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Section 1: 10-Q (10-Q)

10-Q
Table of Contents

 

 

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 March 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. 001-35226

 

 

IF Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   45-1834449

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification Number)

201 East Cherry Street, Watseka, Illinois   60970
(Address of Principal Executive Offices)   Zip Code

(815) 432-2476

(Registrant’s telephone number)

N/A

(Former name or former address, 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

Common Stock, par value $0.01 per share   IROQ   Nasdaq Capital Market

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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  ☒

The Registrant had 3,240,376 shares of common stock, par value $0.01 per share, issued and outstanding as of May 6, 2020.

 

 

 


Table of Contents

IF Bancorp, Inc.

Form 10-Q

Index

 

         Page  
Part I. Financial Information

 

Item 1.  

Condensed Consolidated Financial Statements

     1  
 

Condensed Consolidated Balance Sheets as of March  31, 2020 (unaudited) and June 30, 2019

     1  
 

Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended March 31, 2020 and 2019 (unaudited)

     2  
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended March 31, 2020 and 2019 (unaudited)

     3  
 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended March 31, 2020 and 2019 (unaudited)

     4  
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019 (unaudited)

     6  
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     7  
Item 2.  

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

     36  
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     54  
Item 4.  

Controls and Procedures

     54  
Part II. Other Information

 

Item 1.  

Legal Proceedings

     55  
Item 1A.  

Risk Factors

     55  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     56  
Item 3.  

Defaults upon Senior Securities

     57  
Item 4.  

Mine Safety Disclosures

     57  
Item 5.  

Other Information

     57  
Item 6.  

Exhibits

     57  
 

Signature Page

     58  


Table of Contents

Part I. – Financial Information

 

Item 1.

Financial Statements

IF Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amount)

 

     March 31,
2020
    June 30,
2019
 
Assets    (Unaudited)        

Cash and due from banks

   $ 6,336     $ 57,994  

Interest-bearing demand deposits

     539       1,606  
  

 

 

   

 

 

 

Cash and cash equivalents

     6,875       59,600  
  

 

 

   

 

 

 

Interest-bearing time deposits in banks

     3,000       3,000  

Available-for-sale securities

     152,948       146,291  

Loans, net of allowance for loan losses of $6,474 and $6,328 at March 31, 2020 and June 30, 2019, respectively

     494,517       487,774  

Premises and equipment, net of accumulated depreciation of $7,845 and $7,345 at March 31, 2020 and June 30, 2019, respectively

     10,322       10,706  

Federal Home Loan Bank stock, at cost

     2,408       1,174  

Foreclosed assets held for sale

     432       778  

Accrued interest receivable

     2,025       2,142  

Bank-owned life insurance

     9,277       9,072  

Mortgage servicing rights

     821       853  

Deferred income taxes

     999       2,066  

Other

     557       414  
  

 

 

   

 

 

 

Total assets

   $ 684,181     $ 723,870  
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities

    

Deposits

    

Demand

   $ 27,276     $ 80,442  

Savings, NOW and money market

     214,561       196,296  

Certificates of deposit

     272,288       290,761  

Brokered certificates of deposit

     19,005       39,524  
  

 

 

   

 

 

 

Total deposits

     533,130       607,023  
  

 

 

   

 

 

 

Repurchase agreements

     3,404       2,015  

Federal Home Loan Bank advances

     53,500       24,000  

Line of credit and other borrowings

     5,000       —    

Advances from borrowers for taxes and insurance

     1,272       747  

Accrued post-retirement benefit obligation

     2,951       2,919  

Accrued interest payable

     935       801  

Other

     4,557       3,904  
  

 

 

   

 

 

 

Total liabilities

     604,749       641,409  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, $.01 par value per share, 100,000,000 shares authorized, 3,240,376 and 3,578,252 shares issued and outstanding at March 31, 2020 and June 30, 2019, respectively

     32       36  

Additional paid-in capital

     49,151       48,813  

Unearned ESOP shares, at cost, 216,506 and 230,940 shares at March 31, 2020 and June 30, 2019, respectively

     (2,165     (2,309

Retained earnings

     29,802       35,356  

Accumulated other comprehensive income, net of tax

     2,612       565  
  

 

 

   

 

 

 

Total stockholders’ equity

     79,432       82,461  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 684,181     $ 723,870  
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands except per share amounts)

 

     Three Months Ended March 31,     Nine Months Ended March 31,  
     2020     2019     2020     2019  

Interest and Dividend Income

        

Interest and fees on loans

   $ 5,738     $ 5,747     $ 17,429     $ 16,973  

Securities:

        

Taxable

     975       828       2,805       2,481  

Tax-exempt

     11       29       64       92  

Federal Home Loan Bank dividends

     17       41       53       110  

Deposits with other financial institutions

     58       68       245       134  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     6,799       6,713       20,596       19,790  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     2,000       1,829       6,502       5,106  

Federal Home Loan Bank advances and repurchase agreements

     209       440       577       1,287  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,209       2,269       7,079       6,393  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     4,590       4,444       13,517       13,397  

Provision for Loan Losses

     282       61       198       436  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

     4,308       4,383       13,319       12,961  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Customer service fees

     90       80       287       286  

Other service charges and fees

     66       53       218       208  

Insurance commissions

     149       160       503       497  

Brokerage commissions

     238       228       707       751  

Net realized gains on sales of available-for-sale securities

     146       0       139       0  

Mortgage banking income, net

     (2     25       159       177  

Gain on sale of loans

     148       48       432       227  

Gain (Loss) on foreclosed assets, net

     (2     (82     (4     16  

Bank-owned life insurance income, net

     66       67       205       202  

Other

     273       189       815       725  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,172       768       3,461       3,089  
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Compensation and benefits

     2,887       2,625       8,258       7,839  

Office occupancy

     242       240       739       680  

Equipment

     399       345       1,172       1,016  

Federal deposit insurance

     —         41       28       127  

Stationary, printing and office

     29       30       85       93  

Advertising

     162       130       380       385  

Professional services

     67       75       338       289  

Supervisory examinations

     32       35       117       123  

Audit and accounting services

     17       18       104       103  

Organizational dues and subscriptions

     7       7       45       41  

Insurance bond premiums

     42       36       120       114  

Telephone and postage

     55       50       153       183  

Other

     415       429       1,264       1,622  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     4,354       4,061       12,803       12,615  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     1,126       1,090       3,977       3,435  

Provision for Income Tax

     316       286       1,103       910  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 810     $ 804     $ 2,874     $ 2,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share:

        

Basic

   $ 0.27     $ 0.24     $ 0.92     $ 0.72  

Diluted

   $ 0.26     $ 0.24     $ 0.90     $ 0.71  

Dividends declared per common share

   $ 0.15     $ 0.125     $ 0.30     $ 0.25  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

     Three Months Ended March 31,  
     2020      2019  

Net Income

   $ 810      $ 804  

Other Comprehensive Income

     

Unrealized appreciation on available-for-sale securities, net of taxes of $705 and $718, for 2020 and 2019, respectively

     1,767        1,799  

Less: reclassification adjustment for realized gains included in net income, net of taxes of $42 and $0, for 2020 and 2019, respectively

     104        —    
  

 

 

    

 

 

 
     1,663        1,799  

Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $1 and $2 for 2020 and 2019, respectively

     2        5  
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     1,665        1,804  
  

 

 

    

 

 

 

Comprehensive Income

   $ 2,475      $ 2,608  
  

 

 

    

 

 

 

 

     Nine Months Ended March 31,  
     2020      2019  

Net Income

   $ 2,874      $ 2,525  

Other Comprehensive Income

     

Unrealized appreciation on available-for-sale securities, net of taxes of $852 and $1,380, for 2020 and 2019, respectively

     2,138        2,467  

Less: reclassification adjustment for realized gains included in net income, net of taxes of $40 and $0, for 2020 and 2019, respectively

     99        —    
  

 

 

    

 

 

 
     2,039        2,467  

Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $5 and $5 for 2020 and 2019, respectively

     8        10  
  

 

 

    

 

 

 

Other comprehensive income, net of tax

     2,047        2,477  
  

 

 

    

 

 

 

Comprehensive Income

   $ 4,921      $ 5,002  
  

 

 

    

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share amounts)

 

     Common
Stock
     Additional
Paid-In
Capital
     Unearned
ESOP Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

For the three months ended March 31, 2020

              

Balance, January 1, 2020

   $ 32      $ 49,041      $ (2,213   $ 29,921     $ 947     $ 77,728  

Net income

     —          —          —         810       —         810  

Other comprehensive income

     —          —          —         —         1,665       1,665  

Dividends on common stock, $0.15 per share

     —          —          —         (486     —         (486

Stock equity plan

     —          56        —         —         —         56  

Stock repurchase, 22,795 shares, average price $19.43 each

     —          —          —         (443     —         (443

ESOP shares earned, 4,811 shares

     —          54        48       —         —         102  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2020

   $ 32      $ 49,151      $ (2,165   $ 29,802     $ 2,612     $ 79,432  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended March 31, 2019

