Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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 Number: 001-35226
IF BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
201 East Cherry Street, Watseka, Illinois
(Address of principal executive offices)
45-1834449
(I.R.S. Employer
Identification No.)
60970
(Zip Code)
(815) 432-2476
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Trading
Symbol(s)
IROQ
Name of each exchange
on which registered
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☒
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 Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of December 31, 2018 was $53,353,934.
The number of shares outstanding of the registrant’s common stock as of September 4, 2019 was 3,560,852.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on November 25, 2019 are incorporated by reference in Part III of this Form
10-K.
Table of Contents
PART I
INDEX
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 6.
ITEM 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16. FOR\M 10-K SUMMARY
SIGNATURES
Page
1
1
36
41
42
42
43
43
43
45
47
59
59
59
59
60
61
61
61
61
62
62
63
63
64
This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts;
rather, they are statements based on IF Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance.
Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.
Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the market area in which IF Bancorp, Inc. operates, as well as nationwide, IF Bancorp, Inc.’s
ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation.
For further discussion of factors that may affect the results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors
should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.
Table of Contents
ITEM 1.
BUSINESS
General
PART I
IF Bancorp, Inc. (“IF Bancorp” or the “Company”) is a Maryland corporation formed in March 2011 to become the holding company for Iroquois
Federal Savings and Loan Association (“Iroquois Federal” or the “Association”).
The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of Iroquois Federal. The Company’s
most significant asset is its investment in Iroquois Federal. At June 30, 2019 and 2018, we had consolidated assets of $723.9 million and $638.9 million,
consolidated deposits of $607.0 million and $480.4 million and consolidated equity of $82.5 million and $81.7 million, respectively.
Iroquois Federal is a federally chartered savings association headquartered in Watseka, Illinois. The Association’s business consists primarily of
taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family
residential mortgage loans, multi-family mortgage loans, commercial real estate loans (including farm loans), home equity lines of credit, commercial
business loans, consumer loans (consisting primarily of automobile loans), and, to a much lesser extent, construction loans and land development loans. We
also invest in securities, which historically have consisted primarily of securities issued by the U.S. government, U.S. government agencies and U.S.
government-sponsored enterprises, as well as mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises. To a lesser
extent, we also invest in municipal obligations.
We offer a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and personal checking
accounts, individual retirement accounts and health savings accounts. We also offer alternative delivery channels, including ATMs, online banking and bill
pay, mobile banking with mobile deposit and bill pay, ACH origination, remote deposit capture and telephone banking.
In addition to our traditional banking products and services, we offer a full line of property and casualty insurance products through Iroquois Federal’s
wholly-owned subsidiary, L.C.I. Service Corporation, an insurance agency with offices in Watseka and Danville, Illinois. We also offer annuities, mutual
funds, individual and group retirement plans, life, disability and health insurance, individual securities, managed accounts and other financial services at all
of our locations through Iroquois Financial, a division of Iroquois Federal. Raymond James Financial Services, Inc. serves as the broker-dealer for Iroquois
Financial.
Available Information
IF Bancorp’s executive offices are located at 201 East Cherry Street, Watseka, Illinois 60970. Our telephone number at this address is (815)
432-2476, and our website address is www.iroquoisfed.com. Information on our website should not be considered a part of this annual report.
IF Bancorp, Inc. is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission (“SEC”). The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC (http://www.sec.gov).
We make available free of charge through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act
of 1934, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
1
Table of Contents
Market Area
We conduct our operations from our seven full-service banking offices located in the municipalities of Watseka, Danville, Clifton, Hoopeston, Savoy,
Bourbonnais and Champaign, Illinois and our loan production and wealth management office in Osage Beach, Missouri. Our primary lending market
includes the Illinois counties of Vermilion, Iroquois, Champaign and Kankakee, as well as the adjacent counties in Illinois and Indiana within 30 miles of a
branch or loan production office. Our loan production and wealth management office in Osage Beach, Missouri, serves the Missouri counties of Camden,
Miller and Morgan.
In recent years, Iroquois and Vermilion Counties, our traditional primary market areas, have experienced negative growth, reflecting in part, the
economic downturn. However, Champaign County, where our Savoy and Champaign branches are located, has experienced population growth. Future
business and growth opportunities will be influenced by economic and demographic characteristics of our primary market area and of east central Illinois.
According to data from the U.S. Census Bureau, Iroquois County had an estimated population of 28,000 in July 2018, a decrease of 7.1% since April 2010,
Vermilion County had an estimated population of 77,000 in July 2018, a decrease of 5.9% since April 2010, and Kankakee County had an estimated
population of 110,000 in July 2018, a decrease of 3.0% since April 2010, while Champaign County had an estimated population of 210,000 in July 2018, an
increase of 4.4% since April 2010. Unemployment rates in our primary market have decreased over the last year. According to the Illinois Department of
Employment Security, unemployment, on a non-seasonally adjusted basis, decreased from 3.8% to 3.4% in Iroquois County, from 6.0% to 4.7% in
Vermilion County, from 4.7% to 3.8% in Champaign County, and from 4.9% to 4.3% in Kankakee County.
The economy in our primary market is fairly diversified. Employment in healthcare, manufacturing, and retail trade serve as the basis of the
Vermilion County and Kankakee County economies, while education and healthcare are dominant in Champaign County. Agriculture and agriculture-
related business, hospital and other healthcare providers, local schools, and retail businesses are major employers in Iroquois County.
Our Osage Beach, Missouri loan production and wealth management office is located in the Lake of the Ozarks region and serves the Missouri
counties of Camden, Miller and Morgan. Once known primarily as a resort area, this market is becoming an area of permanent residences and a growing
retirement community, providing an excellent market for mortgage loans and our wealth management and financial services business.
Competition
We face intense competition in our market area both in making loans and attracting deposits. We also compete with commercial banks, credit unions,
savings institutions, mortgage brokerage firms, finance companies, mutual funds, insurance companies and investment banking firms. Some competitors in
our newer markets have the natural advantage of greater name recognition and market presence, while we work to increase our market share in those
markets.
Our deposit sources are primarily concentrated in the communities surrounding our banking offices located in Iroquois and Vermilion Counties,
Illinois. As of June 30, 2018, the latest date for which FDIC data is available, we ranked first of 12 bank and thrift institutions with offices in Iroquois
County with a 25.01% deposit market share. As of the same date, we ranked first of 16 bank and thrift institutions with offices in Vermilion County with a
17.83% deposit market share, we ranked 21st of 31 bank and thrift institutions with offices in Champaign County, with a 0.67% deposit market share and
we ranked 13th of 16 bank and thrift institutions with offices in Kankakee County, with a 1.01% deposit market share.
2
Table of Contents
Lending Activities
Our principal lending activity is the origination of one- to four-family residential mortgage loans, multi-family loans, commercial real estate loans
(including farm loans), home equity loans and lines of credit, commercial business loans, consumer loans (consisting primarily of automobile loans), and, to
a much lesser extent, construction loans and land development loans.
In addition to loans originated by Iroquois Federal, our loan portfolio includes loan purchases which are secured by single family homes located
primarily in the Midwest. As of June 30, 2019 and 2018, the amount of such loans equaled $4.8 million and $5.9 million, respectively. See “—Loan
Originations, Purchases, Sales, Participations and Servicing.”
Our loan portfolio also includes commercial loan participations which are secured by both real estate and other business assets, primarily within 100
miles of our primary lending market. As of June 30, 2019 and 2018, the amount of such loans equaled $29.5 million and $32.9 million, respectively. See
“—Loan Originations, Purchases, Sales, Participations and Servicing.”
The Association’s legal lending limit to any one borrower is 15% of unimpaired capital and surplus. On July 30, 2012 our bank received approval
from the Comptroller of the Currency to participate in the Supplemental Lending Limits Program (SLLP). This program allows eligible savings associations
to make additional residential real estate loans or extensions of credit to one borrower, small business loans or extensions of credit to one borrower, or small
farm loans or extensions of credit to one borrower, in the lesser of the following two amounts: (1) 10% of its capital and surplus; or (2) the percentage of
capital and surplus, in excess of 15%, that a state bank is permitted to lend under the state lending limit that is available for loans secured by one- to four-
family residential real estate, small business loans, small farm loans or unsecured loans in the state where the main office of the savings association is
located. For our association this additional limit (or “supplemental limit(s)”) for one- to four-family residential real estate, small business, or small farm
loans is 10% of our Association’s capital and surplus. In addition, the total outstanding amount of the Association’s loans or extensions of credit or parts of
loans and extensions of credit made to all of its borrowers under the SLLP may not exceed 100% of the Association’s capital and surplus. By Association
policy, participation of any credit facilities in the SLLP is to be infrequent and all credit facilities are to be with prior Board approval.
We originate a substantial portion of our fixed-rate one- to four-family residential mortgage loans for sale to the Federal Home Loan Bank of Chicago
with servicing retained. Total loans sold under this program equaled approximately $99.0 million and $95.8 million as of June 30, 2019 and 2018,
respectively. See “—One- to Four-Family Residential Real Estate Lending” below for more information regarding the origination of loans for sale to the
Federal Home Loan Bank of Chicago.
3
Table of Contents
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, including loans held for sale, by type of loan at the
dates indicated. Amounts shown for one- to four-family loans include loans held for sale of approximately $316,000, $206,000, $186,000, $0 and $93,000 at
June 30, 2019, 2018, 2017 2016 and 2015, respectively.
2019
Amount Percent
2018
Amount Percent
At June 30,
2017
Amount Percent
(Dollars in thousands)
2016
Amount Percent
2015
Amount Percent
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of
$129,290 26.19% $134,977 27.99% $140,647 31.47% $149,538 33.29% $144,887 40.18%
87,228 19.52
104,663 21.20
133,841 29.94
143,367 29.04
107,436 22.28
140,944 29.22
84,200 18.15
119,643 26.64
58,399 16.20
103,614 28.74
credit
Construction
Commercial
Consumer
1.81
8,938
16,113
3.26
84,246 17.06
1.44
7,136
1.88
9,058
13,763
2.85
68,720 14.25
1.53
7,366
7,520
7,421
1.68
1.66
62,392 13.96
1.77
7,905
1.81
8,138
19,698
4.39
57,826 12.87
2.25
10,086
2.14
7,713
0.13
471
37,151 10.30
2.31
8,325
Total loans
493,753 100.00% 482,264 100.00% 446,954 100.00% 449,129 100.00% 360,560 100.00%
Less:
Unearned fees and discounts,
net
Allowance for loan losses
Total loans, net
(1)
Includes home equity loans.
(349)
6,328
$487,774
(161)
5,945
$476,480
(203)
6,835
$440,322
30
5,351
$443,748
155
4,211
$356,194
4
Table of Contents
Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2019. We had no
demand loans or loans having no stated repayment schedule or maturity at June 30, 2019.
Due During the Years
Ending June 30,
2020
2021
2022 to 2023
2024 to 2028
2029 to 2033
2034 and beyond
Total
Due During the Years
Ending June 30,
2020
2021
2022 to 2023
2024 to 2028
2029 to 2033
2034 and beyond
Total
One- to four-family
residential real estate (1)
Weighted
Average
Rate
Amount
Multi-family
real estate
Commercial
real estate
Home equity lines of
credit
Amount
Weighted
Average
Rate
Weighted
Average
Rate
Amount
(Dollars in thousands)
Weighted
Average
Rate
Amount
$
7,619
4,814
16,997
21,579
8,646
69,635
$ 129,290
7,367
5.44% $
24,556
4.97
52,506
4.87
20,027
5.21
143
4.90
4.38
64
4.70% $104,663
4.36% $ 17,728
25,917
3.82
57,803
4.37
37,099
4.76
1,646
6.50
6.13
3,174
4.32% $143,367
450
4.33% $
685
4.18
1,719
4.77
1,401
4.94
3,716
4.80
5.11
967
4.66% $ 8,938
5.35%
4.75
4.76
5.69
5.16
4.44
5.07%
Construction
Commercial
Consumer
Total
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
(Dollars in thousands)
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
$ 2,606
7,641
4,382
808
—
676
$16,113
5.47% $60,246
4,543
6.00
7,630
5.61
10,679
5.58
1,111
—
5.33
37
5.76% $84,246
634
5.82% $
1,489
5.03
2,933
5.61
2,080
5.03
—
4.18
5.50
—
5.63% $ 7,136
5.32% $ 96,650
69,645
5.83
143,970
5.78
93,673
4.50
15,262
—
74,553
—
5.38% $493,753
5.39%
4.40
4.73
4.98
4.92
4.42
4.82%
(1)
Includes home equity loans.
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at June 30, 2019 that are contractually due after June 30,
2020.
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
(1)
Includes home equity loans.
5
Due After June 30, 2020
Fixed Adjustable
(In thousands)
Total
$ 51,132
93,648
108,758
3,335
5,190
22,002
6,502
$290,567
$ 70,539
3,648
16,881
5,153
8,317
1,998
—
$ 106,536
$121,671
97,296
125,639
8,488
13,507
24,000
6,502
$397,103
Table of Contents
One- to Four-Family Residential Mortgage Loans. At June 30, 2019, $129.3 million, or 26.2% of our total loan portfolio, consisted of one- to four-
family residential mortgage loans. We offer residential mortgage loans that conform to Fannie Mae and Freddie Mac underwriting standards (conforming
loans) as well as non-conforming loans. We generally underwrite our one- to four-family residential mortgage loans based on the applicant’s employment
and credit history and the appraised value of the subject property. We also offer loans through various agency programs, such as the Mortgage Partnership
Finance Program of the Federal Home Loan Bank of Chicago, which are originated for sale.
We currently offer fixed-rate conventional mortgage loans with terms of up to 30 years that are fully amortizing with monthly loan payments. We also
offer adjustable-rate mortgage loans that generally provide an initial fixed interest rate of five to seven years and annual interest rate adjustments thereafter.
Our adjustable rate mortgage loans amortize over a period of up to 30 years. We offer one- to four-family residential mortgage loans with loan-to-value
ratios up to 102%. Private mortgage insurance or participation in a government sponsored program is required for all one- to four-family residential
mortgage loans with loan-to-value ratios exceeding 90%. One- to four-family residential mortgage loans with loan-to-value ratios above 80%, but below
90%, require private mortgage insurance unless waived by management. At June 30, 2019, fixed-rate one- to four-family residential mortgage loans totaled
$58.0 million, or 44.8% of our one- to four-family residential mortgage loans, and adjustable-rate one- to four-family residential mortgage loans totaled
$71.3 million, or 55.2% of our one- to four-family residential mortgage loans.
Our one- to four-family residential mortgage loans are generally conforming loans. We generally originate both fixed- and adjustable-rate mortgage
loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac,
which for our primary market area is currently $484,350 for single-family homes. At June 30, 2019, our average one- to four-family residential mortgage
loan had a principal balance of $83,000. We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.” At
June 30, 2019, $22.0 million, or 17.0%, of our total one- to four-family residential loans had principal balances in excess of $484,350. Most of our jumbo
loans are originated with a seven-year fixed-rate term and an annual adjustable rate thereafter, with up to a 30 year amortization schedule. Occasionally we
will originate fixed-rate jumbo loans with terms of up to 15 years.
We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgage loans. In recent years there
has been increased demand for long-term fixed-rate loans, as market rates have dropped and remained near historic lows. As a result, we have sold a
substantial majority of our fixed-rate one- to four-family residential mortgage loans with terms of 15 years or greater. We sell fixed-rate residential
mortgages to the Federal Home Loan Bank of Chicago, with servicing retained, under its Mortgage Partnership Finance Program. Since December 2008, we
have sold loans to the Federal Home Loan Bank of Chicago under its Mortgage Partnership Finance Xtra Program. Total mortgages sold under this program
were approximately $3.4 million and $3.6 million for the years ended June 30, 2019 and 2018, respectively. In October 2015, we began to also sell loans to
FHLBC under its Mortgage Partnership Finance Original Program. Total loans sold under this program were approximately $13.7 million and $14.3 million
for the years ended June 30, 2019 and 2018, respectively. Generally, however, we retain in our portfolio 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 that we have originated in recent years due to
the favorable long-term rates for borrowers.
We currently offer several types of adjustable-rate mortgage loans secured by residential properties with interest rates that are fixed for an initial
period of five to seven years. We offer adjustable-rate mortgage loans that are fully amortizing. After the initial fixed period, the interest rate on adjustable-
rate mortgage loans generally resets every year based upon the weekly average of a one-year U.S. Treasury Securities rate plus an applicable margin,
subject to periodic and lifetime limitations on interest rate changes. The adjustable rate mortgage loans we are currently offering have a 2% maximum
annual rate change up or down, and a 6% lifetime cap. In our portfolio are also adjustable rate mortgage loans with a 1% maximum annual rate change up or
down, and a 5% lifetime cap up from the initial rate. Interest rate changes are further limited by floors. After the initial fixed period, the interest rate will
generally have a floor that is equal to the initial rate, but no less than 4.0% on our five and seven year adjustable-rate mortgage loans.
6
Table of Contents
Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans, This is primarily because the underlying debt
service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default and higher rates of delinquency in a rising
interest rate environment. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Since changes
in the interest rates on adjustable-rate mortgages may be limited by an initial fixed-rate period or by the contractual limits on periodic interest rate
adjustments, adjustable-rate loans may not adjust as quickly to increases in interest rates as our interest-bearing liabilities.
In addition to traditional one- to four-family residential mortgage loans, we offer 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 that we use to underwrite one- to four-
family residential mortgage loans. Home equity loans may be underwritten with a loan-to-value ratio of up to 90% when combined with the principal
balance of the existing first mortgage loan. Our home equity loans are primarily originated with fixed rates of interest with terms of up to 10 years, fully
amortized. At June 30, 2019, approximately $1.6 million, or 1.2% of our one- to four-family mortgage loans were home equity loans secured by a second
mortgage.
Home equity loans secured by second mortgages have greater risk than one- to four-family residential mortgage loans or home equity loans secured
by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default
on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the
value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining
balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property
used as collateral for our loans.
We do not offer or purchase loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less
than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.
We require title insurance on all of our one- to four-family residential mortgage loans, and we also require that borrowers maintain fire and extended
coverage casualty insurance in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We also require flood
insurance, as applicable. We do not conduct environmental testing on residential mortgage loans unless specific concerns for hazards are identified by the
appraiser used in connection with the origination of the loan.
