IF Bancorp, Inc. - Quarter Report: 2019 December (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended December 31, 2019

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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” 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  ☒

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

The Registrant had 3,260,171 shares of common stock, par value $0.01 per share, issued and outstanding as of February 3, 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 December 31, 2019 (unaudited) and June 30, 2019			1
		Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 31, 2019 and 2018 (unaudited)			2
		Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended December 31, 2019 and 2018 (unaudited)			3
		Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2019 and 2018 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018 (unaudited)			6
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			53
Item 4.		Controls and Procedures			53
Part II. Other Information
Item 1.		Legal Proceedings			54
Item 1A.		Risk Factors			54
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 3.		Defaults upon Senior Securities			54
Item 4.		Mine Safety Disclosures			54
Item 5.		Other Information			55
Item 6.		Exhibits			55
		Signature Page			56

Part I. – Financial Information

 

Item 1.

Financial Statements

IF Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amount)

 

		December 31, 2019				June 30, 2019
		(Unaudited)
Assets
Cash and due from banks		$	10,468			$	57,994
Interest-bearing demand deposits			376				1,606
Cash and cash equivalents			10,844				59,600
Interest-bearing time deposits in banks			3,000				3,000
Available-for-sale securities			146,807				146,291
Loans, net of allowance for loan losses of $6,222 and $6,328 at December 31, 2019 and June 30, 2019, respectively			490,481				487,774
Premises and equipment, net of accumulated depreciation of $7,672 and $7,345 at December 31, 2019 and June 30, 2019, respectively			10,470				10,706
Federal Home Loan Bank stock, at cost			1,598				1,174
Foreclosed assets held for sale			435				778
Accrued interest receivable			2,317				2,142
Bank-owned life insurance			9,211				9,072
Mortgage servicing rights			888				853
Deferred income taxes			1,592				2,066
Other			573				414
Total assets		$	678,216			$	723,870
Liabilities and Equity
Liabilities
Deposits
Demand		$	26,606			$	80,442
Savings, NOW and money market			208,007				196,296
Certificates of deposit			289,729				290,761
Brokered certificates of deposit			24,984				39,524
Total deposits			549,326				607,023
Repurchase agreements			3,340				2,015
Federal Home Loan Bank advances			33,500				24,000
Line of credit and other borrowings			5,000				—
Advances from borrowers for taxes and insurance			1,093				747
Accrued post-retirement benefit obligation			2,940				2,919
Accrued interest payable			1,706				801
Other			3,583				3,904
Total liabilities			600,488				641,409
Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value per share, 100,000,000 shares authorized, 3,263,171 and 3,578,252 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively			32				36
Additional paid-in capital			49,041				48,813
Unearned ESOP shares, at cost, 221,318 and 230,940 shares at December 31, 2019 and June 30, 2019, respectively			(2,213	)			(2,309	)
Retained earnings			29,921				35,356
Accumulated other comprehensive income, net of tax			947				565
Total stockholders’ equity			77,728				82,461
Total liabilities and stockholders’ equity		$	678,216			$	723,870

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 December 31,								Six Months Ended December 31,
		2019				2018				2019				2018
Interest and Dividend Income
Interest and fees on loans		$	5,794			$	5,721			$	11,691			$	11,226
Securities:
Taxable			911				826				1,830				1,653
Tax-exempt			23				30				53				63
Federal Home Loan Bank dividends			13				40				36				69
Deposits with other financial institutions			48				41				187				66
Total interest and dividend income			6,789				6,658				13,797				13,077
Interest Expense
Deposits			2,219				1,738				4,502				3,277
Borrowings and repurchase agreements			229				429				368				847
Total interest expense			2,448				2,167				4,870				4,124
Net Interest Income			4,341				4,491				8,927				8,953
Provision (Credit) for Loan Losses			(30	)			138				(84	)			375
Net Interest Income After Provision for Loan Losses			4,371				4,353				9,011				8,578
Noninterest Income
Customer service fees			95				103				197				206
Other service charges and fees			87				67				152				155
Insurance commissions			192				154				354				337
Brokerage commissions			234				247				469				523
Mortgage banking income, net			116				66				161				152
Gain on sale of loans			144				86				284				179
Gain (loss) on foreclosed assets, net			—				(22	)			(2	)			98
Bank-owned life insurance income, net			69				68				139				135
Other			294				274				542				536
Total noninterest income			1,231				1,043				2,296				2,321
Noninterest Expense
Compensation and benefits			2,706				2,711				5,371				5,214
Office occupancy			242				229				497				440
Equipment			387				340				773				671
Federal deposit insurance			—				43				28				86
Stationary, printing and office			26				27				56				63
Advertising			97				113				218				255
Professional services			155				94				271				214
Supervisory examinations			41				44				85				88
Audit and accounting services			18				45				87				85
Organizational dues and subscriptions			19				15				38				34
Insurance bond premiums			37				36				78				78
Telephone and postage			48				66				98				133
Net realized losses on sales of available-for-sale securities			8				—				7				—
Other			482				567				849				1,193
Total noninterest expense			4,266				4,330				8,456				8,554
Income Before Income Tax			1,336				1,066				2,851				2,345
Provision for Income Tax			372				279				787				624
Net Income		$	964			$	787			$	2,064			$	1,721
Earnings Per Share:
Basic		$	0.32			$	0.22			$	0.65			$	0.48
Diluted		$	0.31			$	0.22			$	0.64			$	0.47
Dividends declared per common share		$	—			$	—			$	0.15			$	0.125