              

Balance, January 1, 2019

   $ 36      $ 48,600      $ (2,406   $ 34,726     $ (2,435   $ 78,521  

Net income

     —          —          —         804       —         804  

Other comprehensive income

     —          —          —         —         1,804       1,804  

Dividends on common stock, $0.125 per share

     —          —          —         (447     —         (447

Stock equity plan

     —          56        —         —         —         56  

Stock repurchase, 35,356 shares, average price $20.72 each

     —          —          —         (732     —         (732

ESOP shares earned, 4,811 shares

     —          52        48       —         —         100  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

   $ 36      $ 48,708      $ (2,358   $ 34,351     $ (631   $ 80,106  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


Table of Contents
     Common
Stock
    Additional
Paid-In
Capital
     Unearned
ESOP Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

For the nine months ended March 31, 2020

             

Balance, July 1, 2019

   $ 36     $ 48,813      $ (2,309   $ 35,356     $ 565     $ 82,461  

Net income

     —         —          —         2,874       —         2,874  

Other comprehensive income

     —         —          —         —         2,047       2,047  

Dividends on common stock, $0.30 per share

     —         —          —         (973     —         (973

Stock equity plan

     —         167        —         —         —         167  

Stock repurchase, 337,876 shares, average price $22.08 each

     (4     —          —         (7,455     —         (7,459

ESOP shares earned, 14,434 shares

     —         171        144       —         —         315  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2020

   $ 32     $ 49,151      $ (2,165   $ 29,802     $ 2,612     $ 79,432  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended March 31, 2019

             

Balance, July 1, 2018

   $ 39     $ 48,361      $ (2,502   $ 38,885     $ (3,108   $ 81,675  

Net income

     —         —          —         2,525       —         2,525  

Other comprehensive income

     —         —          —         —         2,477       2,477  

Dividends on common stock, $0.25 per share

     —         —          —         (900     —         (900

Stock equity plan

     —         169        —         —         —         169  

Stock repurchase, 290,356 shares, average price $21.23 each

     (3     —          —         (6,159     —         (6,162

ESOP shares earned, 14,434 shares

     —         178        144       —         —         322  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

   $ 36     $ 48,708      $ (2,358   $ 34,351     $ (631   $ 80,106  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Nine Months Ended March 31,  
     2020     2019  

Operating Activities

    

Net income

   $ 2,874     $ 2,525  

Items not requiring (providing) cash

    

Depreciation

     500       496  

Provision for loan losses

     198       436  

Amortization of premiums and discounts on securities

     141       47  

Deferred income taxes

     251       (56

Net realized gains on loan sales

     (432     (227

Net realized gains on sales of available-for-sale securities

     (139     —    

Loss (Gain) on foreclosed assets held for sale

     4       (16

Bank-owned life insurance income, net

     (205     (202

Originations of loans held for sale

     (21,635     (11,221

Proceeds from sales of loans held for sale

     22,415       11,659  

ESOP compensation expense

     315       322  

Stock equity plan expense

     167       169  

Changes in

    

Accrued interest receivable

     117       (433

Other assets

     (143     198  

Accrued interest payable

     134       406  

Post-retirement benefit obligation

     44       41  

Other liabilities

     167       (345
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,773       3,799  
  

 

 

   

 

 

 

Investing Activities

    

Net change in interest bearing time deposits

     —         (750

Purchases of available-for-sale securities

     (29,681     (10,495

Proceeds from the sales of available-for-sale securities

     6,132       —    

Proceeds from maturities and pay-downs of available-for-sale securities

     19,741       9,364  

Net change in loans

     (7,487     (22,998

Purchase of premises and equipment

     (116     (950

Proceeds from sale of foreclosed assets

     572       4,957  

Redemption of Federal Home Loan Bank stock

           2,295  

Purchase of Federal Home Loan Bank stock

     (1,234     (1,440
  

 

 

   

 

 

 

Net cash used in investing activities

     (12,073     (20,017
  

 

 

   

 

 

 

Financing Activities

    

Net increase (decrease) in demand deposits, money market, NOW and savings accounts

     (34,901     1,030  

Net increase (decrease) in certificates of deposit, including brokered certificates

     (38,992     36,228  

Net increase in advances from borrowers for taxes and insurance

     525       918  

Proceeds from Federal Home Loan Bank advances

     58,500       111,500  

Repayments of Federal Home Loan Bank advances

     (29,000     (125,000

Proceeds from other borrowings

     5,000       —    

Net increase (decrease) in repurchase agreements

     1,389       (39

Dividends paid

     (487     (453

Stock purchase per stock repurchase plan

     (7,459     (6,162
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (45,425     18,022  
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     (52,725     1,804  

Cash and Cash Equivalents, Beginning of Period

     59,600       4,754  
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 6,875     $ 6,558  
  

 

 

   

 

 

 

Supplemental Cash Flows Information

    

Interest paid

   $ 6,945     $ 5,987  

Income taxes paid, net of refunds

   $ 786     $ 175  

Foreclosed assets acquired in settlement of loans

   $ 230     $ 6,332  

Dividends payable

   $ 487     $ 447  

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


Table of Contents

IF Bancorp, Inc.

Form 10-Q (Unaudited)

(Table dollar amounts in thousands)

Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Financial Statement Presentation

IF Bancorp, Inc., a Maryland corporation (the “Company”), became the holding company for Iroquois Federal Savings and Loan Association (the “Association”) upon completion of the Association’s conversion from the mutual form of organization to the stock holding company form of organization (the “Conversion”) on July 7, 2011. In connection with the conversion, the Company completed its initial public offering of common stock, selling 4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to the Association’s employee stock ownership plan, and raising approximately $45.0 million of gross proceeds. The Company also established a charitable foundation, Iroquois Federal Foundation, to which the Company donated 314,755 shares of Company stock and $450,000 cash. IF Bancorp, Inc.’s common stock trades on the NASDAQ Capital Market under the symbol “IROQ”.

The unaudited condensed consolidated financial statements include the accounts of the Company, the Association, and the Association’s wholly owned subsidiary, L.C.I. Service Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of March 31, 2020 and June 30, 2019, and the results of its operations for the three month and nine month periods ended March 31, 2020 and 2019. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. The results of operations for the three month and nine month periods ended March 31, 2020 are not necessarily indicative of the results that may be expected for the entire year.

Risks and Uncertainties—We are subject to risks and uncertainties as a result of the COVID-19 pandemic. The extent of the impact of the COVID-19 pandemic on the Company’s business is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic.

The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted. The Company’s future results of operations and liquidity could be adversely impacted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company’s financial condition, liquidity, or results of operations is uncertain.

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 to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

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The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit and investments securities, as well as revenue related to our mortgage servicing activities and bank owned life insurance, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the scope of ASC 606, and which are presented in our income statements as components of noninterest income are as follows:

 

   

Customer Service Fees—The Company generates revenue from fees charged for deposit account maintenance, overdrafts, wire transfers, and check fees. The revenue related to deposit fees is recognized at the time the performance obligation is satisfied.

 

   

Insurance Commissions—The Company’s insurance agency, Iroquois Insurance Agency, receives commissions on premiums of new and renewed business policies. Iroquois Insurance Agency records commission revenue on direct bill policies as the cash is received. For agency bill policies, Iroquois Insurance Agency retains its commission portion of the customer premium payment and remits the balance to the carrier. In both cases, the carrier holds the performance obligation.

 

   

Brokerage Commissions—The primary brokerage revenue is recorded at the beginning of each quarter through billing to customers based on the account asset size on the last day of the previous quarter. If a withdrawal of funds takes place, a prorated refund may occur; this is reflected within the same quarter as the original billing occurred. All performance obligations are met within the same quarter that the revenue is recorded.

 

   

Other—The Company generates revenue through service charges from the use of its ATM machines and interchange income from the use of Company issued credit and debit cards. The revenue is recognized at the time the service is used, and the performance obligation is satisfied.

Note 2: New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing standards for lease accounting effectively bringing most leases onto the balance sheets of the related lessees by requiring them to recognize a right-of-use asset and a corresponding lease liability, while leaving lessor accounting largely unchanged with only targeted changes incorporated into the update. ASU 2016-02 became effective for the Company July 1, 2019. As permitted by the amendments, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The adoption did not have an effect on the Company’s financial position or results of operations since the Company does not have any material lease agreements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies eligible to be smaller reporting companies (SRC), this update will be effective for interim and annual periods beginning after December 15, 2022. As we prepare for the adoption of ASU 2016-13, we have engaged a firm specializing in ALLL modeling and have begun transition modeling so we will be ready for the required adoption. As of March 31, 2020, model installation and testing continues and we are still evaluating the test runs for accuracy and directional consistency required to reach a reliable determination as to the final expected impact that the adoption of ASU 2016-13 will have on the consolidated financial statements.

