and credit unions. We also face competition from savings institutions, mortgage banking firms, consumer finance companies and, with respect to deposits, from money market funds, brokerage firms, mutual funds and insurance companies. As of June 30, 2020 (the most recent date for which data is available), our market share of deposits represented 0.40% of Federal Deposit Insurance Corporation-insured deposits in Milwaukee County, ranking us 17th in market share of deposits out of 29 institutions operating in the county. In addition, as of that date, our market share of deposits represented 0.53% of Federal Deposit Insurance Corporation-insured deposits in Racine County, ranking us 14th in market share of deposits out of 14 institutions operating in the county, and our market share of deposits represented 0.14% of Federal Deposit Insurance Corporation-insured deposits in Waukesha County, ranking us 32nd in market share of deposits out of 34 institutions operating in the county.

5


Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated. Included with the loans described in the table below, at June 30, 2020, we had $18.7 million of loans held for sale, $3.4 million of loans in process and $184,000 of deferred loan fees.

At June 30, 

At September 30, 

 

2020

2019

2018

2017

2016

 

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

    

Amount

    

Percent

 

(Dollars in thousands)

 

Construction, land and development

$

4,598

1.93

%  

$

4,319

1.65

%  

$

4,845

1.83

%  

$

3,455

1.31

%  

$

3,215

1.25

%

One- to four-family owner occupied residential

100,506

42.11

124,846

47.80

122,599

46.21

119,847

45.40

114,722

44.50

 

One- to four-family non-owner occupied residential

21,213

8.89

20,969

8.03

23,837

8.98

22,837

8.65

22,517

8.73

 

Multifamily

76,444

32.03

73,246

28.05

71,101

26.80

60,883

23.07

58,532

22.71

 

Commercial real estate

23,794

9.97

26,362

10.09

29,451

11.10

42,127

15.96

43,829

17.00

 

Commercial and industrial

3,177

1.33

1,648

0.63

2,112

0.79

1,881

0.71

1,380

0.54

 

Consumer and installment (1)

 

8,921

 

3.74

 

9,777

 

3.74

 

11,378

 

4.3

 

12,922

 

4.90

 

13,588

 

5.27

 

238,653

 

100.00

%  

261,167

 

100.00

%  

265,323

 

100.00

%  

263,952

 

100.00

%  

257,783

 

100.00

%

Less:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for losses

 

(1,353)

 

  

 

(1,294)

 

  

 

(1,324)

 

  

 

(1,879)

 

  

 

(4,482)

 

  

Total loans

$

237,300

 

  

$

259,873

 

  

$

263,999

 

  

$

262,073

 

  

$

253,301

 

  


(1)Includes home equity loans and lines of credit, which totaled $8.4 million at June 30, 2020.

Contractual Maturities. The following tables set forth the contractual maturities of our total loan portfolio at June 30, 2020. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The tables present contractual maturities and do not reflect repricing or the effect of prepayments. Actual maturities may differ.

One- to Four-

One- to Four-

Family Non-

Construction,

Family Owner

Owner

Land and

Occupied

Occupied

June 30, 2020

    

Development

    

Residential

    

Residential

    

Multifamily

 

(In thousands)

Amounts due in:

One year or less

$

1,461

$

$

1,819

$

4,304

More than one to five years

 

1,320

 

198

 

7,240

 

57,261

More than five years

 

1,817

 

100,308

 

12,154

 

14,879

Total

$

4,598

$

100,506

$

21,213

$

76,444

Commercial

Commercial

Consumer and

June 30, 2020

    

Real Estate

    

and Industrial

    

Installment

    

Total

(In thousands)

Amounts due in:

One year or less

$

6,108

$

1,527

$

686

$

15,905

More than one to five years

 

6,189

 

1,607

 

210

 

74,025

More than five years

 

11,497

 

43

 

8,025

 

148,723

Total

$

23,794

$

3,177

$

8,921

$

238,653

6


The following table sets forth our fixed and adjustable-rate loans at June 30, 2020 that are contractually due after June 30, 2021. Our balloon loans are included as fixed-rate loans for purposes of this table.