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2

IF Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Dollars in thousands)

 

		Three Months Ended December 31,
		2019				2018
Net Income		$	964			$	787
Other Comprehensive Income
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $(197) and $752, for 2019 and 2018, respectively			(498	)			1,889
Less: reclassification adjustment for realized losses included in net income, net of taxes of $(2) and $0, for 2019 and 2018, respectively			(6	)			—
			(492	)			1,889
Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $2 and $2 for 2019 and 2018, respectively			4				2
Other comprehensive income (loss), net of tax			(488	)			1,891
Comprehensive Income		$	476			$	2,678
		Six Months Ended December 31,
		2019				2018
Net Income		$	2,064			$	1,721
Other Comprehensive Income
Unrealized appreciation on available-for-sale securities, net of taxes of $148 and $632, for 2019 and 2018, respectively			370				698
Less: reclassification adjustment for realized losses included in net income, net of taxes of $(2) and $0, for 2019 and 2018, respectively			(5	)			—
			375				698
Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $3 and $33 for 2019 and 2018, respectively			7				(25	)
Other comprehensive income, net of tax			382				673
Comprehensive Income		$	2,446			$	2,394

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3

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 December 31, 2019
Balance, October 1, 2019		$	32			$	48,925			$	(2,261	)		$	29,156			$	1,435			$	77,287
Net income			—				—				—				964				—				964
Other comprehensive loss			—				—				—				—				(488	)			(488	)
Dividends paid on unearned ESOP			—				—				—				34				—				34
Stock equity plan			—				56				—				—				—				56
Stock repurchase, 10,900 shares, average price $21.40 each			—				—				—				(233	)			—				(233	)
ESOP shares earned, 4,811 shares			—				60				48				—				—				108
Balance, December 31, 2019		$	32			$	49,041			$	(2,213	)		$	29,921			$	947			$	77,728
For the three months ended December 31, 2018
Balance, October 1, 2018		$	39			$	48,487			$	(2,454	)		$	39,335			$	(4,326	)		$	81,081
Net income			—				—				—				787				—				787
Other comprehensive income			—				—				—				—				1,891				1,891
Dividends paid on unearned ESOP			—				—				—				31				—				31
Stock equity plan			—				57				—				—				—				57
Stock repurchase, 255,000 shares, average price $21.30 each			(3	)			—				—				(5,427	)			—				(5,430	)
ESOP shares earned, 4,811 shares			—				56				48				—				—				104
Balance, December 31, 2018		$	36			$	48,600			$	(2,406	)		$	34,726			$	(2,435	)		$	78,521