 

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Note 3: Stock-based Compensation

In connection with the conversion to stock form, the Association established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 21). The ESOP borrowed funds from the Company in an amount sufficient to purchase 384,900 shares (approximately 8% of the common stock issued in the stock offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Association and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest 100% in their accrued benefits under the employee stock ownership plan after six vesting years, with prorated vesting in years two through five. Vesting is accelerated upon retirement, death or disability of the participant or a change in control of the Association. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Association’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated. Participants receive the shares at the end of employment.

The Company is accounting for its ESOP in accordance with ASC Topic 718, Employers Accounting for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends, if any, on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

A summary of ESOP shares at March 31, 2020 and June 30, 2019 are as follows (dollars in thousands):

 

     March 31, 2020      June 30, 2019  

Allocated shares

     127,102        109,018  

Shares committed for release

     14,434        19,245  

Unearned shares

     216,506        230,940  
  

 

 

    

 

 

 

Total ESOP shares

     358,042        359,203  
  

 

 

    

 

 

 

Fair value of unearned ESOP shares (1)

   $ 3,464      $ 4,829  
  

 

 

    

 

 

 

 

(1)

Based on closing price of $16.00 and $20.91 per share on March 31, 2020, and June 30, 2019, respectively.

During the nine months ended March 31, 2020, 1,161 ESOP shares were paid to ESOP participants due to separation from service. During the nine months ended March 31, 2019, 6,360 ESOP shares were paid to ESOP participants due to separation from service.

At the annual meeting on November 19, 2012, the IF Bancorp, Inc. 2012 Equity Incentive Plan (the “Equity Incentive Plan”) was approved by stockholders. The purpose of the Equity Incentive Plan is to promote the long-term financial success of the Company and its Subsidiaries by providing a means to attract, retain and reward individuals who contribute to such success and to further align their interests with those of the Company’s stockholders. The Equity Incentive Plan authorizes the issuance or delivery to participants of up to 673,575 shares of the Company common stock pursuant to grants of incentive and non-qualified stock options, restricted stock awards and restricted stock unit awards, provided that the maximum number of shares of Company common stock that may be delivered pursuant to the exercise of stock options (all of which may be granted as incentive stock options) is 481,125 and the maximum number of shares of Company stock that may be issued as restricted stock awards or restricted stock units is 192,450.

 

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On December 10, 2013, 85,500 shares of restricted stock and 167,000 in stock options were awarded to senior officers and directors of the Association. The restricted stock vests in equal installments over 10 years and the stock options vest in equal installments over 7 years. Vesting of both the restricted stock and options started in December 2014. On December 10, 2015, 16,900 shares of restricted stock were awarded to senior officers and directors of the Association. The restricted stock vests in equal installments over 8 years, starting in December 2016. As of March 31, 2020, there were 90,050 shares of restricted stock and 314,125 stock option shares available for future grants under this plan.

The following table summarizes stock option activity for the nine months ended March 31, 2020 (dollars in thousands):

 

     Options      Weighted-Average
Exercise Price/Share
     Weighted-Average
Remaining Contractual
Life (in years)
     Aggregate Intrinsic
Value
 

Outstanding, June 30, 2019

     153,143      $ 16.63        

Granted

     —          —          

Exercised

     —          —          

Forfeited

     —          —          
  

 

 

    

 

 

       

Outstanding, March 31, 2020

     153,143      $ 16.63        3.7      $ —    (1) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, March 31, 2020

     130,857      $ 16.63        3.7      $ —    (1) 
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Based on closing price of $16.00 per share on March 31, 2020.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. There were no stock options granted during the nine months ended March 31, 2020.

There were 22,286 options that vested during the nine months ended March 31, 2020 compared to 22,286 stock options that vested during the nine months ended March 31, 2019. Stock-based compensation expense and related tax benefit was considered nominal for stock options for the nine months ended March 31, 2020 and 2019. Total unrecognized compensation cost related to non-vested stock options was $38,000 at March 31, 2020 and is expected to be recognized over the remaining weighted-average period of 0.7 years.

The following table summarizes non-vested restricted stock activity for the nine months ended March 31, 2020:

 

     Shares      Weighted-Average
Grant-Date Fair Value
 

Balance, June 30, 2019

     50,313      $ 16.79  

Granted

     —          —    

Forfeited

     —          —    

Earned and issued

     10,063        16.79  
  

 

 

    

 

 

 

Balance, March 31, 2020

     40,250      $ 16.79  
  

 

 

    

 

 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (ten years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. Stock-based compensation expense and related tax benefit for restricted stock, which was recognized in non-interest expense, was $127,000 and $36,000, respectively, for both the nine months ended March 31, 2020, and for the nine months ended March 31, 2019. Unrecognized compensation expense for non-vested restricted stock awards was $639,000 and is expected to be recognized over 3.7 years with a corresponding credit to paid-in capital.

 

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Note 4: Earnings Per Common Share (“EPS”)

Basic and diluted earnings per common share are presented for the three month and nine month periods ended March 31, 2020 and 2019. The factors used in the earnings per common share computation are as follows:

 

     Three Months Ended
March 31, 2020
    Three Months Ended
March 31, 2019
    Nine Months Ended
March 31, 2020
    Nine Months Ended
March 31, 2019
 

Net income

   $ 810     $ 804     $ 2,874     $ 2,525  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     3,256,972       3,597,762       3,352,546       3,762,126  

Less: Average unallocated ESOP shares

     (218,912     (238,157     (223,723     (242,968
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic average shares outstanding

     3,038,060       3,359,605       3,128,823       3,519,158  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted effect of restricted stock awards and stock options

     51,662       45,749       53,740       57,472  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average shares outstanding

     3,089,722       3,405,354       3,182,563       3,576,630  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.27     $ 0.24     $ 0.92     $ 0.72  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.26     $ 0.24     $ 0.90     $ 0.71  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company announced a stock repurchase plan on June 12, 2019, whereby the Company could repurchase up to 89,526 shares of its common stock, or approximately 2.5% of its then current outstanding shares. As of September 30, 2019, 20,200 shares were repurchased at an average price of $21.17 per share. On September 13, 2019, the Company announced an increase in the number of shares that may be repurchased under the Company’s existing stock repurchase plan, whereby the Company could repurchase up to 320,476 shares, or approximately 9.0% of its then outstanding shares. As of March 31, 2020, the Company had repurchased all shares under this plan at an average price of $22.12 per share.

Note 5: Securities

The amortized cost and approximate fair value of securities, together with gross unrealized gains and losses on securities, are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available-for-sale securities:

          

March 31, 2020:

          

U.S. Government and federal agency and Government sponsored enterprises (GSE’s)

   $ 7,530      $ 630      $ —       $ 8,160  

Mortgage-backed:

          

GSE residential

     136,111        3,860        (331     139,640  

Small Business Administration

     3,620        15        (28     3,607  

State and political subdivisions

     1,450        92        (1     1,541  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 148,711      $ 4,597      $ (360   $ 152,948  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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June 30, 2019:

          

U.S. Government and federal agency and Government sponsored enterprises (GSE’s)

   $ 12,654      $ 296      $ —       $ 12,950  

Mortgage-backed:

          

GSE residential

     124,615        1,231        (336     125,510  

Small Business Administration

     4,911        25        (1     4,935  

State and political subdivisions

     2,725        171        —         2,896  
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 144,905      $ 1,723      $ (337   $ 146,291  
  

 

 

    

 

 

    

 

 

   

 

 

 

With the exception of mortgage-backed GSE residential securities with a book value of approximately $136,111,000, and a market value of approximately $139,640,000 at March 31, 2020, the Company held no securities at March 31, 2020 with a book value that exceeded 10% of total equity.

All mortgage-backed securities at March 31, 2020 and June 30, 2019 were issued by GSEs.

The amortized cost and fair value of available-for-sale securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available-for-sale Securities  
     Amortized
Cost
     Fair
Value
 

Within one year

   $ —        $ —    

One to five years

     6,102        6,615  

Five to ten years

     4,458        4,682  

After ten years

     2,040        2,011  
  

 

 

    

 

 

 
     12,600        13,308  

Mortgage-backed securities

     136,111        139,640  
  

 

 

    

 

 

 

Totals

   $ 148,711      $ 152,948  
  

 

 

    

 

 

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $70,893,000 and $57,921,000 as of March 31, 2020 and June 30, 2019, respectively.

The carrying value of securities sold under agreement to repurchase amounted to $3.4 million at March 31, 2020 and $2.0 million at June 30, 2019. At March 31, 2020, approximately $1.7 million of our repurchase agreements had an overnight maturity, while the remaining $1.7 million in repurchase agreements had a monthly maturity. All of our repurchase agreements were secured by U.S. Government, federal agency and GSE securities. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

Gross gains of $167,000 and gross losses of $28,000, resulting from sales of available-for-sale securities were realized for the nine month period ended March 31, 2020. There were no sales of available-for-sale securities for the nine months ended March 31, 2019. The tax provision applicable to these net realized gains amounted to approximately $40,000 and $0 respectively.