Commercial Real Estate and Multi-family Real Estate Loans. At June 30, 2019, $143.4 million, or 29.0% of our loan portfolio consisted of
commercial real estate loans, and $104.7 million, or 21.2% of our loan portfolio consisted of multi-family (which we consider to be five or more units)
residential real estate loans. At June 30, 2019, substantially all of our commercial real estate and multi-family real estate loans were secured by properties
located in Illinois, Indiana and Missouri.
Our commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, retail rentals, churches, and farm
loans secured by real estate. At June 30, 2019, loans secured by commercial real estate had an average loan balance of $510,000. We originate commercial
real estate loans with balloon and adjustable rates of up to seven years with amortization up to 25 years. At June 30, 2019, $17.5 million or 12.2% of our
commercial real estate loans had adjustable rates. The rates on our adjustable-rate commercial real estate loans are generally based on the prime rate of
interest plus an applicable margin, and generally have a specified floor.
We originate multi-family loans with balloon and adjustable rates for terms of up to seven years with amortization up to 25 years. At June 30, 2019,
$3.8 million or 3.6% of our multi-family loans had adjustable rates. The rates on our adjustable-rate multi-family loans are generally tied to the prime rate
of interest plus or minus an applicable margin and generally have a specified floor.
In underwriting commercial real estate and multi-family real estate loans, we consider a number of factors, which include the projected net cash flow
to the loan’s debt service requirement (generally requiring a minimum
7
Table of Contents
ratio of 120%), 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. Commercial real estate and multi-family real estate loans are originated in amounts up to 80% of the appraised value or the
purchase price of the property securing the loan, whichever is lower. 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.
Commercial real estate and multi-family real estate loans generally carry higher interest rates and have shorter terms than one- to four-family
residential mortgage loans. Commercial real estate and multi-family real estate loans, however, entail greater credit risks compared to the one- to four-
family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related
borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as
repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in
economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the
property. Additionally, any decline in real estate values may be more pronounced for commercial real estate and multi-family real estate than for one- to
four-family residential properties.
At June 30, 2019, our largest commercial real estate loan had an outstanding balance of $6.6 million, was secured by a commercial building, and was
performing in accordance with its terms. At that date, our largest multi-family real estate loan had a balance of $10.9 million, was secured by multiple
apartment buildings with a total of 353 units, and was performing in accordance with its terms.
Home Equity Lines of Credit. In addition to traditional one- to four-family residential mortgage loans and home equity loans, we offer 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 that we use to underwrite one- to four-family residential mortgage loans. Our home equity lines of credit are originated with either fixed or
adjustable rates and may be underwritten with a loan-to-value ratio of up to 90% when combined with the principal balance of an existing first mortgage
loan. Fixed-rate lines of credit are generally based on the prime rate of interest plus an applicable margin and have monthly payments of 1.5% of the
outstanding balance. Adjustable-rate home equity lines of credit are based on the prime rate of interest plus or minus an applicable margin and require
interest paid monthly. Both fixed and adjustable rate home equity lines of credit have balloon terms of five years. At June 30, 2019 we had $8.9 million, or
1.8% of our total loan portfolio in home equity lines of credit. At that date we had $6.7 million of undisbursed funds related to home equity lines of credit.
Home equity lines of credit secured by second mortgages have greater risk than one- to four-family residential mortgage loans secured by first
mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their
loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of
the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance
from those customers. Particularly with respect to our home equity lines of credit, decreases in real estate values could adversely affect the value of property
securing the loan.
Commercial Business Loans. We also originate commercial non-mortgage business (term) loans and adjustable lines of credit. At June 30, 2019, we
had $84.2 million of commercial business loans outstanding, representing 17.1% of our total loan portfolio. At that date, we also had $27.6 million of
unfunded commitments on such loans. These loans are generally originated to small- and medium-sized companies in our primary market area. Our
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. We also offer agriculture loans that are not
secured by real estate.
In underwriting commercial business loans, we generally lend up to 80% of the appraised value or purchase price of the collateral securing the loan,
whichever is lower. The commercial business loans that we offer have fixed interest rates or adjustable rates indexed to the prime rate of interest plus an
applicable margin, and with terms
8
Table of Contents
ranging from one to seven years. Our commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, we
consider the financial statements, lending history and debt service capabilities of the borrower (generally requiring a minimum ratio of 120%), the projected
cash flows of the business and the value of the collateral, if any. Virtually all of our loans are guaranteed by the principals of the borrower.
Commercial business loans generally have a greater credit risk than one- to four-family residential mortgage loans. Unlike residential mortgage loans,
which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by
real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the
borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.
At June 30, 2019, our largest commercial business loan outstanding was for $5.1 million and was secured by commercial business assets. At June 30,
2019, this loan was performing in accordance with its terms.
Construction Loans. We also originate construction loans for one- to four-family residential properties and commercial real estate properties,
including multi-family properties. At June 30, 2019, $16.1million, or 3.3%, of our total loan portfolio, consisted of construction loans, which were secured
by one- to four-family residential real estate, multi-family real estate properties and commercial real estate properties.
Construction loans for one- to four-family residential properties are originated with a maximum loan to value ratio of 85% and are generally “interest-
only” loans during the construction period which typically does not exceed 12 months. After this time period, the loan converts to permanent, amortizing
financing following the completion of construction. Construction loans for commercial real estate are made in accordance with a schedule reflecting the cost
of construction, and are generally limited to an 80% loan-to-completed appraised value ratio. We generally require that a commitment for permanent
financing be in place prior to closing the construction loan.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a
construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the
estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance
additional funds beyond the amount originally committed in order to protect the value of the property.
Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure
full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed
on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
At June 30, 2019, all of the construction loans that we originated were for one- to four-family residential properties, multi-family real estate properties
and commercial real estate properties. The largest of such construction loans at June 30, 2019 was for a 93 unit apartment building and had a principal
balance of $7.2 million. This loan was performing in accordance with its terms at June 30, 2019.
Loan Originations, Purchases, Participations, Sales and Servicing. Lending activities are conducted primarily by our loan personnel operating in
each office. All loans that we originate are underwritten pursuant to our standard policies and procedures. In addition, our one- to four-family residential
mortgage loans generally incorporate Fannie Mae, Freddie Mac or Federal Home Loan Bank of Chicago underwriting guidelines, as applicable. We
originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand
for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity
may be adversely affected by a rising interest rate environment which typically results in decreased loan demand. Most of our commercial real estate and
commercial business loans are generated by our internal business development efforts
9
Table of Contents
and referrals from professional contacts. Most of our originations of one- to four-family residential mortgage loans, consumer loans and home equity loans
and lines of credit are generated by existing customers, referrals from realtors, residential home builders, walk-in business and from our website.
Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold on a servicing-
released basis a substantial majority of the conforming, fixed-rate one- to four-family residential mortgage loans with maturities of 15 years or greater that
we have originated.
From time to time, we purchase loan participations in commercial loans in which we are not the lead lender secured by real estate and other business
assets, primarily within 100 miles of our primary lending area. In these circumstances, we follow our customary loan underwriting and approval policies.
We have sufficient capital to take advantage of these opportunities to purchase loan participations, as well as strong relationships with other community
banks in our primary market area and throughout Illinois that may desire to sell participations, and we may increase our purchases of participations in the
future as a growth strategy. At June 30, 2019 and 2018, the amount of commercial loan participations totaled $29.5 million and $32.9 million, respectively,
of which $12.0 million and $11.0 million, at June 30, 2019 and 2018 were outside our primary market area.
We sell a portion of our fixed-rate residential mortgage loans to the Federal Home Loan Bank of Chicago under its Mortgage Partnership Finance
Xtra Program and its Mortgage Partnership Finance Original Program. We retain servicing on all loans sold under these programs. During the years ended
June 30, 2019 and 2018, we sold $17.1 million and $17.9 million of loans to the Federal Home Loan Bank of Chicago under the program. Prior to
December 2008, and after October 2015, we also retained some credit risk associated with a portion of the loans sold to the Federal Home Loan Bank of
Chicago. For additional information regarding retained risk associated with these loans, see “Allowance for Loan Losses—Other Credit Risk.”
Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination
procedures established by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of
the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information
on the historical and projected income and expenses of the borrower. We will also evaluate a guarantor when a guarantee is provided as part of the loan.
Iroquois Federal’s policies and loan approval limits are established by our Board of Directors. Our 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 and 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 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.
We generally require appraisals from certified or licensed third party appraisers of all real property securing loans. When appraisals are ordered, they
are done so through an agency independent of the Association or by staff independent of the loan approval process, in order to maintain a process free of
any influence or pressure from any party that has an interest in the transaction.
Non-performing and Problem Assets
For all of our loans, once a loan is 15 days delinquent, a past due notice is mailed. Past due notices continue to be mailed monthly in the event the
account is not brought current. Prior to the time a loan is 30 days past due, we attempt to contact the borrower by telephone. Thereafter we continue with
follow-up calls. Generally, once a loan becomes 90-120 days delinquent, if no work-out efforts have been pursued, we commence the foreclosure or
repossession process. A summary report of all loans 90 days or more past due and all criticized and classified loans is provided monthly to our Board of
Directors.
10
Table of Contents
Loans are evaluated for non-accrual status when payment of principal and/or interest is 90 days or more past due. Loans are also placed on
non-accrual status when it is determined collection of principal or interest is in doubt or if the collateral is in jeopardy. When loans are placed on
non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received and only after the loan is returned
to accrual status. The loans are typically returned to accrual status if unpaid principal and interest are repaid so that the loan is current.
Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At June 30, 2019,
2018, 2017, 2016 and 2015, we had troubled debt restructurings of approximately $1.5 million, $2.9 million, $3.1 million, $2.3 million and $2.6 million,
respectively. At the dates presented, we had one loan that was delinquent 120 days or greater and that were still accruing interest. This loan is a performing
TDR with more than 2 years of payments as agreed, but it is still listed as delinquent more than 120 days.
.
11
Table of Contents
Non-accrual loans:
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total non-accrual loans
Loans delinquent 90 days or greater and still accruing:
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity line of credit
Construction
Commercial
Consumer
Total loans delinquent 90 days or greater and still accruing
Total non-performing loans
Performing troubled debt restructurings
Total non-performing loans and performing troubled debt restructurings
Other real estate owned and foreclosed assets:
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total other real estate owned and foreclosed assets
Total non-performing assets
Ratios:
Non-performing loans to total loans
Non-performing assets to total assets
(1)
Includes home equity loans.
2019
2018
At June 30,
2017
2016
2015
(Dollars in thousands)
$ 414
—
18
20
—
60
29
541
$6,339
116
50
—
—
30
—
6,535
$ 9,105
146
25
24
—
84
—
9,384
$1,604
185
63
316
—
9
—
2,177
$2,724
240
46
—
—
21
14
3,045
226
—
—
—
—
—
—
226
767
1,310
$2,264
293
—
—
—
—
—
1
294
6,829
2,675
$9,504
155
—
—
—
—
—
—
155
9,539
2,211
$11,750
4
—
—
—
—
—
8
12
2,189
2,084
$4,273
15
—
—
—
—
—
7
22
3,067
1,855
$4,922
539
—
219
—
—
20
—
778
$1,545
—
—
—
—
—
219
—
219
$7,048
210
—
—
—
—
219
—
429
$ 9,968
338
—
—
—
—
—
—
338
$2,527
50
—
—
—
—
—
—
50
$3,117
0.16%
0.21%
1.42%
1.10%
2.13%
1.70%
0.49%
0.42%
0.85%
0.55%
For the years ended June 30, 2019 and 2018, gross interest income that would have been recorded had our non-accruing loans been current in
accordance with their original terms was $25,000 and $554,000, respectively. We recognized no interest income on such loans for the years ended June 30,
2019 and 2018.
At June 30, 2019, our non-accrual loans totaled $541,000. These non-accrual loans consisted primarily of eight one- to four-family residential loans
with aggregate principal balances totaling $414,000 and specific allowances totaling $13,000, one home equity line of credit with principal balance of
$20,000 and no specific allowance, three commercial real estate loans with aggregate principal balances totaling $18,000 and no specific
12
Table of Contents
allowances, two commercial business loans with aggregate principal balances totaling $60,000 with no specific allowances, and five consumer loans with
aggregate principal balances of $29,000 and specific allowances totaling $10,000.
The $6.3 million of non-accrual one- to four-family loans at June 30, 2018 was related to one credit relationship. In June 2017, a $7.8 million loan
secured by 45 one- to four-family properties was moved to non-performing when the borrower became involved in litigation, and subsequently filed for
bankruptcy protection. The properties securing this loan are all existing homes that were acquired by the borrower to be renovated and resold. As of
June 30, 2018, we had accrued real estate taxes of $577,000 and we had charged off $1.5 million of the credit to reflect the net realizable value of the
properties. During the year ended June 30, 2019, these 45 properties, with an aggregate value of $6.3 million, were moved to foreclosed assets held for sale,
and 43 of these properties were sold.
Troubled Debt Restructurings. Troubled debt restructurings are defined under ASC 310-40 to include loans for which either a portion of interest or
principal has been forgiven, or for loans modified at interest rates or on terms materially less favorable than current market rates. We periodically modify
loans to extend the term or make other concessions to help borrowers stay current on their loans and to avoid foreclosure. At June 30, 2019 and 2018, we
had $1.5 million and $2.9 million, respectively, of troubled debt restructurings. At June 30, 2019 our troubled debt restructurings consisted of $1.5 million
of residential one- to four-family mortgage loans, $6,000 of commercial real estate loans, $22,000 of home equity lines of credit loans, and $2,000 of
consumer loans, all of which were impaired.
For the years ended June 30, 2019 and 2018, gross interest income that would have been recorded had our troubled debt restructurings been
performing in accordance with their original terms was $84,000 and $176,000, respectively. We recognized interest income of $56,000 and $137,000 on
such modified loans for the years ended June 30, 2019 and 2018, respectively.
13
Table of Contents
Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.
Loans Delinquent For
60 to 89 Days
90 Days or Greater
Total
Number Amount Number Amount Number Amount
(Dollars in thousands)
At June 30, 2019
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
At June 30, 2018
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
At June 30, 2017
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
At June 30, 2016
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
At June 30, 2015
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total loans
(1)
Includes home equity loans.
5
—
1
1
—
—
—
255
—
6
26
—
—
—
287
10
—
2
1
—
2
5
20 $
481
—
12
20
—
60
29
602
15
—
3
2
—
2
5
27 $
736
—
18
46
—
60
29
889
7 $
4
—
1
1
—
—
2
8 $
207
—
13
23
—
—
29
272
6,633
10
2
1
37
2
—
—
—
—
30
1
1
1
15 $ 6,703
6,840
14
2
1
50
3
23
1
—
—
30
1
3
30
23 $ 6,975
4
—
1
—
—
—
3
8 $
158
—
84
—
—
—
6
248
5
—
—
1
—
—
—
540
—
—
24
—
—
—
564
9
—
1
1
—
—
3
14 $
698
—
84
24
—
—
6
812
6 $
6
—
2
—
—
1
1
10 $
148
—
97
—
—
100
5
350
1,489
9
—
—
27
1
316
1
—
—
—
—
8
1
12 $ 1,840
1,637
15
—
—
124
3
316
1
—
—
100
1
13
2
22 $ 2,190
14
1
3
—
—
1
—
724
31
137
—
—
21
—
913
2,279
17
—
—
—
—
—
—
—
—
—
—
3
21
20 $ 2,300
3,003
31
31
1
137
3
—
—
—
—
21
1
3
21
39 $ 3,213
19 $
Total delinquent loans decreased by $6.1 million to $889,000 at June 30, 2019 from $7.0 million at June 30, 2018. The decrease in delinquent loans
was due primarily to one large non-performing credit at June 30, 2018, that secured 45 one- to four-family properties with an aggregate value of
$6.3 million that were moved to foreclosed assets held for sale during the year ended June 30, 2019. During the year ended June 30, 2019, 43 of these 45
properties were sold.
14
Table of Contents
Real Estate Owned and Foreclosed Assets. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned. When property is acquired it is recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Estimated fair value
generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial
institutions, less the estimated costs to sell the property. Holding costs and declines in fair value result in charges to expense after acquisition. In addition,
we could repossess certain collateral, including automobiles and other titled vehicles, called other repossessed assets. At June 30, 2019, we had $778,000 in
foreclosed assets compared to $219,000 as of June 30, 2018. During the year ended June 30, 2019, 45 properties, securing one large credit and with an
aggregate value of $6.3 million, were moved to foreclosed assets held for sale, and 43 of these properties were sold. Foreclosed assets at June 30, 2019,
consisted of $539,000 in residential real estate properties, $219,000 in commercial non-occupied property, and $20,000 in business assets, while foreclosed
assets at June 30, 2018, consisted of $219,000 in commercial nonoccupied property.
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered
to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we
will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard
with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and
values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that
their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories,
but which possess potential weaknesses that deserve our close attention, are required to be designated as watch.
When we classify assets as either substandard or doubtful, we undertake an impairment analysis which may result in allocating a portion of our
general loss allowances to a specific allowance for such assets as we deem prudent. The allowance for loan losses is the amount estimated by management
as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. When we
classify a problem asset as loss, we charge off the asset. For other classified assets, we provide a specific allowance for that portion of the asset that is
considered uncollectible. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our
principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. We regularly
review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.
The following table sets forth our amounts of classified assets, assets designated as watch and total criticized assets (classified assets and loans
designated as watch) as of the date indicated. Amounts shown at June 30, 2019 and 2018, include approximately $767,000 and $6.8 million of
nonperforming loans, respectfully. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $23,000 and
$3,000 at June 30, 2019 and 2018, respectively. Substandard assets shown include foreclosed assets.
Classified assets:
Substandard
Doubtful
Loss
Total classified assets
Watch
Total criticized assets
15
At June 30,
2019
2018
(In thousands)
$4,096
10
$ 2,617
6,332
—
4,106
2,415
$6,521
—
8,949
2,294
$11,243
Table of Contents
At June 30, 2019, substandard assets consisted of $1.9 million of one- to four-family residential mortgage loans, $159,000 in multi-family loans,
$251,000 of commercial real estate loans, $20,000 in home equity lines of credit, $965,000 of commercial business loans, $19,000 of consumer loans, and
$778,000 of foreclosed assets held for sale. At June 30, 2019, watch assets consisted $1.0 million of commercial real estate loans and $1.4 million of
commercial business loans, while doubtful assets consisted of $10,000 in consumer loans. During the year ended June 30, 2019, 45 properties, securing one
large credit and with an aggregate value of $6.3 million, were moved to foreclosed assets held for sale, and 43 of these properties were sold. At June 30,
2019, no assets were classified as loss.