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4

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 six months ended December 31, 2019
Balance, July 1, 2019		$	36			$	48,813			$	(2,309	)		$	35,356			$	565			$	82,461
Net income			—				—				—				2,064				—				2,064
Other comprehensive income			—				—				—				—				382				382
Dividends on common stock, $0.15 per share			—				—				—				(487	)			—				(487	)
Stock equity plan			—				111				—				—				—				111
Stock repurchase, 315,081 shares, average price $22.27 each			(4	)			—				—				(7,012	)			—				(7,016	)
ESOP shares earned, 9,622 shares			—				117				96				—				—				213
Balance, December 31, 2019		$	32			$	49,041			$	(2,213	)		$	29,921			$	947			$	77,728
For the six months ended December 31, 2018
Balance, July 1, 2018		$	39			$	48,361			$	(2,502	)		$	38,885			$	(3,108	)		$	81,675
Net income			—				—				—				1,721				—				1,721
Other comprehensive income			—				—				—				—				673				673
Dividends on common stock, $0.125 per share			—				—				—				(453	)			—				(453	)
Stock equity plan			—				113				—				—				—				113
Stock repurchase, 255,000 shares, average price $21.30 each			(3	)			—				—				(5,427	)			—				(5,430	)
ESOP shares earned, 9,622 shares			—				126				96				—				—				222
Balance, December 31, 2018		$	36			$	48,600			$	(2,406	)		$	34,726			$	(2,435	)		$	78,521

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5

IF Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Six Months Ended December 31,
		2019				2018
Operating Activities
Net income		$	2,064			$	1,721
Items not requiring (providing) cash
Depreciation			327				326
Provision (credit) for loan losses			(84	)			375
Amortization of premiums and discounts on securities			185				29
Deferred income taxes			321				4
Net realized gains on loan sales			(284	)			(179	)
Net realized losses on sales of available-for-sale securities			7				—
Loss (gain) on foreclosed assets held for sale			2				(98	)
Bank-owned life insurance income, net			(139	)			(135	)
Originations of loans held for sale			(14,997	)			(9,192	)
Proceeds from sales of loans held for sale			15,562				9,469
ESOP compensation expense			213				222
Stock equity plan expense			111				113
Changes in
Accrued interest receivable			(175	)			(141	)
Other assets			(159	)			383
Accrued interest payable			905				279
Post-retirement benefit obligation			31				25
Other liabilities			(321	)			(479	)
Net cash provided by operating activities			3,569				2,722
Investing Activities
Net change in interest-bearing time deposits			—				(750	)
Purchases of available-for-sale securities			(17,598	)			(7,970	)
Proceeds from sales of available-for-sale securities			6,132				—
Proceeds from maturities and pay-downs of available-for-sale securities			11,283				7,619
Net change in loans			(3,169	)			(24,595	)
Purchase of premises and equipment			(91	)			(924	)
Proceeds from sale of foreclosed assets			571				3,740
Redemption of Federal Home Loan Bank stock owned			—				1,057
Purchase of Federal Home Loan Bank stock			(424	)			(1,440	)
Net cash used in investing activities			(3,296	)			(23,263	)
Financing Activities
Net decrease in demand deposits, money market, NOW and savings accounts			(42,125	)			(12,648	)
Net increase (decrease) in certificates of deposit, including brokered certificates			(15,572	)			25,946
Net increase in advances from borrowers for taxes and insurance			346				831
Proceeds from Federal Home Loan Bank advances			31,500				111,500
Repayments of Federal Home Loan Bank advances			(22,000	)			(97,500	)
Proceeds from other borrowings			5,000				—
Net increase in repurchase agreements			1,325				559
Dividends paid			(487	)			(453	)
Purchases of Common Stock			(7,016	)			(5,430	)
Net cash provided by (used in) financing activities			(49,029	)			22,805
Net Increase (Decrease) in Cash and Cash Equivalents			(48,756	)			2,264
Cash and Cash Equivalents, Beginning of Period			59,600				4,754
Cash and Cash Equivalents, End of Period		$	10,844			$	7,018
Supplemental Cash Flows Information
Interest paid		$	3,965			$	3,845
Income taxes paid		$	513			$	30
Foreclosed assets acquired in settlement of loans		$	230			$	6,332

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6

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 mutual-to-stock 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 December 31, 2019 and June 30, 2019, and the results of its operations for the three month and six month periods ended December 31, 2019 and 2018. 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 six month periods ended December 31, 2019 are not necessarily indicative of the results that may be expected for the entire year.

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 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.

 

7

•

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 December 31, 2019, 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.

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

 

8

will be repaid by the ESOP with funds from contributions made by the Association and dividends received by the ESOP. 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 December 31, 2019 and June 30, 2019 are as follows (dollars in thousands):

 

		December 31, 2019				June 30, 2019
Allocated shares			127,102				109,018
Shares committed for release			9,622				19,245
Unearned shares			221,318				230,940
Total ESOP shares			358,042				359,203
Fair value of unearned ESOP shares (1)		$	5,095			$	4,829

 

(1)	Based on closing price of $23.02 and $20.91 per share on December 31, 2019, and June 30, 2019, respectively.

