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 September 30, 2020

OR

 

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

For the transition period from                      to                     

Commission File 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)

 

 

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, $0.01 par value		IROQ		The Nasdaq Stock Market LLC

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		☒

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 November 5, 2020.

 

 

 

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 September 30, 2020 (unaudited) and June 30, 2020		1
		Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2020 and 2019 (unaudited)		2
		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2020 and 2019 (unaudited)		3
		Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2020 and 2019 (unaudited)		4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019 (unaudited)		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			50
Item 4.		Controls and Procedures			50
Part II. Other Information
Item 1.		Legal Proceedings			51
Item 1A.		Risk Factors			51
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3.		Defaults upon Senior Securities			51
Item 4.		Mine Safety Disclosures			51
Item 5.		Other Information			51
Item 6.		Exhibits			52
		Signature Page		53

Part I. – Financial Information

 

Item 1.

Financial Statements

IF Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amount)

 

		September 30, 2020				June 30, 2020
Assets			(Unaudited	)
Cash and due from banks		$	13,762			$	31,529
Interest-bearing demand deposits			1,934				1,938
Cash and cash equivalents			15,696				33,467
Interest-bearing time deposits in banks			3,000				3,000
Available-for-sale securities			161,292				162,394
Loans, net of allowance for loan losses of $6,506 and $6,234 at September 30, 2020 and June 30, 2020, respectively			518,241				509,817
Premises and equipment, net of accumulated depreciation of $8,185 and $8,016 at September 30, 2020 and June 30, 2020, respectively			10,081				10,193
Federal Home Loan Bank stock, at cost			4,198				3,028
Foreclosed assets held for sale, net			440				386
Accrued interest receivable			1,615				1,908
Bank-owned life insurance			9,415				9,345
Mortgage servicing rights			731				715
Deferred income taxes			707				630
Other			588				634
Total assets		$	726,004			$	735,517
Liabilities and Equity
Liabilities
Deposits
Demand		$	42,169			$	87,486
Savings, NOW and money market			265,837				232,723
Certificates of deposit			281,386				269,152
Brokered certificates of deposit			12,339				12,339
Total deposits			601,731				601,700
Repurchase agreements			4,383				3,738
Federal Home Loan Bank advances			24,000				34,500
Line of credit and other borrowings			3,000				3,000
Advances from borrowers for taxes and insurance			806				519
Accrued post-retirement benefit obligation			3,322				3,306
Accrued interest payable			421				537
Other			4,794				5,653
Total liabilities			642,457				652,953
Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value per share, 100,000,000 shares authorized, 3,240,376 shares issued and outstanding at both September 30, 2020 and June 30, 2020			32				32
Additional paid-in capital			49,326				49,239
Unearned ESOP shares, at cost, 206,884 and 211,695 shares at September 30, 2020 and June 30, 2020, respectively			(2,069	)			(2,117	)
Retained earnings			32,053				31,207
Accumulated other comprehensive income, net of tax			4,205				4,203
Total stockholders’ equity			83,547				82,564
Total liabilities and stockholders’ equity		$	726,004			$	735,517

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1

IF Bancorp, Inc.

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands except per share amounts)

 

		Three Months Ended September 30,
		2020				2019
Interest and Dividend Income
Interest and fees on loans		$	5,353			$	5,897
Securities:
Taxable			840				919
Tax-exempt			11				30
Federal Home Loan Bank dividends			34				23
Deposits with other financial institutions			27				139
Total interest and dividend income			6,265				7,008
Interest Expense
Deposits			1,235				2,283
Federal Home Loan Bank advances and repurchase agreements			123				135
Line of credit and other borrowings			19				4
Total interest expense			1,377				2,422
Net Interest Income			4,888				4,586
Provision for Loan Losses			315				(54	)
Net Interest Income After Provision for Loan Losses			4,573				4,640
Noninterest Income
Customer service fees			67				102
Other service charges and fees			115				65
Insurance commissions			160				162
Brokerage commissions			225				235
Net realized gains on sales of available-for-sale securities			204				1
Mortgage banking income, net			90				45
Gain on sale of loans			563				140
Gain on foreclosed assets, net			(9	)			(2	)
Bank-owned life insurance income, net			70				70
Other			257				248
Total noninterest income			1,742				1,066
Noninterest Expense
Compensation and benefits			2,877				2,665
Office occupancy			229				255
Equipment			423				386
Federal deposit insurance			44				28
Stationary, printing and office			33				30
Advertising			84				121
Professional services			100				116
Supervisory examinations			35				44
Audit and accounting services			73				69
Organizational dues and subscriptions			22				19
Insurance bond premiums			49				41
Telephone and postage			50				50
Other			453				367
Total noninterest expense			4,472				4,191
Income Before Income Tax			1,843				1,515
Provision for Income Tax			512				415
Net Income		$	1,331			$	1,100
Earnings Per Share:
Basic		$	0.44			$	0.33
Diluted		$	0.44			$	0.33
Dividends declared per common share		$	0.15			$	0.15