Due After June 30, 2021

    

Fixed

    

Adjustable

    

Total

(In thousands)

Construction, land and development

$

1,320

$

1,817

$

3,137

One- to four-family owner occupied residential

 

19,774

 

80,732

 

100,506

One- to four-family non-owner occupied residential

 

10,256

 

9,138

 

19,394

Multifamily

 

62,861

 

9,279

 

72,140

Commercial real estate

 

6,838

 

10,848

 

17,686

Commercial and industrial

 

1,650

 

 

1,650

Consumer and installment

 

434

 

7,801

 

8,235

Total loans

$

103,133

$

119,615

$

222,748

The following describes our most significant categories of loan types at June 30, 2020.

One- to Four-Family Real Estate Loans – Owner Occupied. At June 30, 2020, $100.5 million, or 42.1% of our total loan portfolio, consisted of owner-occupied one- to four-family residential real estate loans. We offer adjustable-rate owner-occupied residential real estate loans with maturities up to 30 years that include an initial introductory rate period of up to 10 years. Our adjustable-rate owner-occupied residential real estate loans have a competitive initial rate. After the initial fixed period (ranging between one to ten years) the rate will adjust to a predetermined margin plus the current index based on the 1 Year LIBOR. The rate adjustments are limited to 2.0% for the first change with subsequent adjustments every six months limited to 1.0%. The lifetime cap is limited to 6.0% over the initial rate.

Consistent with our strategy to increase our noninterest income while managing interest rate risk, we have historically sold substantially all of our fixed-rate owner-occupied, “conforming” (as described below) one- to four-family real estate loans, with the majority made up of 30-year fixed-rate loans. The loans are closed in our name, and are then sold to our investors who provide Fannie Mae and Freddie Mac conventional products as well as FHA and VA government loans. The loans are typically purchased and funded by the investors within 30 days of the originations. We earn interest income on the loans until they are purchased.

One- to four-family, owner-occupied residential real estate loans are generally underwritten according to Fannie Mae or Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate one- to four-family owner-occupied real estate loans in amounts up to the maximum conforming loan limits as established by Fannie Mae, which is generally $510,400 for single-family homes in our market area. However, loans in excess of $510,400 (which are referred to as “jumbo loans”) may be originated and sold on a servicing released basis as well. We retain the majority of “jumbo loans” in our loan portfolio. We generally underwrite jumbo loans in accordance to our portfolio underwriting guidelines. At June 30, 2020, the average size of our one- to four-family, owner-occupied residential real estate loans originated for our portfolio was $171,000.

Generally, we originate loans with loan-to-value ratios of up to 80% but we also originate loans with loan-to-value ratios of up to 97%. Any loans we originate with loan-to-value ratios in excess of 80% require private mortgage insurance.

We do not offer “interest only” mortgage loans on permanent one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).

7


One- to Four-Family Real Estate Loans – Non-Owner Occupied. At June 30, 2020, $21.2 million, or 8.9% of our total loan portfolio, consisted of one- to four-family non-owner occupied real estate loans. Our real estate underwriting policies provide that such loans may be made in amounts of up to 80% of the appraised value of the property. Our one- to four-family non-owner occupied real estate loans generally have adjustable rates with 30-year terms and a fixed initial rate ranging between three to seven years. Our adjustable-rate mortgages one- to four-family non-owner occupied real estate loans have a competitive initial rate that typically resets to an applicable margin with an adjustment every six months, up to 2% over the 1 Year LIBOR Rate after the initial three-, five- or seven-year fixed period with a lifetime rate cap of 14.50%.

We generally target one- to four-family non-owner occupied loans with balances up to $250,000. At June 30, 2020, our average one- to four-family non-owner occupied real estate loan was $115,000. Virtually all of our one- to four-family non-owner occupied real estate loans are secured by properties located in our primary lending area.

When originating one- to four-family non-owner occupied real estate loans, we consider the net operating income of the property, the borrower’s expertise and credit history, the global cash flow of the borrowers and the value of the underlying property. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before debt service to debt service) of at least 1.00x, using 75% of estimated or actual rents against principal, interest, taxes and insurance (PITI) for one and two unit properties, and at least 1.00x using 70% of estimated or actual rents against PITI for three or four unit properties.

Generally, one- to four-family real estate loans made to business entities require the principals to execute the loan agreements in their individual capacity through personal guarantees, as well as signing on behalf of such business entity.