During the six months ended December 31, 2019, 1,161 ESOP shares were paid to ESOP participants due to separation from service. During the six months ended December 31, 2018, 6,360 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, the Board of Directors approved grants of 85,500 shares of restricted stock and 167,000 in stock options 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, both starting in December 2014. On December 10, 2015, the Board of Directors approved grants of 16,900 shares of restricted stock to be 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 December 31, 2019, there were 90,050 shares of restricted stock and 314,125 stock option shares available for future grants under this plan.

 

9

The following table summarizes stock option activity for the six months ended December 31, 2019 (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, December 31, 2019			153,143			$	16.63				3.9			$	979	(1)
Exercisable, December 31, 2019			130,857			$	16.63				3.9			$	836	(1)

 

(1)	Based on closing price of $23.02 per share on December 31, 2019.

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 six months ended December 31, 2019.

There were 22,286 stock options that vested during the six months ended December 31, 2019 and 22,286 stock options that vested during the six months ended December 31, 2018. Stock-based compensation expense and related tax benefit was considered nominal for stock options for the six months ended December 31, 2019 and 2018. Total unrecognized compensation cost related to non-vested stock options was $52,000 at December 31, 2019 and is expected to be recognized over a weighted-average period of 0.9 years.

The following table summarizes non-vested restricted stock activity for the six months ended December 31, 2019:

 

		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, December 31, 2019			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 $85,000 and $24,000, respectively, for the six months ended December 31, 2019, and was $85,000 and $24,000, respectively, for the six months ended December 31, 2018. Unrecognized compensation expense for non-vested restricted stock awards was $681,000 at December 31, 2019, and is expected to be recognized over 3.9 years with a corresponding credit to paid-in capital.

 

10

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

Basic and diluted earnings per common share are presented for the three month and six month periods ended December 31, 2019 and 2018. The factors used in the earnings per common share computation follow:

 

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		December 31, 2019				December 31, 2018				December 31, 2019				December 31, 2018
Net income (loss)		$	964			$	787			$	2,064			$	1,721
Basic weighted average shares outstanding			3,266,353				3,813,636				3,399,814				3,842,522
Less: Average unallocated ESOP shares			(223,723	)			(242,968	)			(226,129	)			(245,374	)
Basic average shares outstanding			3,042,630				3,570,668				3,173,685				3,597,148
Diluted effect of restricted stock awards and stock options			57,282				53,475				54,778				62,683
Diluted average shares outstanding			3,099,912				3,624,143				3,228,463				3,659,831
Basic earnings (loss) per common share		$	0.32			$	0.22			$	0.65			$	0.48
Diluted earnings (loss) per common share		$	0.31			$	0.22			$	0.64			$	0.47

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 December 31, 2019, there were 297,681 shares repurchased by the Company and there were 22,795 shares yet to be repurchased under this plan.

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:
December 31, 2019:
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	10,665			$	405			$	—			$	11,070
Mortgage-backed:
GSE residential			128,984				1,757				(354	)			130,387
Small Business Administration			3,797				—				(50	)			3,747
State and political subdivisions			1,450				154				(1	)			1,603
		$	144,896			$	2,316			$	(405	)		$	146,807
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

 

11

With the exception of U.S. Government, federal agency and GSE securities and GSE residential mortgage-backed securities with a book value of approximately $10,665,000 and $128,984,000, respectively, and a market value of approximately $11,070,000 and $130,387,000, respectively, at December 31, 2019, the Company held no securities at December 31, 2019 with a book value that exceeded 10% of total equity.

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

The amortized cost and fair value of available-for-sale securities at December 31, 2019, 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			6,024				6,248
Five to ten years			7,848				8,172
After ten years			2,040				2,000
			15,912				16,420
Mortgage-backed securities			128,984				130,387
Totals		$	144,896			$	146,807

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $66,434,000 and $57,921,000 as of December 31, 2019 and June 30, 2019, respectively.

The carrying value of securities sold under agreement to repurchase amounted to $3.3 million at December 31, 2019 and $2.0 million at June 30, 2019. At December 31, 2019, approximately $1.7 million of our repurchase agreements had an overnight maturity, while the remaining $1.6 million 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 $21,000, and gross losses of $28,000, resulting from sales of available-for-sale securities were realized for the six month period ended December 31, 2019. There were no sales of available-for-sale securities for the six months ended December 31, 2018. The tax provision (credit) applicable to these net realized gains amounted to approximately $(2,000) and $0 respectively.