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2

IF Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

 

		Three Months Ended September 30,
		2020				2019
Net Income		$	1,331			$	1,100
Other Comprehensive Income
Unrealized appreciation on available-for-sale securities, net of taxes of $58 and $345, for 2020 and 2019, respectively			147				868
Less: reclassification adjustment for realized gains included in net income, net of taxes of $58 and $0 for 2020 and 2019, respectively			146				1
			1				867
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			1				3
Other comprehensive income, net of tax			2				870
Comprehensive Income		$	1,333			$	1,970

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

IF Bancorp, Inc.

Condensed Consolidated Statements 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				Total
For the three months ended September 30, 2020
Balance, July 1, 2020		$	32			$	49,239			$	(2,117	)		$	31,207			$	4,203			$	82,564
Net income			—				—				—				1,331				—				1,331
Other comprehensive income			—				—				—				—				2				2
Dividends on common stock, $0.15 per share			—				—				—				(485	)			—				(485	)
Stock equity plan			—				31				—				—				—				31
ESOP shares earned, 4,811 shares			—				56				48				—				—				104
Balance, September 30, 2020		$	32			$	49,326			$	(2,069	)		$	32,053			$	4,205			$	83,547
For the three months ended September 30, 2019
Balance, July 1, 2019		$	36			$	48,813			$	(2,309	)		$	35,356			$	565			$	82,461
Net income			—				—				—				1,100				—				1,100
Other comprehensive income			—				—				—				—				870				870
Dividends on common stock, $0.15 per share			—				—				—				(521	)			—				(521	)
Stock equity plan			—				55				—				—				—				55
Stock repurchase, 304,181 shares, average price $22.30 each			(4	)			—				—				(6,779	)			—				(6,783	)
ESOP shares earned, 4,811 shares			—				57				48				—				—				105
Balance, September 30, 2019		$	32			$	48,925			$	(2,261	)		$	29,156			$	1,435			$	77,287

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

IF Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Three Months Ended September 30,
		2020				2019
Operating Activities
Net income		$	1,331			$	1,100
Items not requiring (providing) cash
Depreciation			169				153
Provision for loan losses			315				(54	)
Amortization of premiums and discounts on securities			158				91
Deferred income taxes			(78	)			342
Net realized gains on loan sales			(563	)			(140	)
Net realized gains on sales of available-for-sale securities			(204	)			(1	)
Loss on foreclosed assets held for sale			9				2
Bank-owned life insurance income, net			(70	)			(70	)
Originations of loans held for sale			(16,358	)			(5,883	)
Proceeds from sales of loans held for sale			17,457				6,356
ESOP compensation expense			104				105
Stock equity plan expense			31				55
Changes in
Accrued interest receivable			293				(244	)
Other assets			45				(296	)
Accrued interest payable			(116	)			389
Post-retirement benefit obligation			18				16
Other liabilities			(1,343	)			(54	)
Net cash provided by operating activities			1,198				1,867
Investing Activities
Purchases of available-for-sale securities			(13,757	)			(6,596	)
Proceeds from the sales of available-for-sale securities			7,830				—
Proceeds from maturities and pay downs of available-for-sale securities			7,076				6,034
Net change in loans			(9,544	)			(3,482	)
Purchase of premises and equipment			(57	)			(84	)
Proceeds from the sale of foreclosed assets			190				220
Purchase of Federal Home Loan Bank stock			(1,170	)			(41	)
Net cash used in investing activities			(9,432	)			(3,949	)
Financing Activities
Net decrease in demand deposits, money market, NOW and savings accounts			(12,203	)			(44,353	)
Net increase (decrease) in certificates of deposit, including brokered certificates			12,234				(6,193	)
Net increase in advances from borrowers for taxes and insurance			287				100
Proceeds from Federal Home Loan Bank advances			72,000				8,000
Repayments of Federal Home Loan Bank advances			(82,500	)			(5,000	)
Proceeds from other borrowings			—				5,000
Net increase in repurchase agreements			645				1,087
Purchases of common stock			—				(6,783	)
Net cash used in financing activities			(9,537	)			(48,142	)
Net Decrease in Cash and Cash Equivalents			(17,771	)			(50,224	)
Cash and Cash Equivalents, Beginning of Period			33,467				59,600
Cash and Cash Equivalents, End of Period		$	15,696			$	9,376
Supplemental Cash Flows Information
Interest paid		$	1,493			$	2,033
Income taxes paid (net of refunds)		$	610			$	200
Dividends payable		$	485			$	521
Foreclosed assets acquired in settlement of loans		$	253			$	28