 

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Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2020 and June 30, 2019 was $9,408,000 and $47,146,000, respectively, which is approximately 6% and 32% of the Company’s available-for-sale investment portfolio. These declines in fair value at March 31, 2020 and June 30, 2019, resulted from increases in market interest rates and are considered temporary.

The following table shows the gross unrealized losses of the Company’s securities and the fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 and June 30, 2019:

 

     Less Than 12 Months     12 Months or More     Total  

Description of Securities

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

March 31, 2020:

               

Mortgage-backed:

               

GSE residential

     5,011        (189     2,325        (142     7,336        (331

Small Business Administration

     2,011        (28     —          —         2,011        (28

State and political subdivisions

     61        (1     —          —         61        (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 7,083      $ (218   $ 2,325      $ (142   $ 9,408      $ (360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

June 30, 2019:

               

Mortgage-backed:

               

GSE residential

   $ 15,167      $ (72   $ 31,049      $ (264   $ 46,216      $ (336

Small Business Administration

     930        (1     —          —         930        (1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 16,097      $ (73   $ 31,049      $ (264   $ 47,146      $ (337
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrealized losses on the Company’s investment in residential mortgage-backed securities and U.S. Government and federal agency and Government sponsored enterprises at March 31, 2020 and June 30, 2019, were mostly the result of a decline in market value that was attributable to changes in interest rates and not credit quality, and the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2020 and June 30, 2019.

Note 6: Loans and Allowance for Loan Losses

Classes of loans include:

 

     March 31, 2020      June 30, 2019  

Real estate loans:

     

One- to four-family, including home equity loans

   $ 129,185      $ 129,290  

Multi-family

     107,107        104,663  

Commercial

     143,396        143,367  

Home equity lines of credit

     9,131        8,938  

 

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Construction

     20,897        16,113  

Commercial

     83,812        84,246  

Consumer

     7,154        7,136  
  

 

 

    

 

 

 

Total loans

     500,682        493,753  

Less:

     

Unearned fees and discounts, net

     (309      (349

Allowance for loan losses

     6,474        6,328  
  

 

 

    

 

 

 

Loans, net

   $ 494,517      $ 487,774  
  

 

 

    

 

 

 

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s lending activity includes the origination of one- to four-family residential mortgage loans, multi-family loans, commercial real estate loans, home equity lines of credits, commercial business loans, consumer loans (consisting primarily of automobile loans), construction loans and land loans. The primary lending market includes the Illinois counties of Vermilion, Iroquois, Champaign and Kankakee, as well as the adjacent counties in Illinois and Indiana. The Company also has a loan production and wealth management office in Osage Beach, Missouri, which serves the Missouri counties of Camden, Miller, and Morgan. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in our loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

The Company’s policies and loan approval limits are established by the Board of Directors. The loan officers generally have authority to approve one- to four-family residential mortgage loans up to $100,000, other secured loans up to $50,000, and unsecured loans up to $10,000. Managing Officers (those with designated loan approval authority), generally have authority to approve one- to four-family residential mortgage loans up to $375,000, other secured loans up to $375,000, and unsecured loans up to $100,000. In addition, any two individual officers may combine their loan authority limits to approve a loan. Our Loan Committee may approve one- to four-family residential mortgage loans, commercial real estate loans, multi-family real estate loans and land loans up to $2,000,000 in aggregate loans, and unsecured loans up to $500,000. All loans above these limits must be approved by the Operating Committee, consisting of the Chairman and up to four other Board members. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans to related parties, including executive officers and the Company’s directors, are reviewed for compliance with regulatory guidelines and the Board of Directors at least annually.

The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small commercial loans on a sample basis, and all larger commercial loans on an annual basis. The Company also receives independent loan reviews performed by a third party on larger commercial loans to be

 

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performed semi-annually. In addition to compliance with our policy, the third party loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management and the Board of Directors.

The Company’s lending can be summarized into six primary areas; one- to four-family residential mortgage loans, commercial real estate and multi-family real estate loans, home equity lines of credit, real estate construction, commercial business loans, and consumer loans.

One- to four-family Residential Mortgage Loans

The Company offers one- to four-family residential mortgage loans that conform to Fannie Mae and Freddie Mac underwriting standards (conforming loans) as well as non-conforming loans. In recent years there has been an increased demand for long-term fixed-rate loans, as market rates have dropped and remained near historic lows. As a result, the Company has sold a substantial portion of the fixed-rate one- to four-family residential mortgage loans with terms of 15 years or greater. Generally, the Company retains fixed-rate one- to four-family residential mortgage loans with terms of less than 15 years, although this has represented a small percentage of the fixed-rate loans originated in recent years due to the favorable long-term rates for borrower.

The Company offers USDA Rural Development loans which are originated and sold servicing released. The Company also offers FHA and VA loans that are originated through a nationwide wholesale lender.

In addition, the Company also offers home equity loans that are secured by a second mortgage on the borrower’s primary or secondary residence. Home equity loans are generally underwritten using the same criteria used to underwrite one- to four-family residential mortgage loans.

As one- to four-family residential mortgage and home equity loan underwriting are subject to specific regulations, the Company typically underwrites its one- to four-family residential mortgage and home equity loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

Commercial Real Estate and Multi-Family Real Estate Loans

Commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, strip mall centers, churches and farm loans secured by real estate. In underwriting commercial real estate and multi-family real estate loans, the Company considers a number of factors, which include the projected net cash flow to the loan’s debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Personal guarantees are typically obtained from commercial real estate and multi-family real estate borrowers. In addition, the borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates. The repayment of these loans is primarily dependent on the cash flows of the underlying property. However, the commercial real estate loan generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company.

Home Equity Lines of Credit

In addition to traditional one- to four-family residential mortgage loans and home equity loans, the Company offers home equity lines of credit that are secured by the borrower’s primary or secondary residence. Home equity lines of credit are generally underwritten using the same criteria used to underwrite one- to four-family residential mortgage loans. As home equity lines of credit underwriting is subject to specific regulations, the Company typically underwrites its home equity lines of credit to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

 

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Table of Contents

Commercial Business Loans

The Company originates commercial non-mortgage business (term) loans and lines of credit. These loans are generally originated to small- and medium-sized companies in the Company’s primary market area. Commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture, and are primarily secured by business assets other than real estate, such as business equipment and inventory, accounts receivable or stock. The Company also offers agriculture loans that are not secured by real estate.

The commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, the Company considers the financial statements, lending history and debt service capabilities of the borrower, the projected cash flows of the business and the value of any collateral. The cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. Loans are typically guaranteed by the principals of the borrower. The Company has established minimum standards and underwriting guidelines for all commercial loan types.

Real Estate Construction Loans

The Company originates construction loans for one- to four-family residential properties and commercial real estate properties, including multi-family properties. The Company generally requires that a commitment for permanent financing be in place prior to closing the construction loan. The repayment of these loans is typically through permanent financing following completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans. These loans are closely monitored and subject to other industry guidelines.

Consumer Loans

Consumer loans consist of installment loans to individuals, primarily automotive loans. These loans are underwritten utilizing the borrower’s financial history, including the Fair Isaac Corporation (“FICO”) credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower. Consumer loans may be underwritten with terms up to seven years, fully amortized. Unsecured loans are limited to twelve months. Loan-to-value ratios vary based on the type of collateral. The Company has established minimum standards and underwriting guidelines for all consumer loan collateral types.

Loan Concentration

The loan portfolio includes a concentration of loans secured by commercial and multi-family real estate properties amounting to $265,464,000 and $260,888,000 as of March 31, 2020 and June 30, 2019, respectively. Generally, these loans are collateralized by multi-family and nonresidential properties. The loans are expected to be repaid from cash flows or from proceeds from the sale of the properties of the borrower.

Purchased Loans and Loan Participations

The Company’s loans receivable included purchased loans of $4,235,000 and $4,844,000 at March 31, 2020 and June 30, 2019, respectively. All of these purchased loans are secured by single family homes located out of our primary market area primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $24,838,000 and $29,524,000 at March 31, 2020 and June 30, 2019, respectively, of which $8,903,000 and $12,025,000, at March 31, 2020 and June 30, 2019 were outside our primary market area.