Once a borrower exceeds $1.0 million in loans, we require one- to four-family non-owner occupied loan borrowers to provide annually updated financial statements and federal tax returns. Additionally, these borrowers with larger exposure are subject to underwriting standards similar to multifamily loans, which include a global debt service requirement of 1.20x.

Multifamily Real Estate Loans. At June 30, 2020 multifamily real estate loans were $76.4 million, or 32.0%, of our total loan portfolio. We originate individual multifamily real estate loans to experienced, growing small- and mid-size owners and investors in our market areas. Our multifamily real estate loans are generally secured by properties consisting of five to 40 rental units within our market. However, due to the highly competitive nature and the limited inventory in our market, we have expanded beyond our market, but within the State of Wisconsin, for multifamily opportunities without compromising credit quality.

We originate balloon loans with a variety of fixed-rate periods, typically up to seven years, with amortization terms up 25 years, although we will provide amortization terms up to 30 years on an exception basis. Interest rates and payments on our balloon loans are typically determined based on our internal pricing requirements and the current competitive market. Multifamily real estate loan amounts generally do not exceed 75% of the property’s appraised value at the time the loan is originated. We require each property to meet a minimum debt service ratio of 1.20x (calculated as net operating income divided by debt service). In addition, each borrowing entity must meet a global debt service ratio of 1.20x. We require multifamily real estate borrowers with loans in excess of $500,000 to submit annual financial statements including federal tax returns (both business and personal), personal financial statement for each borrower/guarantor and an updated rent roll for each property. Properties with a loan in excess of $300,000 are subject to bi-annual inspections to verify appropriate maintenance is being performed.

Commercial Real Estate Loans. In recent years, we have sought to increase our originations of owner-occupied commercial real estate loans, and we have limited our originations of non-owner occupied commercial real estate loans. At June 30, 2020, we had $23.8 million in commercial real estate loans, representing 10.0% of our total loan portfolio, and $3.2 million in commercial and industrial loans, representing 1.3% of our total loan portfolio. Most of our commercial real estate loans are balloon loans with a three-, five- or seven-year initial term and a 25-year amortization period. The maximum loan-to-value ratio of our commercial real estate loans is generally 75%. These loans are secured by traditional commercial property types including industrial, office, retail and warehouse/storage facilities.

8


We consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including credit history, profitability and expertise, as well as the value and condition of the property securing the loan. We require each property to meet a minimum debt service ratio of 1.20x (calculated as net operating income divided by debt service). In addition, each borrowing entity must meet a global debt service ratio of 1.20x. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the strength and stability of the net operating income of the mortgaged property and the ratio of the loan amount to the appraised value of the mortgaged property, along with our assessing any environmental concerns associated with the property. The significant majority of our commercial real estate loans are appraised by outside independent appraisers approved by the board of directors. Under applicable regulations, we are only required to obtain independent appraisals on commercial real estate loans in amounts greater than $500,000 for non-owner-occupied properties and $1.0 million for owner-occupied properties, and any decision not to obtain an outside, independent appraisal is made in accordance with these regulations. Personal guarantees are generally obtained from any principals of the underlying borrowing entity having a 25% or greater ownership/membership interest. We require all commercial real estate borrowers having an overall loan exposure of $500,000 or greater to provide annually updated financial statements and federal tax returns, which are used to conduct an annual review of the relationship.

Home Equity Loans and Lines of Credit. At June 30, 2020, home equity loans and lines of credit (which we categorize as consumer loans) totaled $18.1 million, with $8.7 million in outstanding balances. This total consisted of $338,000 of home equity loans and $8.4 million of home equity lines of credit. The underwriting standards utilized for home equity lines of credit include a determination of the applicant’s credit history, an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan and the value of the collateral securing the loan. Home equity lines of credit are offered with a loan-to-value ratio up to 80%. However, we offer special programs to borrowers who satisfy certain underwriting criteria (such as having an additional banking relationship) with loan-to-value ratios of up to 85%. Our home equity loans and lines of credit are generally 10-year balloon loans. Our home equity lines of credit have adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.