Other Loans of Concern. At June 30, 2019, there were no other loans or other assets that are not disclosed in the text or tables above where known
information about the possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with present loan
repayment terms and which may result in disclosure of such loans in the future.
Other Credit Risk. We also have some credit risk associated with fixed-rate residential loans that we sold to the Federal Home Loan Bank of
Chicago. Between 2000 and 2004, we sold loans under its Mortgage Partnership Finance (MPF) 100 Program. Then from 2004 to December 2008, and
again starting in October 2015, loans were sold under its MPF Original Program. However, while we retain the servicing of these loans and receive both
service fees and credit enhancement fees, they are not our assets. We sold $13.7 million in loans under the MPF Original program in the year ended June 30,
2019, and we continue to service approximately $42.7 million of loans in the MPF 100 and MPF Original Programs combined, for which our maximum
potential credit risk is approximately $1.9 million. From June 2000 to June 30, 2019, we experienced only $170,000 in actual losses under the MPF 100 and
MPF Original Programs combined. We have also sold loans to the Federal Home Loan Bank of Chicago since December 2008 under its MPF Xtra Program.
Unlike loans sold under the MPF 100 and MPF Original Programs, we do not retain any credit risk with respect to loans sold under the MPF Xtra Program.
Allowance for Loan Losses
The allowance for loan losses represents one of the most significant estimates within our financial statements and regulatory reporting. Because of
this, we have developed, maintained, and documented a comprehensive, systematic, and consistently applied process for determining the allowance for loan
losses, in accordance with GAAP, our stated policies and procedures, management’s best judgment and relevant supervisory guidance.
Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to
establish allowances against losses on loans on a quarterly basis, and more frequently if warranted. We analyze the collectability of loans held for
investment and maintain an allowance that is appropriate and determined in accordance with GAAP. When additional allowances are necessary, a provision
for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for
estimated credit losses on individual loans that are determined to be impaired through our review for identified problem loans; and (2) a general allowance
based on estimated credit losses inherent in the remainder of the loan portfolio.
In performing the allowance for loan loss review, we have divided our credit portfolio into several separate homogeneous and non-homogeneous
categories within the following groups:
•
Mortgage Loans: one- to four-family residential first lien loans originated by Iroquois Federal; one- to four-family residential first lien loans
purchased from a separate origination company; one- to four-family residential junior lien loans; home equity lines of credit; multi-family
residential loans on properties with five or more units; non-residential real estate loans; and loans on land under current development or for
future development.
•
Consumer Loans (unsecured or secured by other than real estate): loans secured by deposit accounts; loans for home improvement;
educational loans; automobile loans; mobile home loans; loans on other security; and unsecured loans.
16
Table of Contents
•
Commercial Loans (unsecured or secured by other than real estate): secured loans and unsecured loans.
Determination of Specific Allowances for Identified Problem Loans. The Company establishes a specific allowance when loans are determined to be
impaired. Loss is measured by determining the present value of expected future cash flows, the loan’s observable market value, or, for collateral-dependant
loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors used in identifying a specific problem loan include: (1) the
strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type
and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the
delinquency. In addition, for loans secured by real estate, the Company also considers the extent of any past due and unpaid property taxes applicable to the
property serving as collateral on the mortgage.
Determination of General Allowance for Remainder of the Loan Portfolio. The Company establishes a general allowance for loans that are not
deemed impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to
particular problem assets. The general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages
based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. In certain instances, the
historical loss experience could be adjusted if similar risks are not inherent in the remaining portfolio. The allowance is then adjusted for significant factors
that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These qualitative factors may include: (1) Management’s
assumptions regarding the minimal level of risk for a given loan category and includes amounts for anticipated losses which may not be reflected in our
current loss history experience; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off and recovery
practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions
and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of
the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the
volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured (“TDR”) and other loan modifications, and
the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying
collateral for collateral-dependant loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
(10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing
portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.
Although our policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, we
have historically evaluated every loan classified as substandard, regardless of size, for impairment as part of our review for establishing specific allowances.
Our policy also allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans which are loans criticized as special
mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice
the amount of general allowances calculated on our non-classified loans.
In addition, as an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for
loan losses. Such agency may require that we recognize additions to the allowance based on their judgments of information available to them at the time of
their examination.
We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of
collection. Loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.
17
Table of Contents
All interest accrued but not collected for loans, including troubled debt restructurings, that are placed on nonaccrual status or charged off is reversed
against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.
Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
The allowance for loan losses increased $383,000 to $6.3 million at June 30, 2019, from $5.9 million at June 30, 2018. The increase was a result of an
increase in outstanding loans and corresponding provision expense, partially offset by net charge-offs of $24,000, and was necessary in order to bring the
allowance for loan losses to a level that reflects management’s estimate of the probable loss in the Company’s loan portfolio at June 30, 2019.
As noted above, in its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data including past due
percentages, charge-offs, and recoveries. The Company’s allowance methodology weights the most recent twelve-quarter period’s net charge-offs and uses
this information as one of the primary factors for evaluation of allowance adequacy. The most recent four-quarter net charge-offs are given a higher weight
of 50%, while quarters 5-8 are given a 30% weight and quarters 9-12 are given only a 20% weight. The average net charge-offs in each period are
calculated as net charge-offs by portfolio type for the period as a percentage of the quarter end balance of respective portfolio type over the same period. As
the Company and the industry have seen increases in loan defaults in the past several years, the Company believes that it is prudent to emphasize more
recent historical factors in the allowance evaluation.
The following table sets forth the Company’s weighted average historical net charge-offs as of June 30, 2019 and June 30, 2018:
Portfolio segment
Real Estate:
One- to four-family
Multi-family
Commercial
HELOC
Construction
Commercial business
Consumer
Entire portfolio total
June 30, 2019
Net charge-offs –
12 quarter weighted
historical
June 30, 2018
Net charge-offs –
12 quarter weighted
historical
0.38%
0.00%
0.00%
0.17%
0.00%
0.01%
0.02%
0.12%
0.65%
0.00%
0.00%
0.23%
0.00%
0.02%
0.04%
0.20%
Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in financial conditions of
individual borrowers; changes in local, regional, and national economic conditions; the Company’s historical loss experience; and changes in market
conditions for property pledged to the Company as collateral. As noted above, the Company has identified specific qualitative factors that address these
issues and assigns a percentage to each factor based on management’s judgement. The qualitative factors are applied to the allowance for loan losses based
upon the following percentages by loan type:
Portfolio segment
Real Estate:
One- to four-family
Multi-family
Commercial
HELOC
Construction
Commercial business
Consumer
Entire portfolio total
Qualitative factor applied at
June 30, 2019
Qualitative factor applied at
June 30, 2018
0.42%
1.57%
1.18%
0.83%
1.32%
1.96%
0.75%
1.16%
18
0.13%
1.56%
1.21%
0.77%
1.22%
1.98%
0.74%
1.05%
Table of Contents
At June 30, 2019, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $5.7 million, as compared to
$5.1 million at June 30, 2018. The general increase in qualitative factors was attributable primarily to actual losses versus minimum expected losses already
factored.
While management believes that our asset quality remains strong, it recognizes that, due to the continued growth in the loan portfolio, the increase in
troubled debt restructurings and the potential changes in market conditions, our level of nonperforming assets and resulting charges-offs may fluctuate.
Higher levels of net charge-offs requiring additional provisions for loan losses could result. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.
The following table sets forth activity in our allowance for loan losses at and for the periods indicated.
Balance at beginning of period
Charge-offs:
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total charge-offs
Recoveries:
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Ratios:
Net charge-offs to average loans outstanding
Allowance for loan losses to non-performing loans at end of period
Allowance for loan losses to total loans at end of period
(1)
Includes home equity loans.
19
2019
$ 5,945
2018
At or For the Fiscal Years Ended June 30,
2017
(Dollars in thousands)
$5,351
$ 4,211
$ 6,835
2016
2015
$ 3,958
(17)
—
—
(15)
—
—
(18)
(50)
(1,608)
—
—
(24)
—
(30)
(14)
(1,676)
(232)
—
(8)
—
—
—
(35)
(275)
(188)
—
(3)
(32)
—
—
(10)
(233)
(231)
—
—
(35)
—
—
(12)
(278)
22
—
—
—
—
—
4
26
(24)
407
$ 6,328
1
—
—
—
—
—
8
9
(1,667)
777
$ 5,945
32
—
—
—
—
—
6
38
(237)
1,721
$6,835
5
—
—
—
—
—
2
7
(226)
1,366
$ 5,351
29
—
—
13
—
—
29
71
(207)
460
$ 4,211
0.01%
825.03%
1.28%
0.35%
87.06%
1.23%
0.05%
71.66%
1.53%
0.05%
244.39%
1.19%
0.01%
137.30%
1.17%
Table of Contents
Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of
loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future
losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
2019
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
At June 30,
2018
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
(Dollars in thousands)
2017
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
$
$
1,031
1,642
1,623
89
213
1,659
71
6,328
—
6,328
$
26.2%
21.2
29.0
1.8
3.3
17.1
1.4
100.0%
$
997
1,650
1,604
91
168
1,373
62
5,945
—
5,945
$
28.0%
22.3
29.2
1.9
2.9
14.2
1.5
100.0%
$
2,519
1,336
1,520
76
75
1,242
67
6,835
—
6,835
31.5%
19.5
29.9
1.7
1.6
14.0
1.8
100.0%
2016
2015
At June 30,
Percent of
Loans in Each
Category to
Total Loans
Allowance for
Loan Losses
Percent of
Loans in Each
Category to
Total Loans
(Dollars in thousands)
$
33.3%
18.8
26.6
1.8
4.4
12.9
2.2
100.0%
$
1,216
827
1,246
85
6
744
87
4,211
—
4,211
40.2%
16.2
28.8
2.1
0.1
10.3
2.3
100.0%
Allowance for
Loan Losses
$
$
1,198
1,202
1,399
94
227
1,140
91
5,351
—
5,351
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total allocated allowance
Unallocated
Total
(1)
Includes home equity loans.
Real estate loans:
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total allocated allowance
Unallocated
Total
(1)
Includes home equity loans.
Net charge-offs decreased to $24,000 for the year ended June 30, 2019, from $1.7 million for the year ended June 30, 2018. Charge-offs for the year
ended June 30, 2019 involved one- to four-family real estate loans, home equity lines of credit and consumer loans, while most of the charge-offs during the
year ended June 30, 2018, involved one- to four-family residential real estate loans. In addition, non-performing loans decreased by $6.1 million during the
year ended June 30, 2019.
The allowance for loan losses increased $383,000, or 6.4%, to $6.3 million at June 30, 2019 from $5.9 million at June 30, 2018. The increase was due
to an increase in the loan portfolio and the change in loan portfolio composition, partially offset by charge-offs. At June 30, 2019, the allowance for loan
losses represented 1.28% of total loans compared to 1.23% of total loans at June 30, 2018.
Investments
We conduct investment transactions in accordance with our Board-approved investment policy. The investment policy is reviewed at least annually
by the Budget and Investment Committee of the Board, and any changes to the policy are subject to ratification by the full Board of Directors. This policy
dictates that investment
20
Table of Contents
decisions give consideration to the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging
requirements, minimizing exposure to credit risk, potential returns and consistency with our interest rate risk management strategy. Authority to make
investments under approved guidelines is delegated to our Investment Committee, comprised of our President and Chief Executive Officer, our Senior
Executive Vice President and Chief Financial Officer, our Executive Vice President and Community President, and our Senior Vice President and
Controller. All investments are reported to the Board of Directors for ratification at the next regular Board meeting.
Our current investment policy permits us to invest only in investment quality securities permitted by Office of the Comptroller of the Currency
regulations, including U.S. Treasury or Government guaranteed securities, U.S. Government agency securities, securities issued or guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae, bank-qualified municipal securities, bank-qualified money market instruments, and bank-qualified corporate bonds. We
do not engage in speculative trading. As of June 30, 2019, we held no asset-backed securities other than mortgage-backed securities. As a federal savings
and loan association, Iroquois Federal is generally not permitted to invest in equity securities, although this general restriction will not apply to IF Bancorp,
which may acquire up to 5% of voting securities of any company without regulatory approval.
ASC 320-10, “Investment – Debt and Equity Securities” requires that, at the time of purchase, we designate a security as held to maturity,
available-for-sale, or trading, depending on our ability and intent. Securities available for sale are reported at fair value, while securities held to maturity are
reported at amortized cost. All of our securities are available for sale. We do not maintain a trading portfolio.
U.S. Government and Agency Debt Securities. While U.S. Government and federal agency securities generally provide lower yields than other
investments, including mortgage-backed securities and interest-earning certificates of deposit, we maintain these investments, to the extent appropriate, for
liquidity purposes and as collateral for borrowings.
Mortgage-Backed Securities. We invest in mortgage-backed securities insured or guaranteed by the U.S. Government or government sponsored
enterprises. Mortgage-backed securities are created by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the
underlying mortgages. Some securities pools are guaranteed as to payment of principal and interest to investors. Mortgage-backed securities generally yield
less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities
are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be
used to collateralize our specific liabilities and obligations. Finally, mortgage-backed securities are assigned lower risk weightings for purposes of
calculating our risk-based capital level. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the
prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount
relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether
prepayment estimates require modification that could cause amortization or accretion adjustments. Also classified as agency mortgage-backed securities, are
securities backed by debentures/loans for working capital to small businesses with limited or no access to private venture capital, and regulated by the Small
Business Administration (SBA). Like other agency mortgage-backed securities, they are backed by the full faith and credit of the United States
Government. They have zero risk weighting for purposes of calculating our risk-based capital level. With ten year maturities, these fixed rate bullet
debentures pay interest semi-annually and principal at maturity. Prepayments are required to be in whole on any semi-annual payment date, and there are no
prepayments penalties for deals issued since 2007. Therefore, the two sources of prepayment risk are voluntary prepays and defaults. In the event of default,
the SBA may accelerate the payment equal to 100% of the outstanding principal balance, or the SBA will make the principal and interest payments.
Municipal Obligations. Iroquois Federal’s investment policy allows it to purchase municipal securities of credit-worthy issuers, and does not permit it
to invest more than 10% of Iroquois Federal’s capital in the bonds of any single issuer. At June 30, 2019, we held $2.9 million of municipal securities, all of
which were issued by local governments and school districts within our market area.
21
Table of Contents
Federal Home Loan Bank Stock. At June 30, 2019, we held $1.2 million of Federal Home Loan Bank of Chicago common stock in connection with
our borrowing activities totaling $24.0 million. The common stock of the Federal Home Loan Bank is carried at cost and classified as a restricted equity
security.
Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-
owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned
life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At June 30, 2019, we had $9.1million invested in bank-owned life insurance,
which was 11.1% of our Tier 1 capital plus our allowance for loan losses.
Investment Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated, excluding
Federal Home Loan Bank of Chicago stock, federally insured interest-earning time deposits and bank-owned life insurance. As of June 30, 2019, 2018 and
2017 all of such securities were classified as available for sale.
2019
At June 30,
2018
2017
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
Securities available for sale:
U.S. government, federal agency and government-sponsored enterprises
U.S. government sponsored mortgage-backed securities
Small Business Administration
State and political subdivisions
Total
22
$ 12,654 $ 12,950 $ 24,757 $ 23,922 $ 25,230 $ 25,035
124,615 125,510 100,534 97,059 81,088 80,962
2,032
3,582
$ 144,905 $146,291 $ 130,236 $125,996 $ 111,640 $111,611
4,935
2,896
4,911
2,725
1,965
2,980
1,891
3,124
2,048
3,274
Table of Contents
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2019 are summarized in the
following table. At such date, all of our securities were available for sale. Maturities are based on the final contractual payment dates, and do not reflect the
impact of prepayments or early redemptions that may occur. The yields on municipal securities have not been adjusted to a tax-equivalent basis.
One Year or Less
Amortized
Cost
Weighted
Average
Yield
More than One Year
through Five Years
Weighted
Average
Yield
Amortized
Cost
More than Five
Years through Ten
Years
More than Ten
Years
Total Securities
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Fair
Value
Weighted
Average
Yield
(Dollars in thousands)
U.S. government,
federal agency and
government-
sponsored enterprises $ — — % $
1,999
2.68% $ 10,655
2.62% $ — — % $ 12,654 $ 12,950
2.63%
U.S. government
sponsored mortgage-
backed securities
Small Business
Administration
State and political
subdivisions
Total
— —
5,330
2.48
41,662
2.64
77,623
2.76
124,615 125,510
2.71
— —
— —
1,826
2.63
3,084
2.91
4,910
4,935
2.81
1,150
1,150
6.11
6.11% $
$
— —
1,576
2.53% $ 55,719
7,329
3.04
2.65% $ 80,707
— —
2,896
2,726
2.76% $ 144,905 $146,291
5.37
2.75%
23
Table of Contents
Sources of Funds
General. Deposits traditionally have been our primary source of funds for our lending and investment activities. We also borrow from the Federal
Home Loan Bank of Chicago, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to
manage our cost of funds. Our additional sources of funds are the proceeds from the sale of loans originated for sale, scheduled loan payments, maturing
investments, loan prepayments, retained earnings and income on other earning assets.
Deposits. We generate deposits primarily from the areas in which our branch offices are located. We rely on our competitive pricing, convenient
locations and customer service to attract and retain both retail and commercial deposits.
We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of statement savings accounts, certificates
of deposit, money market accounts, commercial and regular checking accounts, individual retirement accounts and health savings accounts. From time to
time we utilize brokered certificates of deposit or or non-brokered certificates of deposit obtained through an internet listing service. At June 30, 2019, we
had $39.5 million in brokered certificates of deposit and $18.5 million in non-brokered certificates of deposit obtained through an internet listing service.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on
current operating strategies, including the cost of alternate sources of funds, and market interest rates, liquidity requirements, interest rates paid by
competitors and our deposit growth goals.
The following tables set forth the distribution of our average total deposit accounts, by account type, for the periods indicated.