 

12

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 December 31, 2019 and June 30, 2019, was $37,552,000 and $47,146,000, respectively, which is approximately 26% and 32% of the Company’s available-for-sale investment portfolio. These declines in fair value at December 31, 2019 and June 30, 2019, resulted from increases in market interest rates and are considered temporary.

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 December 31, 2019 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
December 31, 2019:
Mortgage-backed:
GSE residential			24,292				(205	)			9,452				(149	)			33,744				(354	)
Small Business Administration			3,747				(50	)			—				—				3,747				(50	)
State and political subdivisions			61				(1	)			—				—				61				(1	)
Total temporarily impaired securities		$	28,100			$	(256	)		$	9,452			$	(149	)		$	37,552			$	(405	)
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 December 31, 2019 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 December 31, 2019 and June 30, 2019.

 

13

Note 6: Loans and Allowance for Loan Losses

Classes of loans include:

 

		December 31, 2019				June 30, 2019
Real estate loans:
One- to four-family, including home equity loans		$	127,679			$	129,290
Multi-family			102,756				104,663
Commercial			148,299				143,367
Home equity lines of credit			8,867				8,938
Construction			18,749				16,113
Commercial			82,692				84,246
Consumer			7,355				7,136
Total loans			496,397				493,753
Less:
Unearned fees and discounts, net			(306	)			(349	)
Allowance for loan losses			6,222				6,328
Loans, net		$	490,481			$	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, commercial business loans, home equity lines of credit, and to a lesser extent, 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 at least 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 performed 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.

 

14

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.

The Company offers USDA Rural Development loans and sells the servicing. 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.

 

15

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 real estate properties amounting to $264,384,000 and $260,888,000 as of December 31, 2019 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 $4,293,000 and $4,844,000 at December 31, 2019 and June 30, 2019, respectively. All of these purchased loans are secured by single family homes located out of our primary market area, but still primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $26,626,000 and $29,524,000 at December 31, 2019 and June 30, 2019, respectively, of which $9,341,000 and $12,025,000, at December 31, 2019 and June 30, 2019 were outside our primary market area.

 

16

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 six month periods ended December 31, 2019 and 2018 and the year ended June 30, 2019:

 

		Three Months Ended December 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		$	990			$	1,602			$	1,657			$	90
Provision charged to expense			14				(40	)			28				—
Losses charged off			(13	)			—				—				—
Recoveries			—				—				—				—
Balance, end of period		$	991			$	1,562			$	1,685			$	90
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	991			$	1,562			$	1,685			$	90
Loans:
Ending balance		$	127,679			$	102,756			$	148,299			$	8,867
Ending balance: individually evaluated for impairment		$	1,470			$	—			$	6			$	18
Ending balance: collectively evaluated for impairment		$	126,209			$	102,756			$	148,293			$	8,849
		Three Months Ended December 31, 2019 (Continued)
		Construction				Commercial				Consumer				Total
Allowance for loan losses:
Balance, beginning of period		$	204			$	1,664			$	70			$	6,277
Provision charged to expense			13				(54	)			9				(30	)
Losses charged off			—				—				(13	)			(26	)
Recoveries			—				—				1				1
Balance, end of period		$	217			$	1,610			$	67			$	6,222
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	217			$	1,610			$	67			$	6,222
Loans:
Ending balance		$	18,749			$	82,692			$	7,355			$	496,397
Ending balance: individually evaluated for impairment		$	—			$	48			$	8			$	1,550
Ending balance: collectively evaluated for impairment		$	18,749			$	82,644			$	7,347			$	494,847
		Six Months Ended December 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		$	1,031			$	1,642			$	1,623			$	89
Provision charged to expense			(30	)			(80	)			62				1
Losses charged off			(13	)			—				—				—
Recoveries			3				—				—				—
Balance, end of period		$	991			$	1,562			$	1,685			$	90
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—
Ending balance: collectively evaluated for impairment		$	991			$	1,562			$	1,685			$	90
Loans:
Ending balance		$	127,679			$	102,756			$	148,299			$	8,867
Ending balance: individually evaluated for impairment		$	1,470			$	—			$	6			$	18
Ending balance: collectively evaluated for impairment		$	126,209			$	102,756			$	148,293			$	8,849

 

17