Loan Underwriting Risks

Commercial Real Estate and Multifamily Real Estate Loans. Loans secured by commercial and multifamily real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential real estate loans. The primary concerns in commercial and multifamily real estate lending are the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial or multifamily real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. A Phase I environmental site assessment is obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

If we foreclose on a commercial or multifamily real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be lengthy with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on commercial and multifamily real estate loans can be unpredictable and substantial.

One- to Four-Family Non-Owner Occupied Residential Real Estate Loans. One- to four-family non-owner occupied residential real estate loans are subject to some of the same risks as our commercial real estate and multifamily real estate loans, in that they depend on the borrower’s creditworthiness and the feasibility and cash flow potential of the

9


project. Such loans are also subject to similar risks with respect to foreclosures and subsequent operations of the property and resale.

Construction, Land and Development Loans. Our construction loans are based upon estimates of costs and values associated with the completed project. Underwriting is focused on the borrowers’ financial strength, credit history and demonstrated ability to produce a quality product and effectively market and manage their operations.

Construction lending involves additional risks when compared with permanent lending because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. In addition, generally during the term of a construction loan, interest may be funded by the borrower or disbursed from an interest reserve set aside from the construction loan budget. These loans often involve the disbursement of substantial funds with repayment primarily dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If the appraised value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Balloon Loans. Although balloon mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they may reprice at the end of the term, subject to renegotiation of rate and terms at maturity, the ability of the borrower to renew or repay the loan and the marketability of the underlying collateral may be adversely affected if real estate values decline prior to the expiration of the term of the loan or in a rising interest rate environment.

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, an increased monthly payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying collateral also may be adversely affected in a high interest rate environment.

Originations, Purchases and Sales of Loans

Residential lending activities are conducted by salaried and commissioned loan personnel operating at our main and branch office locations and our loan production office. Loans we originate are underwritten pursuant to our policies and procedures. Loans originated with the intent for sale are also underwritten pursuant to secondary market guidelines. Our ability to originate fixed-rate loans, adjustable-rate loans or balloon loans depends on relative customer demand for such loans, which can be affected by current and expected future levels of market interest rates. We originate residential real estate loans through our loan originators, marketing efforts, our customer base, walk-in customers and referrals from real estate brokers, builders, accountants and financial advisors.

Commercial lending activities are conducted by salaried commercial lenders operating primarily out of our main location. All loans originated by us are underwritten pursuant to our policies and procedures. Our commercial loans are typically fixed-rate balloon loans with terms between three and seven years, with loan rates dependent on current and expected future levels of market interest rates. Commercial and multifamily lending are sourced primarily through loan originator contacts, networking and marketing efforts, our customer base and referrals from real estate brokers, accountants and financial advisors.

We currently sell a significant majority of the fixed-rate one- to four-family residential real estate loans we originate on the secondary market. The loans are closed in our name, and are then sold to our investors who provide Fannie Mae and Freddie Mac conventional products as well as FHA and VA government loans. During the year ended June 30, 2020, we originated $355.3 million of one- to four-family residential real estate loans and sold $334.9 million, and during the year ended June 30, 2019, we originated $116.8 million of one- to four-family residential real estate loans and sold $105.3 million.

10


Loan Approval Procedures and Authority

Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 20% of our capital. This limit may be increased to 50% of capital for loans secured by certain assets. At June 30, 2020, based on the 20% limitation, our loans-to-one-borrower limit was approximately $5.8 million. On the same date, we had three borrowers with outstanding balances in excess of this amount; such loans were originated when we had higher levels of capital, and, as such, are deemed to comply with our loans-to-one-borrower limit. At June 30, 2020, our largest loan relationship with one borrower was for $7.8 million, which was secured by a mix of commercial real estate retail and office buildings, with the underlying loans performing in accordance with their original terms on that date.

Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, bank statements and tax returns.

All loan approval amounts are based on the aggregate loans, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. Subject to our underwriting procedures, each of our Chairman of the Board, Vice Chairman and our President and Chief Executive Officer has individual authorization to approve certain residential loans up to $1.0 million, or aggregate exposure up to $2.0 million. Any residential loan above $2.0 million, and any commercial loan up to $2.0 million, requires Loan Committee approval. Our Loan Committee consists of our Chairman of the Board, our Vice Chairman, our President and Chief Executive Officer, our Chief Credit Officer and our Vice President of Loan Operations. Commercial loans above $2.0 million require board approval and any commercial borrowing relationship exceeding $3.0 million requires board approval for all subsequent loans.