Deposit type:
Noninterest bearing demand
Interest-bearing checking or NOW
Savings accounts
Money market accounts
Certificates of deposit
Total deposits
Deposit type:
Noninterest bearing demand
Interest-bearing checking or NOW
Savings accounts
Money market accounts
Certificates of deposit
Total deposits
For the Fiscal Year Ended
June 30, 2019
For the Fiscal Year Ended
June 30, 2018
Average
Balance Percent
Weighted
Average
Rate
(Dollars in thousands)
Average
Balance Percent
Weighted
Average
Rate
$ 28,429
50,668
43,183
97,555
296,692
$516,527
5.50%
9.81
8.36
18.89
57.44
100.00%
0.00% $ 21,029
46,299
0.28
43,159
0.41
1.29
96,984
256,250
1.94
1.42% $463,721
4.53%
9.98
9.31
20.92
55.26
100.00%
0.00%
0.14
0.24
0.88
1.34
0.96%
For the Fiscal Year Ended
June 30, 2017
Percent
(Dollars in thousands)
4.43%
10.28
9.38
17.67
58.24
100.00%
Weighted
Average
Rate
0.00%
0.09
0.12
0.26
1.04
0.67%
Average
Balance
$ 19,011
44,080
40,191
75,736
249,689
$428,707
24
Table of Contents
As of June 30, 2019, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately
$152.3 million. The following table sets forth the maturity of those certificates as of June 30, 2019.
Three months or less
Over three months through six months
Over six months through one year
Over one year to three years
Over three years
Total
At
June 30, 2019
(In thousands)
23,499
$
12,676
69,566
44,798
1,754
152,293
$
The following table sets forth the amount of our certificates of deposit classified by interest rate as of the dates indicated.
Interest Rate:
Less than 2.00%
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
Total
2019
At June 30,
2018
(In thousands)
2017
$125,493
199,791
5,001
—
—
$330,285
$216,275
45,565
1,740
—
—
$263,580
$242,262
5,531
—
—
—
$247,793
Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Chicago and repurchase agreements. At June 30, 2019, we
had access to additional Federal Home Loan Bank of Chicago advances of up to $158.0 million based on our collateral. The following table sets forth
information concerning balances and interest rates on our borrowings and repurchase agreements at the dates and for the periods indicated.
Federal Home Loan Bank of Chicago
Balance at end of period
Average balance during period
Maximum outstanding at any month end
Weighted average interest rate at end of period
Average interest rate during period
Repurchase Agreements
Balance at end of period
Average balance during period
Maximum outstanding at any month end
Weighted average interest rate at end of period
Average interest rate during period
25
At or For the Fiscal Years Ended June 30,
2017
2018
2019
(Dollars in thousands)
$ 24,000
61,017
81,500
$ 67,500
61,374
67,500
$ 53,500
64,622
74,000
$
2.11%
2.48%
2,015
2,400
2,840
1.12%
0.84%
$
1.88%
1.34%
2,281
2,623
2,980
0.94%
0.63%
$
1.02%
1.10%
2,183
3,277
4,817
0.38%
0.42%
Table of Contents
Personnel
At June 30, 2019, the Association had 101 full-time employees and 4 part-time employees, none of whom is represented by a collective bargaining
unit. Iroquois Federal believes that its relationship with its employees is good.
Subsidiaries
IF Bancorp conducts its principal business activities through its wholly-owned subsidiary, Iroquois Federal Savings and Loan Association. The
Iroquois Federal Savings and Loan Association has one wholly-owned subsidiary, L.C.I. Service Corporation, an insurance agency with offices in Watseka
and Danville, Illinois.
REGULATION AND SUPERVISION
General
Iroquois Federal is subject to examination and regulation by the OCC, and is also subject to examination by the FDIC. This regulation and supervision
establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit
insurance fund and depositors, and not for the protection of stockholders. Iroquois Federal also is a member of and owns stock in the FHLB-Chicago, which
is one of the 11 regional banks in the Federal Home Loan Bank System.
Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking
and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend
payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of
assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions
relating to capital, asset quality, management, liquidity, earnings and other factors. The receipt of a less than satisfactory rating in one or more categories
may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial
institution, such as Iroquois Federal or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends,
acquire other financial institutions or establish new branches.
In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and
regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions
that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial
institutions or expand our branch network.
As a savings and loan holding company, IF Bancorp is required to comply with the rules and regulations of the Federal Reserve Board and to file
certain reports with and is subject to examination by the Federal Reserve Board. IF Bancorp is also subject to the rules and regulations of the Securities and
Exchange Commission under the federal securities laws.
Any change in applicable laws or regulations, whether by the OCC, the FDIC, the Federal Reserve Board or Congress, could have a material adverse
impact on the operations and financial performance of IF Bancorp and Iroquois.
Set forth below is a brief description of material regulatory requirements that are applicable to Iroquois Federal and IF Bancorp. The description is
limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations
and their effects on Iroquois Federal and IF Bancorp.
26
Table of Contents
Federal Banking Regulation
Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable
federal regulations. Under these laws and regulations, Iroquois Federal may invest in mortgage loans secured by residential and commercial real estate,
commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Iroquois Federal may also
establish subsidiaries that may engage in certain activities not otherwise permissible for Iroquois Federal, including real estate investment and securities and
insurance brokerage.
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common
equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4%
Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of regulations implementing
recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
As noted, the risk-based capital standards for savings associations require the maintenance of common equity Tier 1 capital, Tier 1 capital and total
capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Common
equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1
and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in
equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2
capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock
and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2
capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out
election regarding the treatment of Accumulated other comprehensive income, up to 45% of net unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In
assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the
authority to establish higher capital requirements for individual associations where necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus
payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-
weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement was phased in
and became fully phased in on January 1, 2019 at 2.5%.
Legislation enacted in May 2018 requires the federal banking agencies, including the OCC, to establish for institutions with assets of less than
$10 billion of assets a “community bank leverage ratio” of between 8 to 10%. Institutions electing to follow the alternative framework whose capital meets
or exceeds the specified ratio will be deemed to comply with the applicable regulatory capital requirements, including the risk-based requirements. The
establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators and, in February 2019, a
proposed rule was issued that would establish the community bank leverage ratio at 9%.
At June 30, 2019, Iroquois Federal’s capital exceeded all applicable requirements.
Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by
readily marketable collateral, which generally does not include real estate.
On July 30, 2012 Iroquois Federal received approval from the OCC to participate in the Supplemental Lending Limits Program (SLLP). This program
allows eligible savings associations to make additional residential real estate loans or extensions of credit to one borrower, small business loans or
extensions of credit to one
27
Table of Contents
borrower, or small farm loans or extensions of credit to one borrower, in the lesser of the following two amounts: (1) 10% of its capital and surplus; or
(2) the percentage of capital and surplus, in excess of 15%, that a state bank is permitted to lend under the state lending limit that is available for loans
secured by one- to four-family residential real estate, small business loans, small farm loans or unsecured loans in the state where the main office of the
savings association is located. For Iroquois Federal, this additional limit (or “supplemental limit”) for one- to four-family residential real estate, small
business, or small farm loans is 10% of its capital and surplus. In addition, the total outstanding amount of Iroquois Federal’s loans or extensions of credit or
parts of loans and extensions of credit made to all of Iroquois Federal’s borrowers under the SLLP may not exceed 100% of Iroquois Federal’s capital and
surplus. Iroquois Federal uses the supplemental limit for its loans to one borrower infrequently, and all such credit facilities must receive prior approval by
the Board of Directors.
As of June 30, 2019, Iroquois Federal was in compliance with its loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings bank, Iroquois Federal must either qualify as a “domestic building and loan association” within the
meaning of the Internal Revenue Code or satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Iroquois Federal must maintain at least 65%
of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 months. “Portfolio assets” generally means total assets
of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used
in the conduct of the savings institution’s business. A savings bank that fails the qualified thrift lender test must operate under specified restrictions
specified in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL Test potentially subject to agency enforcement action
for a violation of law. At June 30, 2019, Iroquois Federal held 73.53% of its “portfolio assets” in “qualified thrift investments,” and satisfied the QTL Test.
Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and
other transactions charged to the capital account. A savings bank must file an application for approval of a capital distribution if:
•
•
•
•
the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the
savings bank’s retained net income for the preceding two years;
the savings bank would not be at least adequately capitalized (as defined in the prompt corrective action regulations discussed below)
following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings bank is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every federal savings bank that is a subsidiary of a holding company, such as Iroquois Federal, must
still file a notice with the Federal Reserve Board (with a copy to the OCC) at least 30 days before the Board of Directors declares a dividend or approves a
capital distribution.
The Federal Reserve Board, upon consultation with OCC, may disapprove a notice or application if:
•
•
•
the savings bank would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation, agreement with a federal banking regulatory agency or
condition, imposed in connection with an application or notice.
28
Table of Contents
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making
such distribution, the institution would fail to satisfy any applicable regulatory capital requirement. A federal savings bank also may not make a capital
distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to
stock form. In addition, Iroquois Federal’s ability to pay dividends is now limited if Iroquois Federal does not have the capital conservation buffer required
by the new capital rules, which may limit the ability of IF Bancorp to pay dividends to its stockholders. See “— Capital Requirements.”
Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and
related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination
of a federal savings bank, the OCC is required to assess the association’s record of compliance with the Community Reinvestment Act. In addition, the
Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics
specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial
of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act
and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
Iroquois Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and
by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is
under common control with an insured depository institution such as Iroquois Federal. IF Bancorp is an affiliate of Iroquois Federal because of its control of
Iroquois Federal. In general, transactions between an insured depository institution and its affiliate are subject to certain quantitative limits and collateral
requirements. In addition, federal regulations prohibit a federal savings bank from lending to any of its affiliates that are engaged in activities that are not
permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must
be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as
comparable transactions with non-affiliates.
Iroquois Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons,
is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among
other things, these provisions generally require that extensions of credit to insiders
•
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing
for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other
unfavorable features (subject to an exception for bank-wide lending programs available to all employees); and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in
part, on the amount of Iroquois Federal’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Iroquois Federal’s Board of Directors. Extensions of credit to
executive officers are subject to additional restrictions, including limits on various types of loans.
Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action
against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital
directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties
cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be
as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.
29
Table of Contents
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate.
Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If
an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan.
Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money
penalties.
Interstate Banking and Branching.
Federal regulations permit federal savings banks to establish branches in any state subject to OCC approval and certain other requirements.
Prompt Corrective Action Regulations. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective
action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The OCC has adopted regulations to implement the prompt corrective action legislation. For this purpose, a savings bank is placed in one of the five
categories based on the institution’s capital:
•
•
•
•
•
Well Capitalized - a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of
5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater.
Adequately Capitalized – a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio
of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater.
Undercapitalized - a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less
than 4.0% or a common equity Tier 1 ratio of less than 4.5%.
Significantly Undercapitalized - a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage
ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%.
Critically Undercapitalized - a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
At June 30, 2019, Iroquois Federal met the criteria for being considered “well-capitalized.”
The previously referenced 2018 legislation provides that qualifying institutions that elect the alternative community bank ratio framework, when
effective, and comply with the specified ratio will be considered to be “well-capitalized.”
30
Table of Contents
“Undercapitalized” institution’s must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a
capital restoration plan. Compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal
to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If
an “undercapitalized” institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized”
institutions must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to
become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or
officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company.
“Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or
conservator within 270 days after it obtains such status. These actions are in addition to other discretionary supervisory or enforcement actions that the OCC
may take.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Iroquois
Federal. Deposit accounts in Iroquois Federal are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a
maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance
Fund.
Assessments for institutions with less than $10 billion of assets, such as Iroquois Federal, are based on financial measures and supervisory ratings
derived from statistical modeling estimating the probability of an institution’s failure within three years, with institutions deemed less risky paying lower
assessments. That system, effective July 1, 2016, replaced a previous system under which institutions were placed into risk categories.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets less tangible equity
instead of its insured deposits. The FDIC finalized a rule, effective April 1, 2011, that set the risk-based assessment range (inclusive of possible
adjustments) at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund’s reserve ratio achieving 1.15%,
the assessment range was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.
The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without
notice and comment rulemaking.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated
insured deposits. The FDIC announced that the 1.35% ratio was achieved in September 2018. The Dodd-Frank Act eliminated the 1.5% maximum fund
ratio, instead leaving it to the discretion of the FDIC, which has exercised that discretion by establishing a long range fund ratio of 2%.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC,
assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings
and Loan Insurance Corporation. The bonds issued by the FICO are due to mature by year-end 2019. For the quarter ended June 30, 2019, the annualized
FICO assessment was equal to 0.12 of a basis point of total assets less tangible capital
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and
results of operations of Iroquois Federal. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently
know of any practice, condition or violation that may lead to termination of our deposit insurance.
USA Patriot Act. Iroquois Federal is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering
requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law
enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.
31
Table of Contents
Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service
from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home Loan Bank System. Iroquois Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal
Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities
involved in home mortgage lending. As a member of the Federal Home Loan Bank of Chicago, Iroquois Federal is required to acquire and hold shares of
capital stock in the Federal Home Loan Bank. As of June 30, 2019, Iroquois Federal was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board regulations require savings banks to maintain noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At June 30, 2019, Iroquois Federal was in compliance with these reserve requirements.
Other Regulations
Interest and other charges collected or contracted for by Iroquois Federal are subject to state usury laws and federal laws concerning interest rates.
Iroquois Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:
•
•
•
•
•
•
•
•
•
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive
various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain
practices that increase the cost of settlement services;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
fair lending laws;
Unfair or Deceptive Acts or Practices laws and regulations;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
Truth in Savings Act; and
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
32
Table of Contents
In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our
consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage
loan servicing and originator compensation standards. Iroquois Federal is evaluating recent regulations and proposals, and devotes significant compliance,
legal and operational resources to compliance with consumer protection regulations and standards.
The operations of Iroquois Federal also are subject to the:
•
•
•
•
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and
copies made from that image, the same legal standing as the original paper check;
The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance
programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance
programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act
and the Office of Foreign Assets Control regulations; and
•
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with
unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to
retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt
out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. IF Bancorp is a unitary savings and loan holding company within the meaning of Home Owners’ Loan Act. As such, IF Bancorp is
registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan
holding companies. In addition, the Federal Reserve Board has enforcement authority over IF Bancorp and any future non-savings institution subsidiaries.
Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution.
Permissible Activities. Under present law, the business activities of IF Bancorp are generally limited to those activities permissible for financial
holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met (including electing such
status), or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including
underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A
multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank
Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations. As of June 30, 2018, IF Bancorp,
Inc. has not elected financial holding company status.
Federal law prohibits a savings and loan holding company, including IF Bancorp, directly or indirectly, or through one or more subsidiaries, from
acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or
retention of, with certain exceptions,
33
Table of Contents
more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining
control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve
Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the
risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two exceptions:
•
•
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such
acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act
required the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as
stringent as those required for the insured depository subsidiaries. However, pursuant to legislation passed in December 2014, the FRB extended the
applicability of the “Small Bank Holding Company” exception to its consolidated capital requirements to savings and loan holding companies and increased
the threshold for the exception to $1.0 billion, effective May 15, 2015. As a result, savings and loan holding companies with less than $1.0 billion in
consolidated assets were generally not subject to the capital requirements unless otherwise advised by the FRB. Legislation enacted in 2018 directed the
Federal Reserve Board to expand the applicability of the exception to holding companies with up to $3.0 billion of consolidated assets and that increase was
effective August 2018. Consequently, holding companies of less than $3.0 billion with up to $3 billion of consolidated assets are generally not subject to the
holding company capital requirements unless otherwise directed by the FRB.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve
Board has issued regulations requiring that all bank and savings and loan holding companies serve as a source of managerial and financial strength to their
subsidiary savings and loan associations by providing capital, liquidity and other support in times of financial stress.
Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common
stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current
earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality
and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances
such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the
dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a
savings and loan holding company to pay dividends may be restricted if a subsidiary savings and loan association becomes undercapitalized. The regulatory
guidance also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing
common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption
would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter
in which the redemption or repurchase occurred. These regulatory policies may affect the ability of IF Bancorp to pay dividends, repurchase shares of
common stock or otherwise engage in capital distributions.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a
company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a
change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the
34
Table of Contents
Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition
of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from
the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the
competitive effects of the acquisition.
Federal Securities Laws
IF Bancorp common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. IF
Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock issued in the stock offering does not cover the resale of those shares.
Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to
the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities
Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with
those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the
greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we
may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to
certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange
Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: (i) they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; (ii) they have made certain disclosures to our auditors
and the audit committee of the board of directors about our internal control over financial reporting; and (iii) they have included information in our quarterly
and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could
materially affect internal control over financial reporting.
35
Table of Contents
ITEM 1A.
RISK FACTORS
We intend to continue to grow our commercial real estate, multi-family and commercial business loans and increase these loans as a percentage of
our total loan portfolio. As a result, our credit risk will continue to increase, and downturns in the local real estate market or economy could have a
more severe adverse effect on our earnings.
We intend to continue growing our portfolio of commercial real estate, multi-family and commercial business loans. Historically, we operated as a
traditional thrift institution. At June 30, 2010, prior to our mutual-to-stock conversion, 64.6% of our loan portfolio, consisted of
longer-term, one- to four-family residential real estate loans. Since then we have emphasized the origination of our commercial loans. At June 30, 2019,
$143.4 million, or 29.0%, of our total loan portfolio consisted of commercial real estate loans, $104.7 million, or 21.2%, of our total loan portfolio consisted
of multi-family loans, and $84.2 million, or 17.1%, of our total loan portfolio consisted of commercial business loans. We expect each of these loan
categories to continue to increase as a percentage of our total loan portfolio. Commercial real estate, multi-family and commercial business loans generally
have more risk than the one- to four-family residential real estate loans that we originate. Because the repayment of commercial real estate, multi-family and
commercial business loans depends on the successful management and operation of the borrower’s properties or businesses, repayment of such loans can be
affected by adverse conditions in the local real estate market or economy. Commercial real estate, multi-family and commercial business loans may also
involve relatively large loan balances to individual borrowers or groups of related borrowers. In addition, a downturn in the real estate market or the local
economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of
nonperforming loans. As our commercial real estate, multi-family and commercial business loan portfolios increase, the corresponding risks and potential
for losses from these loans may also increase.
Future changes in interest rates could reduce our profits.
Our profitability largely depends on our net interest income, which can be negatively affected by changes in interest rates. Net interest income is the
difference between:
•
•
the interest income we earn on our interest-earning assets, such as loans and securities; and
the interest expense we incur on our interest-bearing liabilities, such as deposits and borrowings.