Allowance for Loan Losses

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of the three month and nine month periods ended March 31, 2020 and 2019 and the year ended June 30, 2019:

 

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Table of Contents
     Three Months Ended March 31, 2020
Real Estate Loans
 
     One- to
Four-Family
    Multi-
Family
     Commercial     Home Equity
Lines of
Credit
 

Allowance for loan losses:

         

Balance, beginning of period

   $ 991     $ 1,562      $ 1,685     $ 90  

Provision charged to expense

     74       121        (5     2  

Losses charged off

     (27     —          —         —    

Recoveries

     —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,038     $ 1,683      $ 1,680     $ 92  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —       $ —        $ —       $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,038     $ 1,683      $ 1,680     $ 92  
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

         

Ending balance

   $ 129,185     $ 107,107      $ 143,396     $ 9,131  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,591     $ —        $ 4     $ 16  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 127,594     $ 107,107      $ 143,392     $ 9,115  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Three Months Ended March 31, 2020 (Continued)  
     Construction      Commercial      Consumer     Total  

Allowance for loan losses:

          

Balance, beginning of period

   $ 217      $ 1,610      $ 67     $ 6,222  

Provision charged to expense

     27        57        6       282  

Losses charged off

     —          —          (6     (33

Recoveries

     —          —          3       3  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 244      $ 1,667      $ 70     $ 6,474  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ —        $ —       $ —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 244      $ 1,667      $ 70     $ 6,474  
  

 

 

    

 

 

    

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 20,897      $ 83,812      $ 7,154     $ 500,682  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 41      $ 7     $ 1,659  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,897      $ 83,771      $ 7,147     $ 499,023  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended March 31, 2020
Real Estate Loans
 
     One- to
Four-Family
    Multi-
Family
     Commercial      Home Equity
Lines of
Credit
 

Allowance for loan losses:

          

Balance, beginning of period

   $ 1,031     $ 1,642      $ 1,623      $ 89  

Provision charged to expense

     44       41        57        3  

Losses charged off

     (40     —          —          —    

Recoveries

     3       —          —          —    
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Balance, end of period

   $ 1,038      $ 1,683      $ 1,680      $ 92  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,038      $ 1,683      $ 1,680      $ 92  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

           

Ending balance

   $ 129,185      $ 107,107      $ 143,396      $ 9,131  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,591      $ —        $ 4      $ 16  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 127,594      $ 107,107      $ 143,392      $ 9,115  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended March 31, 2020 (Continued)  
     Construction      Commercial     Consumer     Total  

Allowance for loan losses:

         

Balance, beginning of period

   $ 213      $ 1,659     $ 71     $ 6,328  

Provision charged to expense

     31        (6     28       198  

Losses charged off

     —          —         (34     (74

Recoveries

     —          14       5       22  
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 244      $ 1,667     $ 70     $ 6,474  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ —       $ —       $ —    
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 244      $ 1,667     $ 70     $ 6,474  
  

 

 

    

 

 

   

 

 

   

 

 

 

Loans:

         

Ending balance

   $ 20,897      $ 83,812     $ 7,154     $ 500,682  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 41     $ 7     $ 1,659  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 20,897      $ 83,771     $ 7,147     $ 499,023  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

     Year Ended June 30, 2019
Real Estate Loans
 
     One- to
Four-Family
    Multi-
Family
    Commercial      Home Equity
Lines of
Credit
 

Allowance for loan losses:

         

Balance, beginning of year

   $ 997     $ 1,650     $ 1,604      $ 91  

Provision charged to expense

     29       (8     19        13  

Losses charged off

     (17     —         —          (15

Recoveries

     22       —         —          —    
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 1,031     $ 1,642     $ 1,623      $ 89  
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 13     $ —       $ —        $ —    
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,018     $ 1,642     $ 1,623      $ 89  
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

         

Ending balance

   $ 129,290     $ 104,663     $ 143,367      $ 8,938  
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,722     $ —       $ 18      $ 22  
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 127,568     $ 104,663     $ 143,349      $ 8,916  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Year Ended June 30, 2019 (Continued)  
     Construction      Commercial      Consumer     Total  

Allowance for loan losses:

          

Balance, beginning of year

   $ 168      $ 1,373      $ 62     $ 5,945  

Provision charged to expense

     45        286        23       407  

Losses charged off

     —          —          (18     (50

Recoveries

     —          —          4       26  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of year

   $ 213      $ 1,659      $ 71     $ 6,328  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ —        $ 10     $ 23  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Ending balance: collectively evaluated for impairment

   $ 213      $ 1,659      $ 61      $ 6,305  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

           

Ending balance

   $ 16,113      $ 84,246      $ 7,136      $ 493,753  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 60      $ 29      $ 1,851  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 16,113      $ 84,186      $ 7,107      $ 491,902  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended March 31, 2019
Real Estate Loans
 
     One- to
Four-Family
    Multi-
Family
     Commercial     Home Equity
Lines of
Credit
 

Allowance for loan losses:

         

Balance, beginning of period

   $ 1,023     $ 1,668      $ 1,804     $ 103  

Provision charged to expense

     (13     —          (77     2  

Losses charged off

     —         —          —         (15

Recoveries

     21       —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,031     $ 1,668      $ 1,727     $ 90  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 17     $ —        $ 1     $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,014     $ 1,668      $ 1,726     $ 90  
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

         

Ending balance

   $ 129,266     $ 106,400      $ 152,019     $ 9,058  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,831     $ —        $ 25     $ 23  
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 127,435     $ 106,400      $ 151,994     $ 9,035  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Three Months Ended March 31, 2019 (Continued)  
     Construction      Commercial      Consumer     Total  

Allowance for loan losses:

          

Balance, beginning of period

   $ 170      $ 1,481      $ 70     $ 6,319  

Provision charged to expense

     29        116        4       61  

Losses charged off

     —          —          (8     (23

Recoveries

     —          —          —         21  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 199      $ 1,597      $ 66     $ 6,378  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 5      $ —       $ 23  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 199      $ 1,592      $ 66     $ 6,355  
  

 

 

    

 

 

    

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 14,521      $ 80,350      $ 6,964     $ 498,578  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 172      $ 3     $ 2,054  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,521      $ 80,178      $ 6,961     $ 496,524  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended March 31, 2019
Real Estate Loans
 
     One- to
Four-Family
     Multi-
Family
     Commercial      Home Equity
Lines of
Credit
 

Allowance for loan losses:

           

Balance, beginning of period

   $ 997      $ 1,650      $ 1,604      $ 91  

Provision charged to expense

     12        18        123        14  

Losses charged off

     —          —          —          (15

Recoveries

     22        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 1,031      $ 1,668      $ 1,727      $ 90  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 17      $ —        $ 1      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,014      $ 1,668      $ 1,726      $ 90  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

           

Ending balance

   $ 129,266      $ 106,400      $ 152,019      $ 9,058  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 1,831      $ —        $ 25      $ 23  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 127,435      $ 106,400      $ 151,994      $ 9,035  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended March 31, 2019 (Continued)  
     Construction      Commercial      Consumer     Total  

Allowance for loan losses:

          

Balance, beginning of period

   $ 168      $ 1,373      $ 62     $ 5,945  

Provision charged to expense

     31        224        14       436  

Losses charged off

     —          —          (13     (28

Recoveries

     —          —          3       25  
  

 

 

    

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 199      $ 1,597      $ 66     $ 6,378  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 5      $ —       $ 23  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 199      $ 1,592      $ 66     $ 6,355  
  

 

 

    

 

 

    

 

 

   

 

 

 

Loans:

          

Ending balance

   $ 14,521      $ 80,350      $ 6,964     $ 498,578  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 172      $ 3     $ 2,054  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,521      $ 80,178      $ 6,961     $ 496,524  
  

 

 

    

 

 

    

 

 

   

 

 

 

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The allowance for loan losses represents an estimate of the amount of losses believed inherent in our loan portfolio at the balance sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the reserve to be consistent with prior periods and adequate to cover the estimated losses in our loan portfolio.

The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for estimated credit losses on individual loans that are determined to be impaired through the Company’s review for identified problem loans; and (2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio.

The specific allowance is measured by determining the present value of expected cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expense.

 

20


Table of Contents

Factors used in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition for loans secured by real estate, the Company also considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

The Company establishes a general allowance for loans that are not deemed impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. The general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Company’s historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. In certain instances, the historical loss experience could be adjusted if similar risks are not inherent in the remaining portfolio. The allowance is then adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These qualitative factors may include: (1) Management’s assumptions regarding the minimal level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured (“TDR”) and other loan modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.

Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size, for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance, homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Watch – Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of any pledged collateral. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

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Table of Contents

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged off.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Residential One- to Four-Family and Equity Lines of Credit Real Estate: The residential one- to four-family real estate loans are generally secured by owner-occupied one- to four-family residences. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial and Multi-family Real Estate: Commercial and multi-family real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Construction Real Estate: Construction real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

 

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Table of Contents

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity:

 

     Real Estate Loans                              
     One- to Four-
Family
     Multi-Family      Commercial      Home Equity
Lines of Credit
     Construction      Commercial      Consumer      Total  

March 31, 2020:

                       

Pass

   $ 127,480      $ 106,835      $ 141,965      $ 8,980      $ 20,897      $ 81,609      $ 7,147      $ 494,913  

Watch

     927        —          1,083        135        —          1,912        —          4,057  

Substandard

     778        272        348        16        —          291        7        1,712  

Doubtful

     —          —          —          —          —          —          —          —    

Loss

     —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,185      $ 107,107      $ 143,396      $ 9,131      $ 20,897      $ 83,812      $ 7,154      $ 500,682  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Real Estate Loans                              
     One- to Four-
Family
     Multi-Family      Commercial      Home Equity
Lines of Credit
     Construction      Commercial      Consumer      Total  

June 30, 2019:

                       

Pass

   $ 127,386      $ 104,504      $ 142,076      $ 8,918      $ 16,113      $ 81,906      $ 7,107      $ 488,010  

Watch

     —          —          1,040        —          —          1,375        —          2,415  

Substandard

     1,904        159        251        20        —          965        19        3,318  

Doubtful

     —          —          —          —          —          —          10        10  

Loss

     —          —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,290      $ 104,663      $ 143,367      $ 8,938      $ 16,113      $ 84,246      $ 7,136      $ 493,753  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Past due status is based on contractual terms of the loan. In all instances, loans are placed on non-accrual or are charged off at an earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. The interest on these loans is accounted for on a cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present the Company’s loan portfolio aging analysis:

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
Greater
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
90 Days Past
Due &
Accruing
 

March 31, 2020:

                    

Real estate loans:

                    

One- to four-family

   $ 1,445      $ 173      $ 303      $ 1,921      $ 127,264      $ 129,185      $ 129  

Multi-family

     —          —          —          —          107,107        107,107        —    

Commercial

     177        —          73        250        143,146        143,396        72  

Home equity lines of credit

     11        —          —          11        9,120        9,131        —    

Construction

     —          —          —          —          20,897        20,897        —    

Commercial

     76        232        233        541        83,271        83,812        228  

Consumer

     47        32        —          79        7,075        7,154        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,756      $ 437      $ 609      $ 2,802      $ 497,880      $ 500,682      $ 429  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or
Greater
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
90 Days Past
Due &
Accruing
 

June 30, 2019:

                    

Real estate loans:

                    

One- to four-family

   $ 1,515      $ 255      $ 481      $ 2,251      $ 127,039      $ 129,290      $ 226  

Multi-family

     422        —          —          422        104,241        104,663        —    

Commercial

     74        6        12        92        143,275        143,367        —    

Home equity lines of credit

     —          26        20        46        8,892        8,938        —    

Construction

     —          —          —          —          16,113        16,113        —    

Commercial

     291        —          60        351        83,895        84,246        —    

Consumer

     99        —          29        128        7,008        7,136        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,401      $ 287      $ 602      $ 3,290      $ 490,463      $ 493,753      $ 226  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Association will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significantly restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlements with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are $1.4 million in TDRs that were classified as impaired.

The following tables present impaired loans:

 

                          Three Months Ended
March 31, 2020
     Nine Months Ended
March 31, 2020
 
     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Interest on
Cash Basis
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Interest on
Cash Basis
 

March 31, 2020:

                          

Loans without a specific valuation allowance

                          

Real estate loans:

                          

One- to four-family

   $ 1,591      $ 1,591      $ —        $ 1,613      $ 13      $ 15      $ 1,641      $ 47      $ 48  

Multi-family

     —          —          —          —          —          —          —          —          —    

Commercial

     4        4        —          5        —          —          11        —          —    

Home equity line of credit

     16        16        —          17        —          —          19        —          —    

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     41        41        —          44        —          —          51        —          —    

Consumer

     7        7        —          8        —          —          9        —          —    

Loans with a specific valuation allowance

                          

Real estate loans:

                          

One- to four-family

     —          —          —          —          —          —          —          —          —    

 

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Table of Contents

Multi-family

     —          —          —          —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —          —          —          —    

Home equity line of credit

     —          —          —          —          —          —          —          —          —    

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —          —          —          —    

Total:

                          

Real estate loans:

                          

One- to four-family

     1,591        1,591        —          1,613        13        15        1,641        47        48  

Multi-family

     —          —          —          —          —          —          —          —          —    

Commercial

     4        4        —          5        —          —          11        —          —    

Home equity line of credit

     16        16        —          17        —          —          19        —          —    

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     41        41        —          44        —          —          51        —          —    

Consumer

     7        7        —          8        —          —          9        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,659      $ 1,659      $ —        $ 1,687      $ 13      $ 15      $ 1,731      $ 47      $ 48  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Year Ended
June 30, 2019
 
     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Interest on
Cash Basis
 

June 30, 2019:

                 

Loans without a specific valuation allowance

                 

Real estate loans:

                 

One- to four-family

   $ 1,676      $ 1,676      $ —        $ 1,718      $ 63      $ 71  

Multi-family

     —          —          —          1        —          —    

Commercial

     18        18        —          34        —          —    

Home equity line of credit

     22        22        —          24        1        2  

Construction

     —          —          —          —          —          —    

Commercial

     60        60        —          63        6        6  

Consumer

     19        19        —          24        2        2  

Loans with a specific allowance

                 

Real estate loans:

                 

One- to four-family

     46        46        13        47        1        1  

Multi-family

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    

Home equity line of credit

     —          —          —          —          —          —    

Construction

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    

Consumer

     10        10        10        11        1        1  

Total:

                 

Real estate loans:

                 

One- to four-family

     1,722        1,722        13        1,765        64        72  

Multi-family

     —          —          —          1        —          —    

Commercial

     18        18        —          34        —          —    

Home equity line of credit

     22        22        —          24        1        2  

Construction

     —          —          —          —          —          —    

Commercial

     60        60        —          63        6        6  

Consumer

     29        29        10        35        3        3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,851      $ 1,851      $ 23      $ 1,922      $ 74      $ 83  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                          Three Months Ended
March 31, 2019
     Nine Months Ended
March 31, 2019
 
     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Interest on
Cash Basis
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Interest on
Cash Basis
 

March 31, 2019:

                          

Loans without a specific valuation allowance

                          

Real estate loans:

                          

One- to four-family

   $ 1,741      $ 1,741      $ —        $ 1,752      $ 11      $ 20      $ 1,773      $ 50      $ 57  

Multi-family

     —          —          —          —          —          —          1        —          —    

Commercial

     24        24        —          30        —          —          36        —          —    

Home equity line of credit

     23        23        —          23        —          1        24        1        2  

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     167        167        —          176        —          —          194        5        7  

Consumer

     3        3        —          3        —          —          3        —          —    

Loans with a specific valuation allowance

                          

Real estate loans:

                          

One- to four-family

     90        90        17        90        1        1        90        4        4  

Multi-family

     —          —          —          —          —          —          —          —          —    

Commercial

     1        1        1        1        —          —          2        —          —    

Home equity line of credit

     —          —          —          —          —          —          —          —          —    

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     5        5        5        5        —          —          7        —          —    

Consumer

     —          —          —          —          —          —          —          —          —    

Total:

                          

Real estate loans:

                          

One- to four-family

     1,831        1,831        17        1,842        12        21        1,863        54        61  

Multi-family

     —          —          —          —          —          —          1        —          —    

Commercial

     25        25        1        31        —          —          38        —          —    

Home equity line of credit

     23        23        —          23        —          1        24        1        2  

Construction

     —          —          —          —          —          —          —          —          —    

Commercial

     172        172        5        181        —          —          201        5        7  

Consumer

     3        3        —          3        —          —          3        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,054      $ 2,054      $ 23      $ 2,080      $ 12      $ 22      $ 2,130      $ 60      $ 70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.

 

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The following table presents the Company’s nonaccrual loans at March 31, 2020 and June 30, 2019:

 

     March 31,
2020
     June 30,
2019
 

Mortgages on real estate:

     

One- to four-family

   $ 174      $ 414  

Multi-family

     —          —    

Commercial

     4        18  

Home equity lines of credit

     16        20  

Construction loans

     —          —    

Commercial business loans

     41        60  

Consumer loans

     7        29  
  

 

 

    

 

 

 

Total

   $ 242      $ 541  
  

 

 

    

 

 

 

At March 31, 2020 and June 30, 2019, the Company had a number of loans that were modified in TDRs and that were impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of March 31, 2020 and June 30, 2019. With the exception of two one- to four-family residential loans for $2,000, and one commercial real estate loan for $1,000, all were performing according to the terms of the restructuring as of March 31, 2020, and with the exception of three one- to four-family residential loans totaling $8,000, one home equity line of credit for $20,000, and one consumer loan for $2,000, all were performing according to the terms of restructuring as of June 30, 2019. As of March 31, 2020, all loans listed were on nonaccrual except for eleven one- to four-family residential loans totaling $1.4 million, and one home equity line of credit for $1,000. All loans listed as of June 30, 2019 were on nonaccrual except for ten one- to four-family residential loans totaling $1.3 million, and one home equity line of credit for $1,000.

 

     March 31,
2020
     June 30,
2019
 

Real estate loans

     

One- to four-family

   $ 1,420      $ 1,475  

Multi-family

     —          —    

Commercial

     1        6  

Home equity lines of credit

     16        22  
  

 

 

    

 

 

 

Total real estate loans

     1,437        1,503  
  

 

 

    

 

 

 

Construction

     —          —    

Commercial

     —          —    

Consumer loans

     —          2  
  

 

 

    

 

 

 

Total

   $ 1,437      $ 1,505  
  

 

 

    

 

 

 

Modifications

During the nine month period ended March 31, 2020, no loans were modified.