Delinquencies and Asset Quality

Delinquency Procedures. Our loss recovery process for delinquent loans does not provide a set formula for all borrowers; rather, we tailor our recovery efforts based on the borrower’s credit history with The Equitable Bank, their other account relationships with The Equitable Bank, their current employment situation and other individual circumstances. Our loan recovery specialists contact delinquent borrowers through telephone calls and/or mailing notices, typically beginning when a loan payment becomes 17 days past due. We may request receivership for delinquent loans that are 120 or more days past due, or we can initiate foreclosure procedures at that time if approved by our Chairman of the Board or President and Chief Executive Officer. Alternatively, we may determine that it is in the best interests of The Equitable Bank to work further with the borrower to arrange a workout plan.

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis. Management determines that a loan is impaired or non-performing when it is probable at least a portion of the loan will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan is determined to be impaired, the measurement of the loan in the allowance for loan losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans are loans for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received on a cash basis or cost recovery method.

When we acquire real estate as a result of foreclosure, the real estate is classified as real estate owned. Initially, the real estate owned is recorded at the fair value less costs to sell. Then after foreclosure, each foreclosed real estate parcel is carried at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal to determine the current market value of the property. Any excess of the recorded value of the loan satisfied over the market value of the property is charged against the allowance for loan losses, or, if the existing allowance is

11


inadequate, charged to expense of the current period. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair value less estimated costs to sell.

A loan is classified as a troubled debt restructuring if, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date and possibly a partial forgiveness of the principal amount due. Interest income on restructured loans is accrued after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six consecutive months.

Delinquent Loans. The following tables set forth our loan delinquencies, including non-accrual loans, by type and amount at the dates indicated.

At June 30, 

2020

2019

2018

30-59

60-89

90 Days

30-59

60-89

90 Days

30-59

60-89

90 Days

Days

Days

or More

Days

Days

or More

Days

Days

or More

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

(In thousands)

Construction, land and development

$

69

$

$

$

$

$

$

75

$

$

87

One- to four-family owner occupied residential

1,275

114

966

2,129

450

1,203

2,075

924

One- to four-family non-owner occupied residential

57

104

95

Multifamily

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

189

 

 

 

194

 

 

 

199

Commercial and industrial

 

 

 

 

 

 

 

 

 

Consumer and installment

 

64

 

 

129

 

72

 

25

 

128

 

91

 

 

139

Total

$

1,408

$

114

$

1,341

$

2,305

$

475

$

1,525

$

2,241

$

$

1,444

At September 30, 

2017

2016

30-59

60-89

90 Days

30-59

60-89

90 Days

Days

Days

or More

Days

Days

or More

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Past Due

(In thousands)

Construction, land and development

$

116

$

$

$

119

$

$

One- to four-family owner occupied residential

 

1,346

 

38

 

1,225

 

1,948

 

223

 

1,208

One- to four-family non-owner occupied residential

 

 

 

95

 

 

21

 

129

Multifamily

 

 

 

 

 

 

Commercial real estate

 

158

 

 

203

 

168

 

 

6,461

Commercial and industrial

 

 

 

 

 

 

Consumer and installment

 

34

 

 

242

 

87

 

15

 

Total

$

1,654

$

38

$

1,765

$

2,322

$

259

$

7,798

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Non-Performing Assets. The following table sets forth information regarding our non-performing assets. Non-accrual loans include non-accruing troubled debt restructurings of $0, $0, $0, $0, $6.4 million, and $147,000 as of June 30, 2020, 2019 and 2018, September 30, 2017, and 2016, respectively. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or loans modified at interest rates materially less than current market rates.