The interest rates on our loans are generally fixed for a longer period of time than the interest rates on our deposits. Like many savings institutions,
our focus on deposits as a source of funds, which either have no stated maturity or shorter contractual maturities than mortgage loans, results in our
liabilities having a shorter average duration than our assets. For example, as of June 30, 2019, 8.1% of our loans had remaining maturities of, or reprice
after, 5 years or longer, while 63.9% of our certificates of deposit had remaining maturities of, or reprice in, one year or less. This imbalance can create
significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest we earn on our assets, such as
loans and investments, may not increase as rapidly as the interest we pay on our liabilities, such as deposits. In a period of declining market interest rates,
the interest income we earn on our assets may decrease more rapidly than the interest expense we incur on our liabilities, as borrowers prepay mortgage
loans and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these cash flows at lower
interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates
generally results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their
borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates
we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers
to repay adjustable-rate loans.
36
Table of Contents
We evaluate interest rate sensitivity using a model that estimates the change in our net portfolio value over a range of interest rate scenarios, also
known as a “rate shock” analysis. Net portfolio value is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet
contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
Increased interest rates and changes in secondary mortgage market conditions could reduce our earnings from our mortgage banking operations.
Our mortgage banking income varies with movements in interest rates, and increases in interest rates could negatively affect our ability to originate
loans in the same volume as we have in past years. In addition to being affected by interest rates, the secondary mortgage markets are also subject to
investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the
future. In light of current conditions, there is greater risk in retaining mortgage loans pending their sale to investors. As a result, a prolonged period of
secondary market illiquidity may reduce our loan mortgage production volume and could have a material adverse effect on our financial condition and
results of operations.
The State of Illinois has significant financial difficulties, and this could adversely impact certain of our borrowers and the economic vitality of the
state, which would have a negative impact on our business.
The State of Illinois has significant financial difficulties, including material pension funding shortfalls. The State of Illinois’ debt rating has been
downgraded and its executive and legislative branches of government have been unable to reach agreement on a budget for the current fiscal year. These
issues could impact the economic vitality of the state and the businesses operating there, encourage businesses to leave the State of Illinois, discourage new
employers from starting or moving businesses to the state, and could result in an increase in the Illinois state income tax rate. In addition, population
outflow from the State of Illinois could affect our ability to attract and retain customers.
Some of the markets we are in include significant university and healthcare presence, which rely heavily on state funding and contracts. Payment
delays by the State of Illinois to its vendors and government sponsored entities may have significant, negative effects on our markets, which could in turn
adversely affect our financial condition and results of operations. In addition, adverse changes in agribusiness and capital goods exports could materially
adversely affect downstate Illinois markets, which are heavily reliant upon these industries. Delays in the payment of accounts receivable owed to borrowers
that are employed by or who do business with these industries or the State of Illinois could impair their ability to repay their loans when due and negatively
impact our business.
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial
condition and results of operations.
The Financial Accounting Standards Board has adopted Accounting Standard Update 2016-13, which will be effective for IF Bancorp and Iroquois
Federal for the first quarter of the fiscal year ending June 30, 2020. This standard, often referred to as “CECL” (reflecting a current expected credit loss
model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of
the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance
sheet date. This new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of the
allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred
to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of
operations. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
We may be adversely affected by recent changes in U.S. tax laws.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an
impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of
mortgage interest on single-family residential mortgage loans and for home equity loans, (ii) a limitation on the deductibility of business interest expense
and (iii) a limitation on the deductibility of property taxes and state and local income taxes.
37
Table of Contents
The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such
loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand for mortgage
loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of
home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely
affect our business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An
important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve
Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in
banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the
distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in
the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations
cannot be predicted.
Strong traditional and non-traditional competition within our market areas may limit our growth and profitability.
We face intense competition in making loans and attracting deposits. Price competition from other financial institutions, credit unions, money market
and mutual funds, insurance companies, and other non-traditional competitors such as financial technology companies for loans and deposits sometimes
results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition
also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater
resources and lending limits than we have and may offer services that we do not provide. Our competitors also may price loan and deposit products
aggressively when they enter into new lines of business or new market areas. We expect competition to increase in the future as a result of legislative,
regulatory, and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to compete effectively
in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our
competitors may also limit our ability to increase our interest-earning assets.
Our funding sources may prove insufficient to replace deposits and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of
funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of
FHLB advances, certificates of deposit and brokered certificates of deposit and, to a lesser extent, repurchase agreements. As we continue to grow, we are
likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to
access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if
adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and
profitability would be adversely affected.
38
Table of Contents
A portion of our loan portfolio consists of loan participations secured by properties outside of our primary market area. Loan participations may
have a higher risk of loss than loans we originate because we are not the lead lender and we have limited control over credit monitoring.
We occasionally purchase loan participations secured by properties outside of our primary market area in which we are not the lead lender. Although
we underwrite these loan participations consistent with our general underwriting criteria, loan participations may have a higher risk of loss than loans we
originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decision regarding the classification of a loan
participation and loan loss provisions associated with a loan participation is made in part based upon information provided by the lead lender. A lead lender
also may not monitor a participation loan in the same manner as we would for loans that we originate. At June 30, 2019, our loan participations totaled
$29.5 million, or 6.0% of our gross loans, most of which are within 100 miles of our primary lending market and consist primarily of multi-family,
commercial real estate and commercial loans.
Additionally, we expect to continue to use loan participations as a way to effectively deploy our capital. If our underwriting of these participation
loans is not sufficient, our non-performing loans may increase and our earnings may decrease.
If our non-performing loans and other non-performing assets increase, or the value of our foreclosed assets decreases our earnings will decrease.
At June 30, 2019, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent and still accruing, and real estate
owned) totaled $1.5 million. Our non-performing assets adversely affect our net income in various ways. We do not record interest income
on non-accrual loans, and we must establish reserves or take charge-offs for probable losses on non-performing loans. Reserves are established through a
current period charge to income in the provision for loan losses. There are also legal fees associated with the resolution of problem assets.
Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of
operations and other income-producing activities of Iroquois Federal. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to
increase the allowance accordingly by recording a provision for loan losses.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be
insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating
results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan
losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance
for loan losses may not be sufficient to cover probable losses in our loan portfolio, requiring us to make additions to our allowance for loan losses. Our
allowance for loan losses was 1.28% of total loans at June 30, 2019. Additions to our allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or
recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a
material adverse effect on our financial condition and results of operations.
39
Table of Contents
Government responses to economic conditions may adversely affect our operations, financial condition and earnings.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer
protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital
standards for savings associations and savings and loan holding companies, subject to a transition period. Bank regulatory agencies also have been
responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services
industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations
by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks
could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision, and examination by the Office of the Comptroller of the Currency and the Federal Deposit
Insurance Corporation. Federal regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit
Insurance Fund. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operations of a savings association, the classification of assets by a savings association, and the adequacy of a savings
association’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations or legislation,
could have a material impact on our results of operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to
regular modification and change. Any legislative, regulatory or policy changes adopted in the future could make compliance more difficult or expensive or
otherwise adversely affect our business, financial condition or prospects. Further, we expect any such new laws, rules or regulations will add to our
compliance costs and place additional demands on our management team.
The short-term and long-term impact of the changing regulatory capital requirements and capital rules is uncertain.
In July, 2013, the federal banking agencies approved a rule that substantially amended the regulatory risk-based capital rules applicable to Iroquois
Federal and IF Bancorp. The rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The application of
more stringent capital requirements for Iroquois Federal and IF Bancorp could, among other things, result in lower returns on equity, require the raising of
additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such
requirements.
We face significant operational risks because the financial services business involves a high volume of transactions.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the
risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance
requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may
exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result
of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In the event of a breakdown in our internal
control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to
our reputation.
Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.
We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and
concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed,
transmitted or stored by third parties on our behalf.
40
Table of Contents
Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and
telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks
and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is
an emerging threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of
our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions
could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs
and/or cause losses.
If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences,
reputational damage, civil litigation and financial loss.
Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from
mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that
if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary
information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party
agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the
information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue
to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate
any information security vulnerabilities.
Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger,
securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security
breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter
customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure
transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we
have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations
could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their
personnel.
The occurrence of any systems failures, interruptions, or breach of security could damage our reputation and result in a loss of customers and business
thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a
material adverse effect on our financial condition and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
41
Table of Contents
ITEM 2.
PROPERTIES
We operate from our main office, six branch offices, an administrative office, and a data center located in Iroquois, Vermilion, Champaign and
Kankakee Counties, Illinois, and our loan production and wealth management office in Osage Beach, Missouri. The net book value of our premises, land
and equipment was $10.7 million at June 30, 2019. The following tables set forth information with respect to our banking offices, including the expiration
date of leases with respect to leased facilities.
Location
Main Office:
201 East Cherry Street
Watseka, Illinois 60970
Branches:
619 North Gilbert Street
Danville, Illinois 61832
175 East Fourth Avenue
Clifton, Illinois 60927
511 South Chicago Road
Hoopeston, Illinois 60942
108 Arbours Drive
Savoy, Illinois 61874
421 Brown Boulevard
Bourbonnais, Illinois 60914
2411 Village Green Place
Champaign, Illinois 61822
Loan Production Office:
3535 Highway 54
Osage Beach, Missouri 65065
Administrative Office:
204 East Cherry Street
Watseka, Illinois 60970
Data Center:
183 Bethel Drive
Bourbonnais, Illinois 60914
Year
Opened
Owned/
Leased
1964
Owned
1973
Owned
1977
Owned
1979
Owned
2014
Owned
2017
Owned
2018
Owned
2006
Owned
2001
Owned
2019
Leased
(expires March 31,
2022)
ITEM 3.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in
which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a
party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
42
Table of Contents
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market and Dividend Information.
The Company’s common stock is listed on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “IROQ.” The following table sets
forth the high and low sales prices of the Company’s common stock as reported by NASDAQ, as well as dividends paid, during the periods indicated.
Fiscal 2019:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low Dividend
$25.00
$23.40
$22.00
$21.70
$22.45
$18.70
$19.35
$19.16
$ 0.125
—
$ 0.125
—
High
Low
Dividend
$20.42
$20.00
$20.45
$24.65
$19.31
$19.10
$19.21
$19.90
$
0.10
—
$
0.10
—
Holders.
As of September 3, 2019, there were 372 holders of record of the Company’s common stock.
Dividends.
The Company paid dividends of $0.125 per share in October 2018 and April 2019, and $0.10 per share in October 2017 and April 2018. The payment
of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations,
tax considerations, statutory and regulatory limitations and general economic conditions. In addition, the Company’s ability to pay dividends is dependent
on dividends received from Iroquois Federal. No assurances can be given that dividends will continue to be paid, or that, if paid, will not be reduced. For
more information regarding restrictions on the payment of cash dividends by the Company and by Iroquois Federal, see “Business—Regulation and
Supervision—Holding Company Regulation—Dividends” and “—Regulation and Supervision—Federal Savings Institution Regulation—Capital
Distributions.”
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.
Not applicable.
43
Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
The following table provides information regarding the Company’s purchase of its common stock during the quarter ended June 30, 2019.
Period
4/1/19 – 4/30/19
5/1/19 – 5/31/19
6/1/19 – 6/30/19
Total
Total Number of
Shares Purchased
—
—
2,800
2,800
Average Price
Paid per Share
—
$
—
21.02
21.02
$
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
—
—
2,800
2,800
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
—
—
86,726
86,726
(1) On December 6, 2018, the Company announced an increase in the number of shares that may be purchased under the Company’s existing stock
repurchase plan, whereby the Company could repurchase up to 290,356 shares of its common stock, or approximately 7.5% of its then outstanding
shares. As of March 31, 2019, all 290,356 shares had been repurchased under this plan at an average price of $21.23 per share. The Company also
announced a new 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 outstanding shares. There were 2,800 shares of the Company’s common stock repurchased by the Company duing the
three months ended June 30, 2019, and there were 86,726 shares yet to be purchased under the plan as of June 30, 2019.
44
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
Selected Financial Condition Data:
Total assets
Cash and cash equivalents
Investment securities available for sale
Federal Home Loan Bank of Chicago stock
Loans held for sale
Loans receivable, net
Foreclosed assets held for sale
Bank-owned life insurance
Deposits
Federal Home Loan Bank of Chicago advances
Total equity
Selected Operating Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Net income
45
2019
2018
At June 30,
2017
(In thousands)
2016
2015
4,754
7,766
1,174
316
3,285
206
$723,870 $638,923 $585,474 $595,565 $563,668
6,449 13,224
59,600
146,291 125,996 111,611 121,328 170,630
5,425
93
487,458 476,274 440,136 443,748 356,101
50
8,289
607,023 480,421 439,146 433,708 415,544
24,000 67,500 53,500 67,000 58,000
82,461 81,675 83,969 83,972 80,436
5,425
—
219
8,803
2,543
186
429
8,823
338
8,555
778
9,072
For the Fiscal Year Ended June 30,
2016
2018
2019
2017
(In thousands)
2015
407
777 1,721 1,366
$26,725 $22,794 $21,338 $20,373 $18,895
8,854 5,289 3,617 3,313 3,226
17,871 17,505 17,721 17,060 15,669
460
17,464 16,728 16,000 15,694 15,209
4,162 4,091 4,728 4,095 3,320
16,775 16,356 14,535 14,209 13,420
4,851 4,463 6,193 5,580 5,109
1,293 2,725 2,274 2,014 1,835
$ 3,558 $ 1,738 $ 3,919 $ 3,566 $ 3,274
Table of Contents
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (net income as a percentage of average total assets)
Return on average equity (net income as a percentage of average equity)
Interest rate spread (1)
Net interest margin (2)
Efficiency ratio (3)
Dividend payout ratio
Noninterest expense to average total assets
Average interest-earning assets to average interest-bearing liabilities
Average equity to average total assets
Asset Quality Ratios:
Non-performing assets to total assets
Non-performing loans to total loans
Allowance for loan losses to non-performing loans
Allowance for loan losses to total loans
Net charge-offs (recoveries) to average loans
Capital Ratios:
Total capital (to risk-weighted assets):
Company
Association
Tier 1 capital (to risk-weighted assets):
Company
Association
Common Equity Tier 1 Capital (to risk-weighted assets):
Company (4)
Association (4)
Tier 1 capital (to adjusted total assets):
Company
Association
Tangible capital (to adjusted total assets):
Company
Association
Other Data:
Number of full service offices
Full time equivalent employees
At or For the Fiscal Years Ended June 30,
2019
2018
2017
2016
2015
0.67%
4.69%
3.02%
3.14%
0.53%
4.41%
2.54%
2.78%
0.28%
2.09%
2.77%
2.93%
0.62%
4.35%
3.00%
3.11%
0.60%
3.92%
2.87%
2.98%
76.14% 75.76% 64.75% 67.17% 70.67%
24.51% 42.55% 15.09% 13.54% 12.05%
2.45%
116.69% 118.01% 118.30% 117.85% 117.98%
12.10% 13.48% 14.27% 14.33% 15.21%
2.49%
2.66%
2.48%
2.52%
1.10%
1.42%
0.21%
0.16%
0.55%
0.85%
825.03% 87.06% 71.66% 244.39% 137.30%
1.17%
0.01%
0.42%
0.49%
1.19%
0.05%
1.53%
0.05%
1.23%
0.35%
1.28%
0.01%
1.70%
2.13%
17.6%
16.3%
18.5% 20.09%
16.9%
16.1%
19.7%
16.1%
23.2%
19.3%
16.3%
15.0%
17.3%
14.9%
18.8%
15.7%
18.5%
14.9%
22.0%
18.2%
16.3%
15.0%
17.3%
14.9%
18.8%
15.7%
18.5%
14.9%
22.0%
18.2%
11.9%
11.0%
13.4%
11.5%
14.3%
12.0%
14.4%
11.1%
14.5%
11.9%
11.9%
11.0%
13.4%
11.5%
14.3%
12.0%
14.4%
11.1%
14.5%
11.9%
7
103
6
104
6
100
5
95
5
98
(1)
(2)
(3)
(4)
The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities for the period.
The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.
The common equity Tier 1 (“CET1”) capital is a new capital requirement adopted by the OCC, which became effective for the Association in
January, 2015.
46
Table of Contents
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
We have grown our organization to $723.9 million in assets at June 30, 2019 from $377.2 million in assets at June 30, 2009. We have increased our
assets primarily through increased investment securities and loan growth.
Historically, we have operated as a traditional thrift institution. As recently as June 30, 2009, approximately 72.4% of our loan portfolio, consisted of
longer-term, one- to four-family residential real estate loans. However, in recent years, we have increased our focus on the origination of commercial real
estate loans, multi-family real estate loans and commercial business loans, which generally provide higher returns than one- to four-family residential
mortgage loans, have shorter durations and are often originated with adjustable rates of interest.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on
our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing
liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, repurchase agreements, and Federal Home Loan Bank of Chicago
advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income
consists primarily of customer service fees, brokerage commission income, insurance commission income, net realized gains on loan sales, mortgage
banking income, and income on bank-owned life insurance. Noninterest expense consists primarily of compensation and benefits, occupancy and
equipment, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, and foreclosed assets. Our results of
operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental
policies and actions of regulatory authorities.
Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) was
2.54% and 2.77% for the year ended June 30, 2019 and 2018, respectively. Net interest income increased to $17.9 million for the year ended June 30, 2019,
from $17.5 million for the year ended June 30, 2018.
Our net income for the year ended June 30, 2019 was $3.6 million, compared to a net income of $1.7 million for the year ended June 30, 2018. The
year ended June 30, 2018 included an additional $1.3 million income tax expense due to a downward adjustment to our net deferred tax asset (“DTA”)
related to the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017. The Tax Act provided for a reduction in the federal corporate income
tax rate from 35% to 21% effective January 1, 2018, which resulted in the downward adjustment to our DTA. The increase in net income for the year ended
June 30, 2019 was also impacted by a $3.9 million increase in interest income, a $71,000 increase in noninterest income, and a $370,000 decrease in
provision for loan losses, partially offset by a $3.6 million increase in interest expense and a $419,000 increase in noninterest expense. Excluding the
$1.3 million impact of the adjustment to the DTA, the Company’s net income for the year ended June 30, 2018 would have been $3.1 million. Management
believes that presenting net income on a non-GAAP basis excluding the impact of the adjustment to the DTA in the year ended June 30, 2018 provides
useful information for evaluating the Company’s operating results and any related trends that may be affecting the Company’s business. These disclosures
should not be viewed as a substitute for operating results determined in accordance with GAAP.
Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets. However, in June 2017, one large
credit in the amount of $7.8 million, secured by 45 one- to four-family properties, was moved to non-performing when the borrower became involved in
litigation, and subsequently filed for bankruptcy protection. The properties securing this loan are all existing homes that were acquired by the borrower to be
renovated and resold. During the year ended June 30, 2019, these 45 properties with an aggregate value of $6.3 million were moved to foreclosed assets
held for sale, and 43 of these properties were sold for an aggregate gain of $3,000. Our non-performing assets totaled $1.5 million or 0.2% of total assets at
June 30, 2019, and $7.0 million, or 1.1% of assets at June 30, 2018. All of our mortgage-backed securities have been issued by Freddie Mac, Fannie Mae or
Ginnie Mae, U.S. government-sponsored enterprises. These entities guarantee the payment of principal and interest on our mortgage-backed securities.
47
Table of Contents
Other than our loans for the construction of one- to four-family residential properties and the draw portion of our home equity lines of credit, we do
not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period,
after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option
ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We
do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies,
previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden
ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). We also do not own any private label mortgage-backed securities
that are collateralized by Alt-A, low or no documentation or subprime mortgage loans.
The Association’s legal lending limit to any one borrower is 15% of unimpaired capital and surplus. On July 30, 2012 the Association received
approval from the Office of the Comptroller of the Currency to participate in the Supplemental Lending Limits Program (SLLP). This program allows
eligible savings associations to make additional residential real estate loans or extensions of credit to one borrower, small business loans or extensions of
credit to one borrower, or small farm loans or extensions of credit to one borrower. For our association this additional limit (or “supplemental limit(s)”)
for one- to four-family residential real estate, small business, or small farm loans is 10% of our Association’s capital and surplus. In addition, the total
outstanding amount of the Association’s loans or extensions of credit or parts of loans and extensions of credit made to all of its borrowers under the SLLP
may not exceed 100% of the Association’s capital and surplus. By Association policy, participation of any credit facilities in the SLLP is to be infrequent
and all credit facilities are to be with prior Board approval.
All of our mortgage-backed securities have been issued by Freddie Mac, Fannie Mae or Ginnie Mae, U.S. government-sponsored enterprises. These
entities guarantee the payment of principal and interest on our mortgage-backed securities.
On July 7, 2011, we completed our initial public offering of common stock in connection with Iroquois Federal’s mutual-to-stock conversion, selling
4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to Iroquois Federal’s employee stock ownership plan, and raising
approximately $45.0 million of gross proceeds. In addition, we issued 314,755 shares of our common stock to the Iroquois Federal Foundation.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or
could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our
critical accounting policies.
Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change
in the near term, due to changes in credit quality which are evidenced by trends in charge-offs and in the volume and severity of past due loans. In addition,
our portfolio is comprised of a substantial amount of commercial real estate loans which generally have greater credit risk than one- to four-family
residential mortgage and consumer loans because these loans generally have larger principal balances and are non-homogenous.
The allowance for loan losses is maintained at a level to cover probable credit losses inherent in the loan portfolio at the balance sheet date. Based on
our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for
loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:
•
•
loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and
groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”
48
Table of Contents
The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the
collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic
conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any
underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes
available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect
on our financial results. See also “Business — Allowance for Loan Losses.”
Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported
on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in
tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under GAAP, a
valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether
we will be able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative
evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions.
Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future
periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. Any
reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation
allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax
returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the
financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both
initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax
authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in
a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.
We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax
assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are properly
recorded in the consolidated financial statements at June 30, 2019 and no valuation allowance was necessary.
The Tax Cuts and Jobs Act, enacted on December 22, 2017, provided for a reduction in the federal corporate income rate from 35% to 21% effective
January 1, 2018. As a result, our blended federal corporate income tax rate for the year ended June 30, 2019 was 28.505%.
Comparison of Financial Condition at June 30, 2019 and June 30, 2018
Total assets increased $84.9 million, or 13.3%, to $723.9 million at June 30, 2019 from $638.9 million at June 30, 2018. The increase was primarily
due to a $54.8 million increase in cash and cash equivalents, a $20.3 million increase in investments and a $11.3 million increase in net loans, partially
offset by a $2.1 million decrease in FHLB stock and a $1.9 million decrease in deferred income taxes.
Cash and cash equivalents increased by $54.8 million to $59.6 million at June 30, 2019, from $4.8 million at June 30, 2018. This increase was the
result of approximately $55.3 million in deposits received from a public entity that collects real estate taxes in two installments, due June and September.
These deposits are temporary in nature as distributions are made in early July and September.
49
Table of Contents
Investment securities, consisting entirely of securities available for sale, increased $20.3 million, or 16.1%, to $146.3 million at June 30, 2019 from
$126.0 million at June 30, 2018. We had no held-to-maturity securities at June 30, 2019 or June 30, 2018.
Net loans receivable, including loans held for sale, increased by $11.3 million, or 2.4%, to $487.8 million at June 30, 2019 from $476.5 million at
June 30, 2018. The increase in net loans receivable during this period was due primarily to a $15.5 million, or 22.6%, increase in commercial business
loans, a $2.4 million, or 17.1% increase in construction loans, and a $2.4 million, or 1.7%, increase in commercial real estate loans, partially offset by a
$2.8 million, or 2.6%, decrease in multi-family loans, a $5.7 million, or 4.2%, decrease in one- to four-family loans, a $120,000, or 1.3%, decrease in home
equity lines of credit, and a $230,000, or 3.1%, decrease in consumer loans.
Compared to June 30, 2018, as of June 30, 2019, premises and equipment increased $480,000 to $10.7 million, accrued interest receivable increased
$321,000 to $2.1 million, foreclosed assets held for sale increased $559,000 to $778,000, and bank-owned life insurance increased $269,000 to $9.1 million,
while deferred income taxes decreased $1.9 million to $2.1 million, Federal Home Loan Bank (FHLB) stock decreased $2.1 million to $1.2 million, and
other assets decreased $306,000 to $414,000. The increase in premises and equipment was mostly due to the opening of a new office building in
Champaign, Illinois, and the increase in accrued interest receivable was due to increases in the average balance of both loans and securities. The increase in
foreclosed assets held for sale was due to the large credit discussed in “Overview” above that resulted in 45 one- to four-family properties with an aggregate
value of $6.3 million being transferred to foreclosed assets held for sale. During the year ended June 30, 2019, 43 of those 45 properties were sold. The
increase in bank-owned life insurance was the result of regular accruals of the cash surrender value. The decrease in deferred income taxes was mostly due
to an increase in unrealized gains on the sale of available-for sale securities, while the decrease in FHLB stock was the result of a lower stock requirement
due to a reduced balance of FHLB advances, and the decrease in other assets resulted from a lower accounts receivable general at June 30, 2019.
At June 30, 2019, our investment in bank-owned life insurance was $9.1 million, an increase of $269,000 from $8.8 million at June 30, 2018. We
invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides
us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of the Association’s Tier
1 capital plus our allowance for loan losses. At June 30, 2019, our investment of $9.1 million in bank-owned life insurance was 11.1% of our Tier 1 capital
plus our allowance for loan losses.
Deposits increased $126.6 million, or 26.4%, to $607.0 million at June 30, 2019 from $480.4 million at June 30, 2018. Savings, NOW, and money
market accounts increased $805,000, or 0.4%, to $196.3 million, noninterest bearing demand accounts increased $59.1 million, or 276.8%, to $80.4 million,
certificates of deposit, excluding brokered certificates of deposit, increased $61.5 million, or 26.8%, to $290.8 million, and brokered certificates of deposit
increased $5.2 million, or 15.1%, to $39.5 million. Repurchase agreements decreased $266,000 to $2.0 million. The increase in noninterest bearing demand
deposits includes approximately $55.3 million in deposits from a public entity that collects real estate taxes in two installments, due June and September.
These deposits are temporary in nature as distributions are made in early July and September.
Advances from the Federal Home Loan Bank of Chicago decreased $43.5 million, or 64.4%, to $24.0 million at June 30, 2019 from $67.5 million at
June 30, 2018 as the new deposit funds were used to reduce our borrowing from the Federal Home Loan Bank of Chicago.
Total equity increased $786,000, or 1.0%, to $82.5 million at June 30, 2019 from $81.7 million at June 30, 2018. Equity increased due to net income
of $3.6 million, an increase of $3.7 million in accumulated other comprehensive income, net of tax, and ESOP and stock equity plan activity of $645,000,
partially offset by the repurchase of 293,156 shares of common stock at an aggregate cost of approximately $6.2 million, and the payment of approximately
$868,000 in dividends to our shareholders. The Company announced a stock repurchase plan on December 5, 2018, whereby the Company could repurchase
up to 290,356 shares of its common stock, or approximately 7.5% of its then current outstanding shares. All 290,356 shares of the Company’s common
stock were repurchased by the Company at an average price of $21.23 per share. The Company announced another repurchase plan on June 12, 2019, which
allowed the Company to repurchase up to 89,526 shares of it common stock, or approximately 2.5% of its then current outstanding shares. As of June 30,
2019, 2,800 shares had been repurchased at an average price of $21.02 per share, and there were 86,726 shares yet to be repurchased under the plan.
50
Table of Contents
Comparison of Operating Results for the Years Ended June 30, 2019 and 2018
General. Net income increased $1.8 million, or 104.7%, to $3.6 million net income for the year ended June 30, 2019 from $1.7 million net income for
the year ended June 30, 2018. The increase was largely due to a decrease of $1.3 million in provision for income tax as a result of the Tax Act enacted in
December 2018. The increase was also impacted by an increase in net interest income, a decrease in provision for loan losses, and an increase in noninterest
income, partially offset by an increase in noninterest expense.
Net Interest Income. Net interest income increased by $366,000, or 2.1%, to $17.9 million for the year ended June 30, 2019 from $17.5 million for
the year ended June 30, 2018. The increase was due to an increase of $3.9 million in interest and dividend income, partially offset by an increase of
$3.6 million in interest expense. A $45.6 million, or 7.6%, increase in the average balance of interest earning assets was partially offset by a $44.8 million,
or 8.9%, increase in the average balance of interest bearing liabilities. Our interest rate spread decreased 23 basis points to 2.54% for the year ended
June 30, 2019 from 2.77% for the year ended June 30, 2018, and our net interest margin decreased by 15 basis points to 2.78% for the year ended June 30,
2019 from 2.93% for the year ended June 30, 2018. The decrease in spread and margin was primarily due to the increasing interest rate environment, as our
interest earning assets repriced more slowly than our interest bearing liabilities.
Interest and Dividend Income. Interest and dividend income increased $3.9 million, or 17.2%, to $26.7 million for the year ended June 30, 2019 from
$22.8 million for the year ended June 30, 2018. The increase in interest income was due to a $3.2 million increase in interest income on loans, a $510,000
increase in interest income on securities, and a $204,000 increase in other interest income. An increase of $3.2 million, or 16.4%, in interest on loans
resulted from a $25.2 million, or 5.4%, increase in the average balance of loans to $494.9 million for the year ended June 30, 2019, and a 43 basis point, or
10.3%, increase in the average yield on loans to 4.61% from 4.18%. Interest on securities increased $510,000, or 17.3%, due to a $13.2 million increase in
the average balance of securities to $132.2 million at June 30, 2019 from $118.9 million at June 30, 2018, and a 14 basis point, or 5.6%, increase in the
average yield on securities to 2.62% for the year ended June 30, 2019 from 2.48% for the year ended June 30, 2018.
Interest Expense. Interest expense increased $3.6 million, or 67.4%, to $8.9 million for the year ended June 30, 2019 from $5.3 million for the year
ended June 30, 2018. The increase was primarily due to increased average balance of interest-bearing liabilities and higher market rates of interest during
the period.
Interest expense on interest-bearing deposits increased $2.9 million, or 64.4%, to $7.3 million for the year ended June 30, 2019, from $4.5 million for
the year ended June 30, 2018. This increase was primarily due to an increase in the average balance of interest-bearing deposits to $488.1 million for the
year ended June 30, 2019, from $442.7 million for the year ended June 30, 2018, and also a 49 basis point, or 49.1% increase in the average cost of interest-
bearing deposits to 1.50% from 1.01%.
Interest expense on borrowings, including FHLB advances and repurchase agreements, increased $698,000, or 83.2%, to $1.5 million for the year
ended June 30, 2019 from $839,000 for the year ended June 30, 2018. This increase was due to an 111 basis point increase in the average cost of such
borrowings to 2.42% for the year ended June 30, 2019 from 1.31% for the year ended June 30, 2018, partially offset by a $580,000, or 0.9%, decrease in the
average balance of borrowings to $63.4 million for the year ended June 30, 2019 from $64.0 million for the year ended June 30, 2018.
Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses
at a level we consider necessary to absorb potential credit losses inherent in our loan portfolio. We recorded a provision for loan losses of $407,000 for the
year ended June 30, 2019, compared to a provision for loan losses of $777,000 for the year ended June 30, 2018. The allowance for loan losses was
$6.3 million, or 1.28% of total loans, at June 30, 2019, compared to $5.9 million, or 1.23% of total loans, at June 30, 2018. Non-performing loans decreased
during the year ended June 30, 2019, to $767,000, from $6.8 million at June 30, 2018. This decrease was the result of moving the 45 properties with an
aggregate value of $6.3 million, that secured the large credit discussed in “Overview” above, to foreclosed assets held for sale. During the year ended
June 30, 2019, 43 of those 45 properties were sold. During the year ended June 30, 2019, net charge-offs of $24,000 were recorded, while during the year
ended June 30, 2018, $1.7 million in net charge-offs were recorded. Of the $1.7 million charged off in the year ended June 30, 2018, $1.5 million related to
one large credit discussed under “Overview” above.
51
Table of Contents
The following table sets forth information regarding the allowance for loan losses and nonperforming assets at the dates indicated:
Allowance to non-performing loans
Allowance to total loans outstanding at the end of the
period
Net charge-offs to average total loans outstanding during
the period, annualized
Total non-performing loans to total loans
Total non-performing assets to total assets
Year Ended
June 30, 2019
825.03%
Year Ended
June 30, 2018
87.06%
1.28%
0.01%
0.16%
0.21%
1.23%
0.35%
1.42%
1.10%
Noninterest Income. Noninterest income increased $71,000, or 1.7%, to $4.2 million for the year ended June 30, 2019 from $4.1 million for the year
ended June 30, 2018. The increase was primarily due to an increase in brokerage commissions, an increase in insurance commissions, an increase in other
income, an increase in the gain on the sale of loans, and an increase in the gain on foreclosed assets, net, partially offset by a decrease in mortgage banking
income, net, a decrease in other service charges and fees, and a decrease in bank-owned life insurance, net. For the year ended June 30, 2019, brokerage
commissions increased $106,000 to $981,000, insurance commissions increased $61,000 to $660,000, other income increased $117,000 to $1.0 million,
gains on the sale of loans increased $111,000 to $343,000, and gain on foreclosed assets, net increased $27,000 to $3,000, while mortgage banking income,
net decreased $152,000 to $236,000, other service charges and fees decreased $79,000 to $279,000, and bank-owned life insurance, net decreased $108,000
to $269,000. The increase in brokerage commissions was due to a change in the timing and calculation of commission payments, the increase in insurance
commissions was due to higher commissions earned, the increase in other income was mostly to due to an increase in debit card and ATM income, the
increase in gain on the sale of loans was the result of an increase in loans sold, and the increase in the gain on foreclosed assets, net was due to more
foreclosed assets being sold at a gain in the year ended June 30, 2019. The decrease in mortgage banking income, net was the result of a decrease in the
valuation of mortgage servicing rights, the decrease in service charges and fees was due to fewer service charges assessed in the year ended June 30, 2019,
and the decrease in bank-owned life insurancewas due to a benefit claim received in the year ended June 30, 2018.
Noninterest Expense. Noninterest expense increased $419,000, or 2.6%, to $16.8 million for the year ended June 30, 2019 from $16.4 million for the
year ended June 30, 2018. The largest components of this increase were compensation and benefits, which increased $912,000, or 9.4%, office occupancy,
which increased $126,000, or 16.6%, and equipment expense, which increased $94,000, or 7.3%. These increases were partially offset by decreases in other
expenses, which decreased $640,000, or 24.1%, stationary, printing and office, which decreased $49,000, or 31.4%, and telephone and postage, which
decreased $42,000, or 15.8%. Compensation and benefits increased due to increased staffing changes including additional staff for the Champaign office
that opened in August 2018, as well as, normal salary increases and increased medical costs. Office occupancy and equipment expense increased as a result
of the addition of the new Champaign office. The other expenses decreased as a result of the accrual of real estate taxes and closing costs on a large credit in
bankruptcy in the year ended June 30, 2018. Expenses for stationary, printing and office decreased as a result of additional supplies purchased in the year
ended June 30, 2018 related to our IT core conversion, and expenses for telephone and postage decreased as a result of new vendor billing that allowed us to
reduce telephone expenses by reallocating data line expenses to equipment expense.
Income Tax Expense. We recorded a provision for income tax of $1.3 million for the year ended June 30, 2019, compared to a provision for income tax of
$2.7 million for the year ended June 30, 2018, reflecting effective tax rates of 26.7% and 61.1%, respectively. The effective tax rate for the year ended
June 30, 2018, reflects the impact of the adjustment to the DTA, as discussed above under “Overview”.
52
Table of Contents
Asset Quality and Allowance for Loan Losses
For information regarding asset quality and allowance for loan loss activity, see “Item 1. Business—Non-performing and Problem Assets” and “Item
1. Business—Allowance for Loan Losses.”
Average Balances and Yields
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Tax-equivalent
yield adjustments have not been made for tax-exempt securities. All average balances are based on month-end balances, which management deems to be
representative of the operations of Iroquois Federal. Non-accrual loans were included in the computation of average balances, but have been reflected in the
table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to
interest income or expense.