During the year ended June 30, 2019, the Company modified one one- to four-family loan in the amount of $166,000.

During the nine month period ended March 31, 2019, the Company modified one one- to four-family loan for $166,000 was modified as a TDR.

TDR’s with Defaults

The Company had three TDRs, all one- to four-family residential loans totaling $131,000 that were in default as of March 31, 2020, and were restructured in prior periods. No restructured loans were in foreclosure at March 31, 2020. The Company had six TDRs, four one- to four-family residential loans for $144,000, one home equity line of credit for $20,000, and one consumer loan for $2,000 that were in default as of June 30, 2019, and were restructured in prior years. No restructured loans were in foreclosure at June 30, 2019. The Company defines a default as any loan that becomes 90 days or more past due.

 

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Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of estimating future losses.

Management considers the level of defaults within the various portfolios, as well as the current adverse economic environment and negative outlook in the real estate and collateral markets when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. We believe the qualitative adjustments more accurately reflect collateral values in light of the sales and economic conditions that we have recently observed.

We may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of March 31, 2020, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $213,000. In addition, as of March 31, 2020, we had residential mortgage loans and home equity loans with a carrying value of $7,000 collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Note 7: Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned $2,408,000 of Federal Home Loan Bank stock as of March 31, 2020 and $1,174,000 as of June 30, 2019. The FHLB provides liquidity and funding through advances.

Note 8: Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, were as follows at the dates specified:

 

     March 31,
2020
     June 30,
2019
 

Net unrealized gains on securities available-for-sale

   $ 4,237      $ 1,386  

Net unrealized postretirement health benefit plan obligations

     (584      (596
  

 

 

    

 

 

 
     3,653        790  

Tax effect

     (1,041      (225
  

 

 

    

 

 

 

Total

   $ 2,612      $ 565  
  

 

 

    

 

 

 

Note 9: Changes in Accumulated Other Comprehensive Income (AOCI) by Component

Amounts reclassified from AOCI and the affected line items in the statements of income during the three and nine month periods ended March 31, 2020 and 2019, were as follows:

 

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    Amounts Reclassified from AOCI      
    Three Months Ended March 31,     Nine Months Ended March 31,      
    2020     2019     2020     2019    

Affected Line Item in the Condensed
Consolidated Statements of Income

Realized gains (losses) on available-for-sale securities

  $ 146     $ —       $ 139     $ —      

Net realized gains on sale of available-for-sale securities

Amortization of defined benefit pension items:

         

Components are included in computation of net periodic pension cost

Actuarial losses

  $ 3     $ 7     $ 13     $ 15    

Prior service costs

  $ —       $ —       $ —       $ —      
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassified amount before tax

    149       7       152       15    

Tax expense

    43       2       45       5     Provision for Income Tax
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassification out of AOCI

  $ 106     $ 5     $ 107     $ 10     Net Income
 

 

 

   

 

 

   

 

 

   

 

 

   

Note 10: Income Taxes

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2020      2019      2020      2019  

Computed at the statutory rate

   $ 236      $ 229      $ 835      $ 721  

Decrease resulting from

           

Tax exempt interest

     (2      (6      (13      (19

Cash surrender value of life insurance

     (14      (14      (43      (42

State income taxes

     86        73        299        231  

Other

     10        4        25        19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Actual expense

   $ 316      $ 286      $ 1,103      $ 910  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 11: Regulatory Capital

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

The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things, (i) establish the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) set forth the acceptable scope of deductions/adjustments to the specified capital measures. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions fully phased in on January 1, 2019.

 

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Additionally, the Basel III Capital Rules require that we maintain a capital conservation buffer with respect to each of the CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital conservation buffer was phased in and became fully phased in on January 1, 2019 at 2.5%. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies were required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have issued a final ruling setting the minimum capital for the Community Bank Leverage Ratio at 9%. The Association “opted in” to elect the Community Bank Leverage Ratio, effective with the quarter ended March 31, 2020.

As of March 31, 2020, the Association met all capital adequacy requirements to which it is subject and was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Association’s prompt corrective action category.

Note 12: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

  Level 1

Quoted prices in active markets for identical assets or liabilities

 

  Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

  Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019:

 

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Table of Contents
            Fair Value Measurements Using  
     Fair Value      Quoted
Prices in
Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

March 31, 2020:

           

Available-for-sale securities:

           

US Government and federal agency

   $ 8,160      $ —        $ 8,160      $ —    

Mortgage-backed securities – GSE residential

     139,640        —          139,640        —    

Small Business Administration

     3,607        —          3,607        —    

State and political subdivisions

     1,541        —          1,541        —    

Mortgage servicing rights

     821        —          —          821  

 

            Fair Value Measurements Using  
     Fair Value      Quoted
Prices in
Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

June 30, 2019:

           

Available-for-sale securities:

           

US Government and federal agency

   $ 12,950      $ —        $ 12,950      $ —    

Mortgage-backed securities – GSE residential

     125,510        —          125,510        —    

Small Business Administration

     4,935        —          4,935        —    

State and political subdivisions

     2,896        —          2,896        —    

Mortgage servicing rights

     853        —          —          853  

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2020. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There were no Level 1 securities as of March 31, 2020 or June 30, 2019. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include

 

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one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE—residential) and state and political subdivisions. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. There were no Level 3 securities as of March 31, 2020 or June 30, 2019.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

 

     Mortgage
Servicing Rights
 

Balance, July 1, 2019

   $ 853  

Total realized and unrealized gains and losses included in net income

     (110

Servicing rights that result from asset transfers

     173  

Payments received and loans refinanced

     (95
  

 

 

 

Balance, March 31, 2020

   $ 821  
  

 

 

 

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date

   $ (110
  

 

 

 

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as noninterest income.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019:

 

            Fair Value Measurements Using  
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

March 31, 2020:

           

Impaired loans (collateral-dependent)

   $ —        $ —        $ —        $ —    

Foreclosed assets

   $ —        $ —        $ —        $ —    

June 30, 2019:

           

Impaired loans (collateral-dependent)

   $ 33      $ —        $ —        $ 33  

Foreclosed assets

   $ 512      $ —        $ —        $ 512  

 

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The following table presents recoveries (losses) recognized on assets measured on a non-recurring basis for the three months and nine months ended March 31, 2020 and 2019:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2020      2019      2020      2019  

Impaired loans (collateral-dependent)

   $ —        $ —        $ 13      $ —    

Foreclosed and repossessed assets held for sale

   $ —        $ (160    $ —        $ (160

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of the Allowance for Loan Losses

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the senior lending officer. Appraisals are reviewed for accuracy and consistency by the senior lending officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the senior lending officer by comparison to historical results.

Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2020 and June 30, 2019.

 

     Fair Value at
March 31, 2020
    

Valuation Technique

  

Unobservable Inputs

   Range (Weighted Average)

Mortgage servicing rights

   $ 821     

Discounted cash flow

  

Discount rate

   9.5% - 11.5% (9.5%)
        

Constant prepayment rate

   12.0% - 14.5% (12.1%)
        

Probability of default

   0.05% - 0.12% (0.11%)

 

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Table of Contents
     Fair Value at
June 30, 2019
    

Valuation Technique

  

Unobservable Inputs

   Range (Weighted Average)

Mortgage servicing rights

   $ 853     

Discounted cash flow

  

Discount rate

   9.5% - 11.5% (9.5%)
        

Constant prepayment rate

   8.3% - 11.0% (9.0%)
        

Probability of default

   0.05% - 0.12% (0.11%)

Impaired loans (collateral dependent)

     33     

Market comparable properties

  

Marketability discount

   11.1% (11.1%)

Foreclosed assets

     512     

Market comparable properties

  

Comparability adjustments (%)

   7.8% (7.8%)

Fair Value of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2020 and June 30, 2019.

 

     Carrying
Amount
     Fair Value
Measurements
Using

Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

March 31, 2020:

           

Financial assets

           

Cash and cash equivalents

   $ 6,875      $ 6,875      $ —        $ —    

Interest-bearing time deposits in banks

     3,000        3,000        —          —    

Loans, net of allowance for loan losses

     494,517        —          —          498,172  

Federal Home Loan Bank stock

     2,408        —          2,408        —    

Accrued interest receivable

     2,025        —          2,025        —    

Financial liabilities

           

Deposits

     533,130        —          241,837        293,137  

Repurchase agreements

     3,404        —          3,404        —    

Federal Home Loan Bank advances

     53,500        —          54,533        —    

Advances from borrowers for taxes and insurance

     1,272        —          1,272        —    

Accrued interest payable

     935        —          935        —    

Unrecognized financial instruments (net of contract amount)

     —          —          —          —    

Commitments to originate loans

     —          —          —          —    

Lines of credit

     5,000        5,000        —          —    

 

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Table of Contents
     Carrying
Amount
     Fair Value
Measurements
Using
Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

June 30, 2019:

           

Financial assets

           

Cash and cash equivalents

   $ 59,600      $ 59,600      $ —        $ —    

Interest-bearing time deposits in banks

     3,000        3,000        —          —    

Loans, net of allowance for loan losses

     487,774        —          —          480,479  

Federal Home Loan Bank stock

     1,174        —          1,174        —    

Accrued interest receivable

     2,142        —          2,142        —    

Financial liabilities

           

Deposits

     607,023        —          276,738        331,865  

Repurchase agreements

     2,015        —          2,015        —    

Federal Home Loan Bank advances

     24,000        —          24,419        —    

Advances from borrowers for taxes and insurance

     747        —          747        —    

Accrued interest payable

     801        —          801        —    

Unrecognized financial instruments (net of contract amount)

           

Commitments to originate loans

     —          —          —          —    

Lines of credit

     —          —          —          —    

In accordance with the Company’s adoption of ASU 2016-01 as of July 1, 2018, the methods utilized to measure the fair value of financial instruments at March 31, 2020, represent an approximation of exit price; however, an actual exit price may differ.