At June 30, 

At September 30, 

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in thousands)

 

Non-accrual loans:

 

Construction, land and development

$

$

$

87

$

$

 

One- to four-family owner occupied residential

 

966

 

1,203

 

924

 

1,225

 

1,208

One- to four-family non-owner occupied residential

 

57

 

 

95

 

95

 

129

Multifamily

 

 

 

 

 

Commercial real estate

 

189

 

194

 

199

 

203

 

6,461

Commercial and industrial

 

 

 

 

 

Consumer and installment

 

129

 

128

 

139

 

242

 

Total non-accrual loans

 

1,341

 

1,525

 

1,444

 

1,765

 

7,798

 

  

 

  

 

  

 

  

 

  

Accruing loans past due 90 days or more

 

 

 

 

 

 

  

 

  

 

  

 

  

 

  

Real estate owned:

 

  

 

  

 

  

 

  

 

  

Construction, land and development

 

434

 

909

 

1,114

 

1,278

 

1,753

One- to four-family owner occupied residential

 

 

384

 

88

 

136

 

243

One- to four-family non-owner occupied residential

 

 

 

 

 

Multifamily

 

 

 

 

 

Commercial real estate

 

1,854

 

2,787

 

2,741

 

2,957

 

Commercial and industrial

 

 

 

 

 

Consumer and installment

 

 

 

14

 

 

Total real estate owned

 

2,288

 

4,080

 

3,957

 

4,371

 

1,996

 

  

 

  

 

  

 

  

 

  

Total non-performing assets

$

3,629

$

5,605

$

5,401

$

6,136

$

9,794

 

  

 

  

 

  

 

  

 

  

Total accruing troubled debt restructured loans

$

196

$

$

$

1,408

$

2,592

 

  

 

  

 

  

 

  

 

  

Total non-performing loans to total loans

 

0.56

%  

 

0.58

%  

 

0.54

%  

 

0.67

%  

 

3.03

%

Total non-performing assets to total assets

 

1.19

%  

 

1.80

%  

 

1.72

%  

 

1.99

%  

 

3.22

%

Interest income that would have been recorded for the fiscal year ended June 30, 2020 had non-accruing loans been current according to their original terms amounted to $50,000. We recognized $21,000 of interest income for these loans for the fiscal year ended June 30, 2020. In addition, interest income that would have been recorded for the fiscal year ended June 30, 2020 had accruing troubled debt restructurings been current according to their original terms, amounted to $0. We recognized no interest income for these loans for the fiscal year ended June 30, 2020.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in

13


those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.

On the basis of our review of our assets, our classified and special mention assets at the dates indicated were as follows:

At June 30, 

    

2020

    

2019

 

(In thousands)

Substandard assets - not accruing

$

3,440

$

5,369

Doubtful assets

 

 

Loss assets

 

116

 

76

Total classified assets

$

3,629

$

5,605

Special mention assets

$

8,119

$

8,120

During the year ended June 30, 2020, classified assets improved by $2.0 million year over year. Activities having the largest impact on the balances include $989,000 in charge-offs on OREO properties, net proceeds from OREO sales of $1.1 million, and two residential loan upgrades to pass from classified totaling $345,000. In addition, we classified $456,000 in assets consisting of six residential real estate loans.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions, including the impact of COVID-19. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit losses inherent in the loan portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans, facts and issues related to specific loans, historical loan loss and delinquency experience, trends in past due and non-accrual loans, existing risk characteristics of specific loans or loan pools, changes in the nature, volume and terms of loans, the fair value of underlying collateral, changes in lending personnel, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

In addition, the WDFI and the Federal Deposit Insurance Corporation periodically review our allowance for loan losses and as a result of such reviews, we may have to adjust our allowance for loan losses or recognize further loan charge-offs.

14


The following table sets forth activity in our allowance for loan losses for the periods indicated.

At or for the

At or for the

At or for the

 

Years Ended

Nine Months Ended

Years Ended

 

June 30, 

June 30, 

September 30, 

 

    

2020

    

2019

    

2018

    

2017

    

2017

    

2016

 

 

(Dollars in thousands)

Allowance at beginning of period

$

1,294

$

1,324

$

1,879

$

4,482

$

4,482

$

2,586

Provision for loan losses

 

135

 

 

425

 

 

 

2,125

 

 

  

 

  

 

  

 

  

 

  

Charge offs:

 

 

  

 

  

 

  

 

  

 

  

Construction, land and development

 

 

 

 

 

 

65

One- to four-family owner occupied residential

 

58

 

 

54

 

8

 

14

 

90

One- to four-family non-owner occupied residential

 

 

44

 

 

18

 

18

 

5

Multifamily

 

 

 

 

 

 

Commercial real estate

 

 

 

980

 

2,610

 