53
Table of Contents
Interest-earning assets:
Loans:
Real estate loans:
2019
Average
Outstanding
Balance
Interest
Yield/
Rate
For the Fiscal Years Ended June 30,
2018
2017
Average
Outstanding
Balance
Interest
(Dollars in thousands)
Yield/
Rate
Average
Outstanding
Balance
Interest
Yield/
Rate
One- to four-family (1)
Multi-family
Commercial
Home equity lines of credit
Construction loans
Commercial business loans
Consumer loans
Total loans
Securities:
U.S. government, federal agency and
$ 131,494
107,282
148,344
9,033
13,931
77,548
7,288
494,920
$ 5,909 4.49% $ 139,529
97,767
138,351
8,269
10,945
66,962
7,923
469,746
4,543 4.23
6,672 4.50
437 4.84
745 5.35
4,148 5.35
379 5.20
22,833 4.61
$ 5,866 4.20% $ 145,662
83,292
123,706
7,735
19,738
56,975
8,687
445,795
3,857 3.95
5,584 4.04
358 4.33
491 4.49
3,092 4.62
368 4.64
19,616 4.18
$ 6,119 4.20%
3,275 3.93
5,029 4.07
336 4.34
789 4.00
2,490 4.37
405 4.66
18,443 4.14
government-sponsored enterprises
27,816
711 2.56
22,594
543 2.40
69,920
1,802 2.58
U.S. government sponsored
mortgage-backed securities
State and political subdivisions
Total securities
Other
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing checking or NOW
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
Federal Home Loan Bank advances and
repurchase agreements
Total interest-bearing liabilities
Noninterest-bearing liabilities
Total liabilities
Equity
Total liabilities and equity
Net interest income
Net interest rate spread (2)
Net interest-earning assets (3)
Net interest margin (4)
Average interest-earning assets to interest-
101,530
2,812
132,158
16,512
643,590
23,054
$ 666,644
2,700 2.66
52 1.85
3,463 2.62
429 2.60
26,725 4.15
93,247
3,103
118,944
9,276
597,966
17,948
$ 615,914
2,345 2.51
65 2.09
2,953 2.48
225 2.43
22,794 3.81
37,238
3,340
110,498
8,716
565,009
20,403
$ 585,412
$
50,668
43,183
97,555
296,692
488,098
63,417
551,515
34,440
585,955
80,689
666,644
$
141 0.28
178 0.41
1,254 1.29
5,744 1.94
7,317 1.50
1,537 2.42
8,854 1.61
46,299
43,159
96,984
256,250
442,692
63,997
506,689
26,193
532,882
83,032
615,914
$
66 0.14
102 0.24
853 0.88
3,429 1.34
4,450 1.01
839 1.31
5,289 1.04
44,080
40,191
75,736
249,689
409,696
67,899
477,595
24,279
501,874
83,538
585,412
870 2.34
75 2.25
2,747 2.49
148 1.70
21,338 3.78
40 0.09
49 0.12
195 0.26
2,607 1.04
2,891 0.71
726 1.07
3,617 0.76
$17,871
$17,505
$17,721
$
92,075
$
91,277
$
87,414
2.54%
2.77%
2.78%
2.93%
3.02%
3.14%
bearing liabilities
117%
118%
118%
Includes home equity loans.
(1)
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing
liabilities.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.
54
Table of Contents
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated to the changes due to rate and the changes due to volume in proportion to the
relationship of the absolute dollar amounts of change in each.
Fiscal Years Ended June 30,
2019 vs. 2018
Fiscal Years Ended June 30,
2018 vs. 2017
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Volume
Rate
Total
Increase
(Decrease)
(In thousands)
Interest-earning assets:
Loans
Securities
Other
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing checking or NOW
Savings accounts
Certificates of deposit
Money market accounts
Total interest-bearing deposits
Federal Home Loan Bank advances
Total interest-bearing liabilities
Change in net interest income
$1,102 $2,115 $
338
187
172
17
$1,627 $2,304 $
3,217
510
204
3,931
$ 996 $
217
9
$1,222 $
177 $
(11)
68
234 $
6 $
$
—
603
5
614
(8)
69 $
76
1,712
396
2,253
706
$ 606 $2,959 $
75
76
2,315
401
2,867
698
3,565
$
$
24 $
49
754
621
1,448
157
2 $
4
68
37
111
(44)
67 $ 1,605 $
1,173
206
77
1,456
26
53
822
658
1,559
113
1,672
$1,021 $ (655) $
366
$1,155 $(1,371) $
(216)
55
Table of Contents
Management of Market Risk
General. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest
rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-
earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to
changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee pursuant to our Interest
Rate Risk Management Policy that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk
that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent
with the guidelines approved by the Board of Directors.
As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:
(i)
(ii)
(iii)
(iv)
sell the majority of our long-term, fixed-rate one- to four-family residential mortgage loans that we originate;
lengthen the weighted average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding
sources such as brokered certificates of deposit and fixed-rate advances from the Federal Home Loan Bank of Chicago;
invest in shorter- to medium-term investment securities and interest-earning time deposits;
originate commercial mortgage loans, including multi-family loans and land loans, commercial loans and consumer loans, which tend to have
shorter terms and higher interest rates than one- to four-family residential mortgage loans, and which generate customer relationships that can
result in larger noninterest-bearing demand deposit accounts; and
(v)
maintain adequate levels of capital.
We currently do not engage in hedging activities, such as futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as
collateralized mortgage obligations, residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
In addition, changes in interest rates can affect the fair values of our financial instruments. For additional information regarding the fair values of our
assets and liabilities, see Note 17 to the Notes to our Consolidated Financial Statements.
Interest Rate Risk Analysis
We also perform an interest rate risk analysis that assesses our earnings at risk and our value at risk (or net economic value of equity at risk). Earnings
at risk represents the underlying threat to earnings associated with the continual repricing of a financial institution’s various assets and liabilities in differing
amounts, at different times, at different interest rate levels, all within the context of a continually changing, global interest rate environment. Our analysis of
our earnings at risk is completed monthly on our net interest income for periods extending twelve and twenty-four months forward. Simulations include a
base line analysis with no change in the current interest rate environment and alternative interest rate possibilities including rising and falling interest rates
of 100, 200, 300, and 400 basis points in interest rates under ramp, shock, static and dynamic rate environments to generate the estimated impact on net
interest income. Value at risk represents the threat to the underlying value of a financial institution’s various assets and liabilities, and consequently its
capital, given the potential for change in the interest rate structure in which these financial instruments might either reprice, or fail to reprice, in an
environment of constantly changing interest rates. Our analysis of our value at risk is completed quarterly and the calculation measures the net effect on the
market value of the bank’s equity position when quantifying the impact when interest rates rise and fall for the range of -400 basis points to +400 basis
points. Details of our general ledger along with key data from each deposit, loan, investment, and borrowing are downloaded into our forecasting model,
which takes into account both market
56
Table of Contents
and internal trends. Historical testing is done internally on a regular basis to confirm the validity of the model, while third-party testing is done
periodically. Details of our interest rate risk analysis are reviewed by the Asset/Liability Management Committee and presented to the Board on a quarterly
basis.
The tables below illustrate the simulated impact of rate shock scenarios up to 400 basis points over a two-year period on our earnings at risk for net
interest income. The earnings at risk tables show net interest income increasing in a rising rate environment and decreasing when rates decline. The net
economic value of equity at risk table below sets forth our calculation of the estimated changes in our net economic value of equity at June 30, 2019
resulting from immediate rate shocks ranging from -400 basis points to +400 basis points..
Earnings at Risk
Change in Interest
Rates (basis points)
+400
+300
+200
+100
0
-100
-200
-300
-400
Net Economic Value of Equity (NEVE) at Risk
Change in Interest
Rates (basis points)
+400
+300
+200
+100
0
-100
-200
-300
-400
% Change in Net Interest Income
6/30/20
5.39
4.51
3.26
1.88
(3.58)
(6.97)
(10.04)
(12.80)
Estimated NEVE
81,097
84,091
87,185
90,164
91,058
89,300
86,938
89,371
91,442
6/30/21
1.53
1.91
1.60
1.01
(3.76)
(7.38)
(10.43)
(13.22)
% Change NEVE
(10.94)
(7.65)
(4.25)
(0.98)
(1.93)
(4.52)
(1.85)
0.42
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows,
loan sales and repayments, advances from the Federal Home Loan Bank of Chicago, and maturities of securities. We also utilize brokered certificates of
deposit, internet funding, borrowings from the Federal Reserve, and sales of securities, when appropriate. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies
in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated
contingencies. For the years ended June 30, 2019 and 2018, our liquidity ratio averaged 21.4% and 19.8% of our total assets, respectively. We believe that
we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2019.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows;
(iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess liquid assets are
invested generally in interest-earning deposits and short- and medium-term securities.
Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by our operating, financing, lending and investing
activities during any given period. At June 30, 2019, cash and cash equivalents totaled $59.6 million.
57
Table of Contents
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Statements of Cash Flows included
in our financial statements.
At June 30, 2019, we had $5.4 million in loan commitments outstanding, and $50.8 million in unused lines of credit to borrowers. Certificates of
deposit due within one year of June 30, 2019 totaled $210.9 million, or 34.7% of total deposits. Depending on market conditions, we may be required to pay
higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2018. Additionally, it is our
intention as we continue to grow our commercial real estate portfolio, to emphasize lower cost deposit relationships with these commercial loan customers
and thereby replace the higher cost certificates with lower cost deposits. We have the ability to attract and retain deposits by adjusting the interest rates
offered.
Our primary investing activity is originating loans. During the years ended June 30, 2019 and 2018, we originated $156.2 million and $224.1 million
of loans, respectively.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We had a net increase in total deposits
of $126.6 million for the year ended June 30, 2019, and a net increase in total deposits of $41.3 million for the year ended June 30, 2018. Deposit flows are
affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provides an additional source of funds. Federal Home Loan
Bank advances were $24.0 million at June 30, 2019. At June 30, 2019, we had the ability to borrow up to an additional $158.0 million from the Federal
Home Loan Bank of Chicago based on our collateral and had the ability to borrow an additional $28.5 million from the Federal Reserve based upon current
collateral pledged.
Iroquois Federal is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to
broad risk categories. At June 30, 2019, Iroquois Federal exceeded all regulatory capital requirements. Iroquois Federal is considered “well capitalized”
under regulatory guidelines. See Note 12– Regulatory Matters of the notes to the financial statements included in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as
commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of
commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process
accorded to loans we make. For additional information, see Note 19 – Commitments and Credit Risk of the notes to the financial statements included in this
Annual Report on Form 10-K.
Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data
processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Recent Accounting Pronouncements
For a discussion of the impact of recent and future accounting pronouncements, see Note 1 of the notes to our consolidated financial statements
beginning on page F-1 of this Annual Report on Form 10-K.
Impact of Inflation and Changing Prices
Our financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time
due to inflation. The impact of
58
Table of Contents
inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a
result, changes in market interest rates have a greater impact on our performance than the effects of inflation.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, including supplemental data, of IF Bancorp begin on page F-1 of this Annual Report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated
the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of June 30, 2019.
Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to
be disclosed by the Company, including Iroquois Federal, in reports that are filed or submitted under the Exchange Act, is (1) recorded, processed,
summarized and reported, within the time periods specified in the Commission’s rules and forms and (2) is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely discussions regarding required disclosures.
Changes in Internal Controls Over Financial Reporting.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2019 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal
control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of
America.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2019, utilizing
the framework established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of June 30,
2019 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to
permit preparation of financial
59
Table of Contents
statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only
in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
ITEM 9B.
OTHER INFORMATION
Not applicable.
60
Table of Contents
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and
information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for
the Registrant’s Annual Meeting of Stockholders, to be held on November 25, 2019 (the “Proxy Statement”) under the captions “Proposal 1—Election of
Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Nominating Committee Procedures—Procedures to be
Followed by Stockholders,” “Corporate Governance—Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by
reference.
The Company has adopted a code of ethics that applies to its principal executive officer, the principal financial officer and principal accounting
officer. The Code of Ethics is posted on the Company’s Internet Web site.
ITEM 11.
EXECUTIVE COMPENSATION
The information regarding executive compensation, compensation committee interlocks and insider participation is incorporated herein by reference
to the Proxy Statement under the captions “Executive Officers—Executive Compensation” and “Director Compensation.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
(a)
Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.
(b)
Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.
(c)
Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of
which may at a subsequent date result in a change in control of the registrant.
61
Table of Contents
Equity Compensation Plan Information
The following table sets forth information as of June 30, 2019 about Company common stock that may be issued upon the exercise of options
under the IF Bancorp, Inc. 2012 Equity Incentive Plan. The plan was approved by the Company’s stockholders.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon the exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
153,143
N/A
153,143
$
$
16.63
N/A
16.63
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in the first
column)
314,125
N/A
314,125
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy
Statement under the captions “Transactions with Related Persons” and “Proposal 1 — Election of Directors.”
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information relating to the principal accounting fees and expenses is incorporated herein by reference to the Proxy Statement under the captions
“Proposal III—Ratification of Independent Registered Public Accounting Firm—Audit Fees” and “—Pre-Approval of Services by the Independent
Registered Public Accounting Firm.”
62
Table of Contents
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1)
(2)
The financial statements required in response to this item are incorporated by reference from Item 8 of this report.
All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3)
Exhibits
3.1 Articles of Incorporation of IF Bancorp, Inc. (1)
3.2 Amended and Restated Bylaws of IF Bancorp, Inc. (2)
4.1
Specimen Stock Certificate of IF Bancorp, Inc. (1)
4.6 Description of Registrant’s Securities
10.1
Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (3)
10.2
Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (3)
10.3 Change in Control Agreement of Pamela J. Verkler (4)
10.4 Change in Control Agreement of Thomas J. Chamberlain (9)
10.5 Amendment One to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III
(5)
10.6 Amendment One to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (5)
10.7 Amendment Two to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III
(6)
10.8 Amendment Two to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (6)
10.9 Directors Non Qualified Retirement Plan (1)
10.10 IF Bancorp, Inc. 2012 Equity Incentive Plan (7)
21.0
List of Subsidiaries (1)
23.0 Consent of BKD, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (8)
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2019 and 2018, (ii)
the Consolidated Statements of Income for the years ended June 30, 2019 and 2018, (iii) the Consolidated Statements of
Comprehensive Income (Loss) for the years ended June 30, 2019 and 2018, (iv) the Consolidated Statements of Stockholders’ Equity
for the years ended June 30, 2019 and 2018, (v) the Consolidated Statements of Cash Flows for the years ended June 30, 2019 and
2018, and (vi) the notes to the Consolidated Financial Statements.
(1)
(2)
(3)
(4)
(5)
(6)
Incorporated by reference to the Company’s Registration Statement on Form S-1 (333-172842), as amended, initially filed with the SEC on March 16,
2011.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 8, 2018.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 1, 2015.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2011.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2016.
Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 15, 2017.
63
Table of Contents
(7)
(8)
(9)
Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on October 12, 2012.
This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange
Act of 1934.
Incorporated by reference to the Company’s Form 10-K filed with the SEC on September 11, 2017.
ITEM 16.
FORM 10-K SUMMARY
None.
64
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: September 10, 2019
IF BANCORP, INC.
By: /s/ Walter H. Hasselbring, III
Walter H. Hasselbring, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Walter H. Hasselbring, III
Walter H. Hasselbring, III
President, Chief Executive Officer and Director (Principal Executive
Officer)
September 10, 2019
/s/ Pamela J. Verkler
Pamela J. Verkler
/s/ Gary Martin
Gary Martin
/s/ Alan D. Martin
Alan D. Martin
/s/ Joseph A. Cowan
Joseph A. Cowan
/s/ Wayne A. Lehmann
Wayne A. Lehmann
/s/ Frank J. Simutis
Frank J. Simutis
/s/ Dennis C. Wittenborn
Dennis C. Wittenborn
/s/ Rodney E. Yergler
Rodney E. Yergler
Senior Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
September 10, 2019
Chairman of the Board
September 10, 2019
Director
Director
Director
Director
Director
Director
September 10, 2019
September 10, 2019
September 10, 2019
September 10, 2019
September 10, 2019
September 10, 2019
Table of Contents
IF Bancorp, Inc.
Consolidated Financial Statements
Years Ended June 30, 2019 and 2018
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-5
F-7
F-8
F-9
F-11
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
IF Bancorp, Inc.
Watseka, Illinois
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of IF Bancorp, Inc. (Company) as of June 30, 2019 and 2018, the related consolidated
statements of income, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion
We have served as the Company’s auditor since 2009.
/s/ BKD, LLP
Decatur, Illinois
September 12, 2019
F-2
Table of Contents
Assets
Cash and due from banks
Interest-bearing demand deposits
IF Bancorp, Inc.
Consolidated Balance Sheets
June 30, 2019 and 2018
(in thousands)
Cash and cash equivalents
Interest-bearing time deposits in banks
Available-for-sale securities
Loans, net of allowance for loan losses of $6,328 and $5,945 at June 30, 2019 and 2018, respectively
Premises and equipment, net of accumulated depreciation of $7,345 and $6,717 at June 30, 2019 and 2018, respectively
Federal Home Loan Bank stock, at cost
Foreclosed assets held for sale
Accrued interest receivable
Bank-owned life insurance
Mortgage servicing rights
Deferred income taxes
Other
Total assets
See Notes to Consolidated Financial Statements
F-3
2018
2019
$ 57,994 $
4,240
514
4,754
1,750
125,996
476,480
10,226
3,285
219
1,821
8,803
866
4,003
720
$723,870 $638,923
1,606
59,600
3,000
146,291
487,774
10,706
1,174
778
2,142
9,072
853
2,066
414
Table of Contents
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand
Savings, NOW and money market
Certificates of deposit
Brokered certificates of deposit
Total deposits
Repurchase agreements
Federal Home Loan Bank advances
Advances from borrowers for taxes and insurance
Accrued post-retirement benefit obligation
Accrued interest payable
Other
Total liabilities
Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value, 100,000,000 shares authorized, 3,578,252 and 3,871,408 shares issued and outstanding at
June 30, 2019 and 2018, respectively
Additional paid-in capital
Unearned ESOP shares, at cost, 230,940 and 250,185 shares at June 30, 2019 and 2018, respectively
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Total stockholders’ equity
Total liabilities and stockholders’ equity
F-4
2019
2018
$ 80,442 $ 21,350
195,491
229,236
34,344
480,421
2,281
67,500
309
2,770
188
3,779
557,248
196,296
290,761
39,524
607,023
2,015
24,000
747
2,919
801
3,904
641,409
36
48,813
(2,309)
35,356
565
82,461
39
48,361
(2,502)
38,885
(3,108)
81,675
$723,870 $638,923
Table of Contents
IF Bancorp, Inc.