Note 13: Commitments

Commitments to Originate Loans

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 a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

 

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Table of Contents

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

 

Item 2.

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on management’s current expectations regarding its business strategies and their intended results and IF Bancorp, Inc.’s (“the Company”) future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our actual results include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Association’s loan or investment portfolios.

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 that has caused the COVID-19 pandemic 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, our forward-looking statements are subject to the following additional risks, uncertainties and assumptions:

 

   

demand for our products and services may decline;

 

   

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;

 

   

collateral for loans, especially real estate, may decline in value;

 

   

our allowance for loan losses may have to be increased if borrowers experience financial difficulties;

 

   

the net worth and liquidity of loan guarantors may decline;

 

   

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;

 

   

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our semi-annual cash dividend;

 

   

actions taken by the federal, state or local governments to cushion the impact of COVID-19 on consumers and businesses may have a negative impact on us and our business;

 

   

our wealth management 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; and

 

   

FDIC premiums may increase if the agency experience additional resolution costs.

 

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Additional factors that may affect our results are discussed under “Item 1A.—Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, and the Company’s other filings with the SEC including in Part II, Item 1A of this report. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. IF Bancorp, Inc. assumes no obligation to update any forward-looking statement, except as may be required by law.

Overview

On July 7, 2011 we completed our initial public offering of common stock in connection with the Association’s mutual-to-stock conversion, selling 4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to the Association’s employee stock ownership plan, and raising approximately $45.0 million of gross proceeds. We also established a charitable foundation, Iroquois Federal Foundation, to which we contributed 314,755 shares of our common stock. As of March 31, 2020, the Company repurchased 1,674,479 shares of common stock under stock repurchase plans.

The Company is a savings and loan holding company and is subject to regulation by the Board of Governors of the Federal Reserve System. The Company’s business activities are limited to oversight of its investment in the Association.

The Association is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers within a 100-mile radius of its locations in Watseka, Danville, Clifton, Hoopeston, Savoy, Champaign and Bourbonnais, Illinois and Osage Beach, Missouri. The principal activity of the Association’s wholly-owned subsidiary, L.C.I. Service Corporation (“L.C.I.”), is the sale of property and casualty insurance. The Association is subject to regulation by the Office of the Controller of the Currency and the Federal Deposit Insurance Corporation.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, repurchase agreements, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, insurance commission income, net realized gains on loan sales, mortgage banking income, and income on bank-owned life insurance. Noninterest expense consists primarily of compensation and benefits, occupancy and equipment, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) was 2.51% and 2.61% for the nine months ended March 31, 2020 and 2019, respectively. Net interest income increased to $13.5 million for the nine months ended March 31, 2020, from $13.4 million for the nine months ended March 31, 2019.

Our emphasis on conservative loan underwriting has historically resulted in relatively low levels of non-performing assets. Our non-performing loans totaled $671,000, or 0.1%, of total loans at March 31, 2020 and $767,000, or 0.2%, of total loans at June 30, 2019. Our non-performing assets totaled $1.1 million or 0.2% of total assets at March 31, 2020, and $1.5 million, or 0.2% of total assets at June 30, 2019.

At March 31, 2020, the Association was categorized as “well capitalized” under regulatory capital requirements.

Our net income for the nine months ended March 31, 2020 was $2.9 million, compared to a net income of $2.5 million for the nine months ended March 31, 2019.

 

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Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended March 31, 2020 and 2019 is intended to assist in understanding the financial condition and results of operations of the Association. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Recent Developments: COVID-19 and the CARES Act

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

Financial position and results of operations

Our March 31, 2020 financial condition and results of operations reflect a slightly negative impact on our allowance for loan losses as a result of COVID-19. While we have not yet experienced any charge-offs related to COVID-19, our allowance for loan losses calculation and resulting provision for credit losses were impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios have darkened since the pandemic was declared in early March, our need for additional reserve for credit loss increased. Refer to our discussion and analysis of financial condition and results of operations below and under Risk Factors. Should economic conditions worsen, we could experience further increases in our required allowance for loan losses and record additional credit loss expense. The execution of the payment deferrals discussed in the following commentary, including below under the heading “Lending operations and accommodations to borrowers” has assisted our ratio of past due loans to total loans. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

Our fee income could be reduced due to COVID-19. We are working with COVID-19 affected customers by temporarily waiving fees when appropriate including insufficient funds and overdraft fees, and ATM fees. At this time, we do not anticipate a material impact on our fee income.

Our interest income could be reduced due to COVID-19. In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and liquidity

As of March 31, 2020, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

 

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We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin. If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of March 31, 2020 we did not have any impairment with respect to our intangible assets, premises and equipment or other long-lived assets.

Our Business Continuity and Pandemic Response Plan

The Company maintains a Disaster Recovery/Business Continuity Plan to ensure the maintenance or recovery of operations, including services to customers, when confronted with adverse events such as natural disasters, technological failures, human error, cybercrime, terrorism or pandemic outbreak. When the Pandemic declaration was announced, the Disaster Planning/Recovery team activated the Disaster Recovery Plan, including the Pandemic Response Plan, with a focus on maintaining virtually all customer services in the event of a total or partial closure of banking offices and/or staffing shortages. The team implemented protocols for employee safety, reviewed critical business processes, identified staff who could work remotely, and began mobilizing and preparing the equipment that would be required. An Employee Telecommuting Agreement was developed to establish controls and expectations for those working remotely, including adherence to security and privacy policies. Timely communication was provided to employees and customers. ATM and vault cash was increased at all locations in anticipation of greater demand. The Company’s quick and decisive plan implementation resulted in minimal impacts to operations as a result of COVID-19. Prior technology planning enabled the successful deployment of certain operations and other personnel to remote environments thereby reducing the number of employees working from physical banking offices. In addition, bank lobbies were closed and customer traffic limited to drive-up facilities. This reduced the number of employees required to be on-site at any given time and allowed teams to rotate in and out at periodic intervals, helping to facilitate the effective implementation of social distancing standards.

We do not anticipate any material cost related to the deployment of safety protocols, including PPE or the remote working strategy. No material operational or internal control challenges or risks have been identified to date. Our COVID-19 Response Team continues to anticipate and respond to COVID-19 developments. We don’t anticipate any significant challenges to our ability to maintain our systems and controls and we do not currently face any material resource constraint through the implementation of our business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing payment deferrals for our lending clients that are adversely affected by the pandemic. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment for 60 to 180 days. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings.

With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company is actively participating in assisting our customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, we have closed or approved with the SBA 266 PPP loans representing $25.7 million in funding. It is our understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

 

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We are working with customers directly affected by COVID-19. We are prepared to offer short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-19 virus, we are engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing us to respond proactively as needs and issues arise.

Retail operations

With the health and safety of our customers and staff in mind, and consistent with recommendations from the CDC and State and Local governments concerning COVID-19, all banking offices, with the exception of the Hoopeston location began operating as drive-up only facilities on March 18, 2020. The lobby and drive-up of the Hoopeston location remained open with protective screening. Most banking transactions continue through the drive-ups, including opening new deposit accounts. Online and Mobile Banking is available for customer’s to check their balance, transfer funds, and pay bills. Checks can be deposited using Mobile Banking. Our network of over 50,000 ATMs are available for cash withdrawals with no service charge. Although our lobbies are closed, we are still open, operating and serving our customers with uninterrupted access to their account information and the ability to complete banking transactions.

Critical Accounting Policies

We define critical accounting policies as those policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change in the near term, due to changes in credit quality which are evidenced by trends in charge-offs and in the volume and severity of past due loans. In addition, our portfolio is comprised of a substantial amount of commercial real estate loans which generally have greater credit risk than one- to four-family residential mortgage and consumer loans because these loans generally have larger principal balances and are non-homogenous.

The allowance for loan losses is maintained at a level to provide for probable credit losses inherent in the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:

 

   

loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and

 

   

groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and the estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results. See “Allowance for Loan Loss Activity” below.

Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is more likely than not that