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

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., (“IF Bancorp” or the “Company”) is a Maryland corporation whose principal activity is the ownership and management of its wholly-owned subsidiary, Iroquois Federal Savings and Loan Association (“Iroquois Federal” or the “Association”). 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 September 30, 2020 and June 30, 2020, and the results of its operations for the three month periods ended September 30, 2020 and 2019. These condensed 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, 2020. The results of operations for the three-month period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the entire year.

COVID-19

We are subject to risks and uncertainties as a result of the COVID-19 pandemic. Given the ongoing and dynamic nature of circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. 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 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.

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

 

6

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 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 established a team to review the requirements as published, monitor developments and new guidance, and review and collect data that will be required to calculate and report the allowance when ASU 2016-13 becomes effective. We have entered an agreement with a firm specializing in ALLL modeling and have begun transition modeling so we will be ready for the required adoption. As of September 30, 2020, model installation was not completed to a point a reliable parallel test could determine the final expected impact that the adoption of ASU 2016-13 will have on the consolidated financial statements.

 

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,

 

7

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 September 30, 2020 and June 30, 2020 are as follows (dollars in thousands):

 

		September 30, 2020				June 30, 2020
Allocated shares			146,347				127,102
Shares committed for release			4,811				19,245
Unearned shares			206,884				211,695
Total ESOP shares			358,042				358,042
Fair value of unearned ESOP shares (1)		$	3,200			$	3,652

 

(1)	Based on closing price of $15.47 and $17.25 per share on September 30, 2020, and June 30, 2020, respectively.

During the three months ended September 30, 2020 and 2019, no ESOP shares, were paid to ESOP participants due to separation from service.

The IF Bancorp, Inc. 2012 Equity Incentive Plan (the “Equity Incentive Plan”) was approved by stockholders in 2012. 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.

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 September 30, 2020, there were 90,050 shares of restricted stock and 314,125 stock option shares available for future grants under this plan.

 

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The following table summarizes stock option activity for the three months ended September 30, 2020 (dollars in thousands):

 

		Options				Weighted-Average Exercise Price/Share				Weighted-Average Remaining Contractual Life (in years)				Aggregate Intrinsic Value
Outstanding, June 30, 2020			153,143			$	16.63
Granted			—				—
Exercised			—				—
Forfeited			—				—
Outstanding, September 30, 2020			153,143			$	16.63				3.2			$	—	(1)
Exercisable, September 30, 2020			130,857			$	16.63				3.2			$	—	(1)

 

(1)	Based on closing price of $15.47 per share on September 30, 2020.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. There were no options granted during the three months ended September 30, 2020.

No options vested during the three months ended September 30, 2020 and 2019. Stock-based compensation expense and related tax benefit was considered nominal for stock options for the three months ended September 30, 2020 and 2019. Total unrecognized compensation cost related to non-vested stock options was $9,000 at September 30, 2020 and is expected to be recognized over a weighted-average period of 0.2 years.

The following table summarizes non-vested restricted stock activity for the three months ended September 30, 2020:

 

		Shares				Weighted-Average Grant- Date Fair Value
Balance, June 30, 2020			40,250			$	16.79
Granted			—				—
Forfeited			—				—
Earned and issued			—				—
Balance, September 30, 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 $42,000 and $12,000, respectively, for the three months ended September 30, 2020, and was $42,000 and $12,000, respectively, for the three months ended September 30, 2019. Unrecognized compensation expense for non-vested restricted stock awards was $536,000 and is expected to be recognized over 3.2 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 periods ended September 30, 2020 and 2019. The factors used in the earnings per common share computation are as follows:

 

		Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
Net income		$	1,331			$	1,100
Basic weighted average shares outstanding			3,240,376				3,533,275
Less: Average unallocated ESOP shares			(209,289	)			(228,534	)
Basic average shares outstanding			3,031,087				3,304,741
Diluted effect of restricted stock awards and stock options			10,101				52,155
Diluted average shares outstanding			3,041,188				3,356,896
Basic earnings per common share		$	0.44			$	0.33
Diluted earnings per common share		$	0.44			$	0.33

 

Note 5:

Securities

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

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale securities:
September 30, 2020:
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	7,526			$	709			$	—			$	8,235
Mortgage-backed:
GSE residential			142,008				6,075				(129	)			147,954
Small Business Administration			3,502				152				—				3,654
State and political subdivisions			1,450				—				(1	)			1,449
		$	154,486			$	6,936			$	(130	)		$	161,292
June 30, 2020:
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	7,528			$	708			$	—			$	8,236
Mortgage-backed:
GSE residential			143,033				6,044				(222	)			148,855
Small Business Administration			3,578				62				—				3,640
State and political subdivisions			1,449				215				(1	)			1,663
		$	155,588			$	7,029			$	(223	)		$	162,394

With the exception of Mortgage-backed GSE residential securities with a book value of approximately $142,008,000 and a market value of approximately $147,954,000 at September 30, 2020, the Company held no securities at September 30, 2020 with a book value that exceeded 10% of total equity.

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

 

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The amortized cost and fair value of available-for-sale securities at September 30, 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.

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $73,908,000 and $66,186,000 as of September 30, 2020 and June 30, 2020, respectively.

The carrying value of securities sold under agreement to repurchase amounted to $4.4 million at September 30, 2020 and $3.7 million at June 30, 2020. At September 30, 2020, approximately $2.7 of our repurchase agreements had an overnight maturity, while the remaining $1.7 in repurchase agreements had a term of 30 to 90 days. 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 $204,000 and $1,000 and gross losses of $0 and $0 resulting from sales of available-for-sale securities were realized for the three months ended September 30, 2020, and 2019, respectively. Tax provision applicable to these net realized gains was $58,000 for the three months ended September 30, 2020, and nominal for the three months ended September 30, 2019.

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 September 30, 2020 and June 30, 2020, was $27,195,000 and $24,574,000, respectively, which is approximately 17% and 16% of the Company’s available-for-sale investment portfolio. These declines in fair value at September 30, 2020 and June 30, 2020, resulted from increases in market interest rates and are considered temporary.

 

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The following table shows the Company’s gross unrealized investment losses and the fair value of the Company’s investments 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 September 30, 2020 and June 30, 2020:

 

		Less Than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
September 30, 2020:
Mortgage-backed:
GSE residential		$	24,699			$	(116	)		$	2,435			$	(13	)		$	27,134			$	(129	)
State and political subdivisions			61				(1	)			—				—				61				(1	)
Total temporarily impaired securities		$	24,760			$	(117	)		$	2,435			$	(13	)		$	27,195			$	(130	)
June 30, 2020:
Mortgage-backed:
GSE residential		$	22,162			$	(116	)		$	2,351			$	(106	)		$	24,513			$	(222	)
State and political subdivisions			61				(1	)			—				—				61				(1	)
Total temporarily impaired securities		$	22,223			$	(117	)		$	2,351			$	(106	)		$	24,574			$	(223	)

The unrealized losses on the Company’s investment in residential mortgage-backed securities and state and political subdivisions at September 30, 2020 and June 30, 2020, 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 September 30, 2020 and June 30, 2020.

 

Note 6:

Loans and Allowance for Loan Losses

 

Classes of loans include:		September 30, 2020				June 30, 2020
Real estate loans:
One- to four-family, including home equity loans		$	125,574			$	128,876
Multi-family			106,886				96,195
Commercial			157,096				145,113
Home equity lines of credit			8,147				8,551
Construction			10,050				22,042
Commercial			109,182				107,581
Consumer			8,098				7,529
Total loans			525,033				515,887
Less:
Unearned fees and discounts, net			286				(164	)
Allowance for loan losses			6,506				6,234
Loans, net		$	518,241			$	509,817

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.

 

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The Company maintains lending policies and procedures in place 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 principal lending activity is the origination of one- to four-family residential mortgage loans but also includes multi-family loans, commercial real estate loans, home equity lines of credits, commercial business loans, consumer (consisting primarily of automobile loans), and, to a much lesser extent, 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 a 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 Association also receives independent loan reviews performed by a third party on larger commercial loans to be performed annually. In addition to compliance with our policy, the loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management, Audit Committee 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 credits, 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 borrowers.

 

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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.

Commercial Business Loans

The Company originates commercial non-mortgage business (term) loans and adjustable 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.

 

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Commercial business loans also include Small Business Administration (SBA) Paycheck Protection Program (PPP) loans which are covered by a 100% government guaranty. As of September 30, 2020, the Company had 304 PPP loans totaling $26.3 million.

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 real estate properties, including real estate construction loans, amounting to $267,104,000 and $256,015,000 as of September 30, 2020 and June 30, 2020, 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 $3,895,000 and $4,181,000 at September 30, 2020 and June 30, 2020, 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 $25,354,000 and $23,950,000 at September 30, 2020 and June 30, 2020, respectively, of which $7,853,000 and $8,126,000, at September 30, 2020 and June 30, 2020 were outside our primary market area. These participation loans are secured by real estate and other business assets.