2,639

 

Commercial and industrial

 

 

 

 

 

 

99

Consumer and installment

 

45

 

16

 

1

 

2

 

4

 

155

Total charge-offs

 

103

 

60

 

1,035

 

2,638

 

2,675

 

414

 

  

 

  

 

  

 

  

 

  

 

  

Recoveries:

 

  

 

  

 

  

 

  

 

  

 

  

Construction, land and development

 

 

 

30

 

9

 

12

 

90

One- to four-family owner occupied residential

 

5

 

29

 

18

 

27

 

34

 

79

One- to four-family non-owner occupied residential

 

 

 

1

 

9

 

9

 

4

Multifamily

 

 

 

 

1

 

1

 

Commercial real estate

 

 

 

4

 

8

 

11

 

Commercial and industrial

 

 

 

 

 

 

4

Consumer and installment

 

22

 

1

 

2

 

4

 

5

 

8

Total recoveries

 

27

 

30

 

55

 

58

 

72

 

185

 

  

 

  

 

  

 

  

 

  

 

  

Net (charge-offs) recoveries

 

(76)

 

(30)

 

(980)

 

(2,580)

 

(2,603)

 

(229)

 

  

 

  

 

  

 

  

 

  

 

  

Allowance at end of period

$

1,353

$

1,294

$

1,324

$

1,902

$

1,879

$

4,482

 

  

 

  

 

  

 

  

 

  

 

  

Allowance to non-performing loans

 

100.91

%  

 

84.86

%  

 

91.68

%  

 

130.32

%  

 

106.47

%  

 

57.47

%

Allowance to total loans outstanding at the end of the period

 

0.57

%  

 

0.50

%  

 

0.50

%  

 

0.73

%  

 

0.71

%  

 

1.74

%

Net (charge-offs) recoveries to average loans outstanding during the period

 

(0.03)

%  

 

(0.01)

%

 

(0.51)

%(1) 

 

(1.32)

% (1) 

 

(1.00)

%  

 

(0.09)

%


(1)Annualized.

Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category and the percent of the allowance in each category to the total allocated allowance at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

15


At June 30, 

 

2020

2019

2018

 

Percent of

Percent of

Percent of

Percent of

Percent of

Percent of

 

Allowance

Loans in

Allowance

Loans in

Allowance

Loans in

 

in Category

Each

in Category

Each

in Category

Each

 

Allowance

to Total

Category to

Allowance

to Total

Category to

Allowance

to Total

Category to

 

for Loan

Allocated

Total

for Loan

Allocated

Total

for Loan

Allocated

Total

 

    

Losses

    

Allowance

    

Loans

    

Losses

    

Allowance

    

Loans

    

Losses

    

Allowance

    

Loans

 

(Dollars in thousands)

 

Construction, land and development

$

14

1.13

%  

1.93

%  

$

4

0.40

%  

1.65

%  

$

5

0.38

%  

1.82

%

One- to four-family owner occupied residential

 

356

 

28.74

 

42.11

 

68

 

6.27

 

47.80

 

7

 

0.54

 

46.21

One- to four-family non-owner occupied residential

 

77

 

6.21

 

8.89

 

27

 

2.47

 

8.03

 

71

 

5.42

 

8.98

Multifamily

 

287

 

23.16

 

32.03

 

110

 

10.19

 

28.05

 

71

 

5.42

 

26.80

Commercial real estate

 

400

 

32.28

 

9.97

 

796

 

73.86

 

10.10

 

953

 

72.78

 

11.10

Commercial and industrial

 

8

 

0.65

 

1.33

 

3

 

0.31

 

0.63

 

104

 

7.95

 

0.80

Consumer and installment

 

97

 

7.83

 

3.74

 

70

 

6.50

 

3.74

 

98

 

7.49

 

4.29

Total allocated allowance

 

1,239

 

100.00

%  

100.00

%  

 

1,078

 

100.00

%  

100.00

%  

 

1,309

 

100.00

%  

100.00

%

Unallocated

 

114

 

  

 

  

 

216

 

  

 

  

 

15

 

  

 

  

Total

$

1,353

 

  

 

  

$

1,294

 

  

 

  

$

1,324

 

  

 

  

    

At September 30, 

 

2017

2016

 