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 periods ended September 30, 2020 and 2019 and the year ended June 30, 2020:

 

		Three Months Ended September 30, 2020 Real Estate Loans
		One- to Four-Family				Multi-Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period		$	1,044			$	1,514			$	1,706			$	87
Provision charged to expense			4				227				168				(5	)
Losses charged off			(15	)			—				—				—
Recoveries			—				—				—				—
Balance, end of period		$	1,033			$	1,741			$	1,874			$	82

 

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Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	1,033			$	1,741			$	1,874			$	82
Loans:
Ending balance		$	125,574			$	106,886			$	157,096			$	8,147
Ending balance: individually evaluated for impairment		$	1,277			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	124,297			$	106,886			$	157,096			$	8,147
		Three Months Ended September 30, 2020 (Continued)
		Construction				Commercial				Consumer				Total
Allowance for loan losses:
Balance, beginning of period		$	240			$	1,583			$	60			$	6,234
Provision charged to expense			(155	)			61				15				315
Losses charged off			—				(29	)			(13	)			(57	)
Recoveries			—				9				5				14
Balance, end of period		$	85			$	1,624			$	67			$	6,506
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	85			$	1,624			$	67			$	6,506
Loans:
Ending balance		$	10,050			$	109,182			$	8,098			$	525,033
Ending balance: individually evaluated for impairment		$	—			$	55			$	4			$	1,336
Ending balance: collectively evaluated for impairment		$	10,050			$	109,127			$	8,094			$	523,697
		Year Ended June 30, 2020 Real Estate Loans
		One- to Four-Family				Multi-Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of year		$	1,031			$	1,642			$	1,623			$	89
Provision charged to expense			50				(128	)			83				(2	)
Losses charged off			(40	)			—				—				—
Recoveries			3				—				—				—
Balance, end of year		$	1,044			$	1,514			$	1,706			$	87
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	1,044			$	1,514			$	1,706			$	87
Loans:
Ending balance		$	128,876			$	96,195			$	145,113			$	8,551
Ending balance: individually evaluated for impairment		$	1,336			$	—			$	—			$	15
Ending balance: collectively evaluated for impairment		$	127,540			$	96,195			$	145,113			$	8,536
		Year Ended June 30, 2020 (Continued)
		Construction				Commercial				Consumer				Total
Allowance for loan losses:
Balance, beginning of year		$	213			$	1,659			$	71			$	6,328
Provision charged to expense			27				84				14				128
Losses charged off			—				(191	)			(37	)			(268	)
Recoveries			—				31				12				46
Balance, end of year		$	240			$	1,583			$	60			$	6,234

 

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Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	240			$	1,583			$	60			$	6,234
Loans:
Ending balance		$	22,042			$	107,581			$	7,529			$	515,887
Ending balance: individually evaluated for impairment		$	—			$	304			$	5			$	1,660
Ending balance: collectively evaluated for impairment		$	22,042			$	107,277			$	7,524			$	514,227
		Three Months Ended September 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		$	1,031			$	1,642			$	1,623			$	89
Provision charged to expense			(44	)			(40	)			34				1
Losses charged off			—				—				—				—
Recoveries			3				—				—				—
Balance, end of year		$	990			$	1,602			$	1,657			$	90
Ending balance: individually evaluated for impairment		$	13			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	977			$	1,602			$	1,657			$	90
Loans:		$	126,152			$	105,548			$	146,500			$	8,897
Ending balance		$	1,702			$	—			$	16			$	19
Ending balance: individually evaluated for impairment		$	124,450			$	105,548			$	146,484			$	8,878
		Three Months Ended September 30, 2019 (Continued)
		Construction				Commercial				Consumer				Total
Allowance for loan losses:
Balance, beginning of year		$	213			$	1,659			$	71			$	6,328
Provision charged to expense			(9	)			(9	)			13				(54	)
Losses charged off			—				—				(15	)			(15	)
Recoveries			—				14				1				18
Balance, end of year		$	204			$	1,664			$	70			$	6,277
Ending balance: individually evaluated for impairment		$	—			$	—			$	6			$	19
Ending balance: collectively evaluated for impairment		$	204			$	1,664			$	64			$	6,258
Loans:
Ending balance		$	17,267			$	84,825			$	7,714			$	496,903
Ending balance: individually evaluated for impairment		$	—			$	55			$	21			$	1,813
Ending balance: collectively evaluated for impairment		$	17,267			$	84,770			$	7,693			$	495,090

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.

 

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