Percent of

Percent of

 

Allowance

Percent of

Allowance

Percent of

 

in Category

Loans in

in Category

Loans in

 

Allowance

to Total

Each

Allowance

to Total

Each

 

for Loan

 

Allocated

 

Category to

for Loan

 

Allocated

 

Category to

    

Losses

    

Allowance

    

Total Loans

    

Losses

    

Allowance

    

Total Loans

 

Construction, land and development

$

84

 

5.81

%  

1.31

%  

$

93

 

2.10

%  

1.25

%

One- to four-family owner occupied residential

 

54

 

3.71

 

45.40

 

228

 

5.17

 

44.50

One- to four-family non-owner occupied residential

 

121

 

8.39

 

8.65

 

399

 

9.03

 

8.73

Multifamily

 

61

 

4.21

 

23.07

 

74

 

1.67

 

22.71

Commercial real estate

 

885

 

61.25

 

15.96

 

3,431

 

77.63

 

17.00

Commercial and industrial

 

76

 

5.26

 

0.71

 

56

 

1.27

 

0.54

Consumer and installment

 

164

 

11.37

 

4.90

 

139

 

3.13

 

5.27

Total allocated allowance

 

1,445

 

100.00

%  

100.00

%  

 

4,420

 

100.00

%  

100.00

%

Unallocated

 

434

 

 

  

62

 

  

 

  

Total

$

1,879

 

  

$

4,482

 

  

 

  

16


Investment Activities

General. The goals of our investment policies are to provide liquidity, manage interest-rate risk, maximize our rate of return and manage asset quality diversification. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.

All of our investment securities are held by Equitable Investment Corp., a Nevada corporation that is a wholly-owned subsidiary of The Equitable Bank. Like many Wisconsin financial institutions, we established a Nevada subsidiary to hold our investment securities due to favorable state tax treatment. Although the favorable tax treatment is no longer applicable, we maintain the structure because of the expertise provided by the investment manager. Equitable Investment Corp.’s investment policy was adopted by its board of directors (consisting primarily of executive officers of The Equitable Bank) and is reviewed annually by its board of directors. Equitable Investment Corp.’s current investment policy permits, with certain limitations, investments in: U.S. Treasury obligations; securities issued by U.S. government agencies or government sponsored enterprises including mortgage-backed securities and collateralized mortgage obligations issued by Fannie Mae, Ginnie Mae and Freddie Mac; state and municipal obligations and bonds; money market funds and certificates of deposit; and corporate debt and securities.

Because Equitable Investment Corp. is our wholly owned subsidiary, we have incorporated Equitable Investment Corp.’s investment policy into our policies, and we have adopted general guidelines with respect to the types of investments that can be made by Equitable Investment Corp., including targeted guidelines on amounts of municipal investments, agency securities, collateralized mortgage obligations and corporate debt.

At June 30, 2020, our investment portfolio consisted primarily of obligations issued by states and political subdivisions, and Federal Home Loan Bank of Chicago stock. At June 30, 2020, we owned $1.3 million of Federal Home Loan Bank of Chicago stock. As a member of Federal Home Loan Bank of Chicago, we are required to purchase stock in the Federal Home Loan Bank of Chicago, which stock is carried at cost and classified as restricted equity securities.

The following table sets forth the amortized cost and estimated fair value of our available for sale securities portfolio at the dates indicated. At the dates indicated, we did not hold any securities as held to maturity.

At June 30, 

2020

2019

2018

Estimated

Estimated

Estimated

Amortized

Fair

Amortized

Fair

Amortized

Fair

    

Cost

    

Value

    

Cost

    

Value

    

Cost

    

Value

(In thousands)

Obligations of states and political subdivisions

$

17,563

$

18,005

$

18,720

$

18,878

$

19,847

$

19,426

Mortgage-backed securities

 

1,372

 

1,444

 

1,065

 

1,106

 

1,162

 

1,158

Certificates of deposit

 

800

 

849

 

555

 

558

 

330

 

322

Total

$

19,735

$

20,298

$

20,340

$

20,542

$

21,339

$

20,906

As of June 30, 2020, we had no securities of issuers that exceeded 10% of our total equity as of that date.

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2020, are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. All of our securities at June 30, 2020, were taxable securities.

17