Consolidated Statements of Income
Years Ended June 30, 2019 and 2018
(in thousands)
Interest Income
Interest and fees on loans
Securities
Taxable
Tax-exempt
Federal Home Loan Bank dividends
Deposits with financial institutions
Total interest and dividend income
Interest Expense
Deposits
Federal Home Loan Bank advances and repurchase agreements
Total interest expense
Net Interest Income
Provision for Loan Losses
Net Interest Income After Provision for Loan Losses
Noninterest Income
Customer service fees
Other service charges and fees
Insurance commissions
Brokerage commissions
Net realized gains on sale of available-for-sale securities
Mortgage banking income, net
Gain on sale of loans
Gain (loss) on foreclosed assets, net
Bank-owned life insurance income, net
Other
Total noninterest income
See Notes to Consolidated Financial Statements
F-5
2019
2018
$22,833 $19,616
3,341 2,818
135
122
150
96
129
279
26,725 22,794
7,317 4,450
839
1,537
8,854 5,289
17,871 17,505
407
777
17,464 16,728
377
367
358
279
599
660
875
981
13
11
388
236
232
343
(24)
3
377
269
1,013
896
4,162 4,091
Table of Contents
Noninterest Expense
Compensation and benefits
Office occupancy
Equipment
Federal deposit insurance
Stationary, printing and office
Advertising
Professional services
Supervisory examination
Audit and accounting services
Organizational dues and subscriptions
Insurance bond premiums
Telephone and postage
Other
Total noninterest expense
Income Before Income Tax
Provision for Income Taxes
Net Income
Earnings Per Share:
Basic
Diluted
Dividends Paid Per Share
F-6
2019
2018
$10,644 $ 9,732
761
1,283
171
156
474
352
165
141
55
148
265
2,653
16,356
4,463
2,725
$ 3,558 $ 1,738
887
1,377
169
107
503
355
165
138
44
150
223
2,013
16,775
4,851
1,293
$
$
$
1.02 $
1.01 $
0.25 $
0.47
0.47
0.20
Table of Contents
IF Bancorp, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Years Ended June 30, 2019 and 2018
(in thousands)
Net Income
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $1,860 and $(1,584) for 2019 and 2018,
respectively
Less: reclassification adjustment for realized gains included in net income, net of taxes of $3 and $4 for 2019 and 2018,
respectively
Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $(4)
and $18 for 2019 and 2018, respectively
Other comprehensive income (loss), net of tax
Comprehensive Income (Loss)
See Notes to Consolidated Financial Statements
F-7
2019
2018
$3,558 $ 1,738
3,777 (2,614)
8
9
3,769 (2,623)
(96)
88
3,673 (2,535)
$7,231 $ (797)
Table of Contents
IF Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended June 30, 2019 and 2018
(in thousands)
Common
Stock
Additional
Paid-In
Capital
Unearned
ESOP
Shares
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, July 1, 2017
Net income
Other comprehensive loss
Reclassification of stranded tax effects due to tax reform
Dividends on common stock, $0.20 per share
Stock equity plan
Stock repurchase, 69,000 shares, average price $20.00 each
ESOP shares earned, 19,245 shares
Balance, June 30, 2018
Net income
Other comprehensive income
Dividends on common stock, $0.25 per share
Stock equity plan
Stock repurchase, 293,156 shares, average price $21.22 each
ESOP shares earned, 19,245 shares
$
39 $ 47,940 $ (2,694) $39,051 $
—
—
—
—
—
—
—
39
—
—
—
—
(3)
—
—
—
—
—
225
—
196
48,361
—
—
—
225
—
227
—
—
—
—
—
—
192
(2,502)
—
—
—
—
—
193
1,738
—
206
(730)
—
(1,380)
—
38,885
3,558
—
(868)
—
(6,219)
—
Balance, June 30, 2019
$
36 $ 48,813 $ (2,309) $35,356 $
(367) $83,969
1,738
—
(2,535)
(2,535)
—
(206)
(730)
—
—
225
(1,380)
—
—
388
81,675
(3,108)
3,558
—
3,673
3,673
(868)
—
—
225
(6,222)
—
—
420
565 $82,461
See Notes to Consolidated Financial Statements
F-8
Table of Contents
IF Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended June 30, 2019 and 2018
(in thousands)
Operating Activities
Net income
Items not requiring (providing) cash
Depreciation
Provision for loan losses
Amortization of premiums and discounts on securities
Deferred income taxes
Net realized gains on loan sales
Net realized gains on sales of available-for-sale securities
(Gain) loss on foreclosed real estate held for sale
Bank-owned life insurance income, net
Originations of loans held for sale
Proceeds from sales of loans held for sale
ESOP compensation expense
Stock equity plan expense
Changes in
Accrued interest receivable
Other assets
Accrued interest payable
Post-retirement benefit obligation
Other liabilities
Net cash provided by operating activities
Investing Activities
Net change in interest bearing time deposits
Purchases of available-for-sale securities
Proceeds from the sales of available-for-sale securities
Proceeds from maturities and pay-downs of available-for-sale securities
Net change in loans
Purchase of premises and equipment
Proceeds from the sale of foreclosed assets
Purchase of Federal Home Loan Bank stock
Redemption of Federal Home Loan Bank stock
Proceeds from settlement of bank-owned life insurance policies
Net cash used in investing activities
See Notes to Consolidated Financial Statements
F-9
2019
2018
$ 3,558 $ 1,738
628
407
83
76
(343)
(11)
(3)
(269)
(16,836)
17,082
420
225
468
777
157
1,324
(232)
(13)
24
(377)
(17,811)
17,867
388
225
(321)
306
613
57
125
5,797
(282)
(300)
133
(34)
786
4,838
(1,250)
(42,148)
6,852
20,555
(17,950)
(1,108)
5,803
(1,440)
3,551
—
(27,135)
—
(39,230)
5,966
14,524
(37,094)
(4,854)
365
(2,408)
1,666
397
(60,668)
Table of Contents
Financing Activities
Net increase in demand deposits, money market, NOW and savings accounts
Net increase in certificates of deposit, including brokered certificates
Net increase (decrease) in advances from borrowers for taxes and insurance
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
Net increase (decrease) in repurchase agreements
Dividends paid
Purchases of common stock
Net cash provided by financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Supplemental Cash Flows Information
Interest paid
Income taxes paid (net of refunds)
Foreclosed assets acquired in settlement of loans
2019
2018
$ 59,897 $ 25,488
15,787
(445)
140,000
(126,000)
98
(730)
(1,380)
52,818
(3,012)
7,766
4,754
66,705
438
111,500
(155,000)
(266)
(868)
(6,222)
76,184
54,846
4,754
$ 59,600 $
F-10
$
$
$
8,241 $
365 $
6,359 $
5,156
2,094
179
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
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 Association provides a full range of banking and financial services to individual and corporate customers from our seven full-service banking
offices located in the municipalities of Watseka, Danville, Clifton, Hoopeston, Savoy, Champaign, and Bourbonnais, Illinois, and our loan production
and wealth management office in Osage Beach, Missouri. Our primary lending market includes the Illinois counties of Vermilion, Iroquois,
Champaign and Kankakee, as well as the adjacent counties in Illinois and Indiana. Our loan production and wealth management office in Osage
Beach, Missouri, serves the Missouri counties of Camden, Miller and Morgan. The principal activity of the Association’s wholly-owned subsidiary,
L.C.I. Service Corporation (“L.C.I.”), is the sale of property and casualty insurance. The Company is primarily engaged in the business of directing,
planning, and coordinating the business activities of the Association. The Company and Association are subject to competition from other financial
institutions. The Company and Association are also subject to the regulation of certain federal and state agencies and undergo periodic examinations
by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Association and Association’s wholly owned subsidiary, L.C.I. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Operating Segment
The Company provides community banking services, including such products and services as loans, certificates of deposits, savings accounts, and
mortgage originations. These activities are reported as a single operating segment.
The Company does not derive revenues from, or have assets located in, foreign countries, nor does it derive revenues from any single customer that
represents 10% or more of the Company’s total revenues.
F-11
Table of Contents
Use of Estimates
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of loans, fair value measurements and classifications of investment securities,
loan servicing rights and income taxes.
Interest-bearing Time Deposits in Banks
Interest-bearing time deposits in banks mature within five years and are carried at cost.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At June 30, 2019 and 2018, cash
equivalents consisted primarily of noninterest bearing deposits and interest bearing demand deposits.
Securities
Securities are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive loss. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the
securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in
noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon
sale of the loan.
F-12
Table of Contents
Loans
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding
principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, and any unamortized deferred fees or costs on originated
loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.
Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these
loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan
losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of
the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans
that are classified as impaired, an allowance is established when the collateral value of the impaired loan is lower than the carrying value of that loan.
The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the
Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external
influences on credit quality that are not fully reflected in the historical loss or risk rating data.
F-13
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the
collateral if the loan is collateral dependent.
Groups of loans with similar characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for
impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment
of the loans.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the
estimated useful lives of the assets.
The estimated useful lives for each major depreciable classification of premises and equipment are as follows:
Buildings and improvements
Furniture and equipment
35-40 years
3-5 years
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are
included in net income or expense from foreclosed assets.
F-14
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Bank-owned Life Insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheets at the estimated cash surrender value. Changes in the cash
surrender value are reflected in noninterest income in the consolidated statements of income.
Fee Income
Loan origination fees, net of direct origination costs, are recognized as income using the level-yield method over the contractual life of the loans.
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.
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.
F-15
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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.
Mortgage Servicing Rights
Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing
assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company
are initially measured at fair value at the date of transfer. The Company has elected to initially and subsequently measure the mortgage servicing
rights for consumer mortgage loans using the fair value method. Under the fair value method, the servicing rights are carried in the balance sheet at
fair value and the changes in fair value are reported in earnings in the period in which the changes occur.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would
use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest
rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a
fixed amount per loan and are recorded as income when earned. The change in fair value of mortgage servicing rights is netted against loan servicing
fee income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to
be surrendered when (1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
F-16
Table of Contents
Income Taxes
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting
guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for
the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company
determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on
the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in
the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax
assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a
deferred tax asset will not be realized.
Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon
examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include
resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and
subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a
taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the
more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to
management’s judgment. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax
examinations by tax authorities for years before 2015.
In December 2017, the Tax Cuts and Jobs Act was enacted, which lowered our federal income tax rate to 21% effective for periods after
December 31, 2017. As a result, the Company was required to revalue its deferred tax assets and deferred tax liabilities to account for the future
impact of the lower corporate rate on these deferred amounts. The effect of the change in tax rates on our deferred tax assets and liabilities was
recognized as an expense in the period that includes the enactment date, which is the quarter ended December 31, 2017. The one-time adjustment of
deferred taxes for this tax change negatively impacted the Company’s current earnings and is reflected in our June 30, 2018 financials as a
$1.3 million tax expense.
The Company uses the specific identification method for reclassifying material stranded tax effects in accumulated other comprehensive income
(AOCI) to earnings.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiary.
Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares
outstanding during each year. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares
that may be issued by the Company relate solely to outstanding stock options and restricted stock awards and are determined using the treasury stock
method.
F-17
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive
loss includes unrealized appreciation (depreciation) on available-for-sale securities and changes in the funded status of the postretirement health
benefit plan.
Stock-based Compensation Plans
At June 30, 2019 and 2018, the Company has stock-based compensation plans (stock options and restricted stock) which are described more fully in
Note 15.
Transfers between Fair Value Hierarchy Levels
Transfers in and out of Level 1 (quoted market prices), Level 2 (other significant observable inputs) and Level 3 (significant unobservable inputs) are
recognized on the period ending date.
Reclassifications
Certain reclassifications have been made to the 2018 financial statements to conform to the 2019 financial statement presentation. These
reclassifications had no effect on income.
Recent and Future Accounting Requirements
In May, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers (Topic 606). The guidance implements a common revenue standard that clarifies the principles for recognizing revenue. The core
principal of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 establishes a five-step
model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The guidance does not
apply to revenue associated with financial instruments, including loans and investments securities that are accounted for under other GAAP, which
comprises a significant portion of our revenue stream. ASU 2014-09 became effective for the Company on July 1, 2018 and had no material effect on
how we recognize revenue or to our consolidated financial statements. See below for additional information related to revenue generated from
contracts with customers.
F-18
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10)—Recognition and Measurement of Financial
Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial
statements with more decision-useful information. ASU 2016-01 became effective for the Company on July 1, 2018, and the adoption did not have
material impact on our consolidated financial statements. The guidance also emphasizes the existing requirement to use exit prices to measure fair
value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans.
Accordingly, we refined the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting this
standard. The refined calculation did not have a significant impact on our fair value disclosures.
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 effective 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 impact does not have a material effect on the Company’s financial position or
results of operations since the Company does not have a material amount of 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, this update will be effective for
interim and annual periods beginning after December 15, 2019. In August 2019, FASB issued a proposal to delay the implementation of the current
expected loss standard for certain companies, including small reporting companies like our Company. If this is approved, the Company would not be
required to adopt the standard until July 1, 2023. 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. This team has determined that our best option for compliance with ASU 2016-13 is an outsourced
model. Therefore, we have entered an agreement with a firm specializing in ALLL modeling to begin transition modeling so we will be ready for the
required adoption. As of June 30, 2019 model installation was started but 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.
F-19
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which amends ASC 230 to add or clarify guidance on the
classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the
classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial
statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to eight types of cash flows.
The amendment became effective for the Company on July 1, 2018, and the adoption of ASU-2016-15 did not have a material impact on the
Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification”. ASU 2017-09 was issued to
provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock
Compensation, to a change to the terms or conditions of a share-based payment award. Diversity in practice has arisen in part because some entities
apply modification accounting under Topic 718 for modifications to terms and conditions that they consider substantive, but do not when they
conclude that particular modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that
they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes the fair value, the
vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value, vesting, or classification may be used to
evaluate whether a change is substantive. ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based
payment awards require an entity to apply modification accounting under Topic 718. ASU 2017-09 became effective for the Company on July 1,
2018, and did not have a material impact on the Company’s consolidated financial statements.
Note 2: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:
Available-for-sale Securities:
June 30, 2019:
U.S. Government and federal agency and Government sponsored
enterprises (GSEs)
Mortgage-backed:
GSE residential
Small Business Administration
State and political subdivisions
F-20
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$ 12,654
$
296
$
—
$ 12,950
124,615
4,911
2,725
$ 144,905
1,231
25
171
1,723
$
$
(336)
(1)
—
(337)
125,510
4,935
2,896
$146,291
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
June 30, 2018:
U.S. Government and federal agency and Government sponsored enterprises
(GSEs)
Mortgage-backed:
GSE residential
Small Business Administration
State and political subdivisions S
$ 24,757
$—
$ (835)
$ 23,922
100,534
1,965
2,980
$130,236
24
—
144
$168
(3,499)
(74)
—
$(4,408)
97,059
1,891
3,124
$125,996
With the exception of U.S. Government and federal agency and GSE securities and Mortgage-backed-GSE residential securities with a book value of
$12,654,000 and $124,615,000, respectively, and a market value of $12,950,000 and $125,510,000, respectively at June 30, 2019, the Company held
no securities at June 30, 2019 with a book value that exceeded 10% of total equity.
All mortgage-backed securities at June 30, 2019 and 2018 were issued by government sponsored enterprises.
The amortized cost and fair value of available-for-sale securities at June 30, 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.
Amortized
Cost
Fair
Value
Within one year
One to five years
Five to ten years
After ten years
Mortgage-backed securities
Totals
$
1,150 $
1,999
14,057
3,084
20,290
124,615
1,173
2,000
14,523
3,085
20,781
125,510
$ 144,905 $146,291
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $57,921,000 at June 30, 2019 and
$64,625,000 at June 30, 2018.
Gross gains of $96,000 and $20,000 and gross losses of $85,000 and $7,000 resulting from sales of available-for-sale securities were realized for 2019
and 2018, respectively. The tax provision applicable to these net realized gains amounted to approximately $3,000 and $4,000 for 2019 and 2018,
respectively.
F-21
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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 June 30, 2019 and 2018, was $47,146,000 and $119,180,000, respectively, which is approximately 32% and 95% of the
Company’s available-for-sale investment portfolio. These declines in fair value at June 30, 2019, resulted from increases in market interest rates and
are considered temporary. There were no securities reported at less than historical cost at June 30, 2019.
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 June 30, 2019 and 2018:
Description of
Securities
June 30, 2019:
Mortgage-backed:
GSE residential
Small Business Administration
Total temporarily impaired securities
June 30, 2018:
U.S. Government and federal agency and Government sponsored
enterprises (GSE’s)
Mortgage-backed:
GSE residential
Small Business Administration
Total temporarily impaired securities
Less Than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$15,167 $
930
$16,097 $
(72) $31,049 $
(1)
(73) $31,049 $
—
(264) $ 46,216 $
—
(264) $ 47,146 $
930
(336)
(1)
(337)
$15,541 $
(439) $ 8,381 $
(396) $ 23,922 $
(835)
59,478
—
(3,499)
(74)
$75,019 $ (2,275) $44,161 $ (2,133) $119,180 $ (4,408)
93,367
1,891
33,889
1,891
(1,663)
(74)
(1,836)
—
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 June 30, 2019 and 2018, 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 June 30, 2019 and
2018.
F-22
Table of Contents
Note 3: Loans and Allowance for Loan Losses
Classes of loans at June 30, include:
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Real estate loans
One- to four-family, including home equity loans
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Less
Unearned fees and discounts, net
Allowance for loan losses
Loans, net
2019
2018
$129,290 $134,977
107,436
104,663
140,944
143,367
9,058
8,938
13,763
16,113
68,720
84,246
7,366
7,136
482,264
493,753
(349)
6,328
(161)
5,945
$487,774 $476,480
The Company had loans held for sale included in one- to four-family real estate loans totaling $316,000 and $206,000 as of June 30, 2019 and 2018,
respectively.
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 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 lending
activity includes the origination of one- to four-family residential mortgage loans, multi-family loans, commercial real estate loans, home equity lines
of credits, commercial business loans, consumer (consisting primarily of automobile loans), and construction 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 within 30
miles of a branch or loan production office. 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.
F-23
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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. These loan approval limits are up slightly from the prior year when
Managing Officers generally had authority to approve one- to four-family residential mortgage loans up to $300,000, other secured loans up to
$300,000, 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 and unsecured loans up to $500,000. These loan approval limits also were increased from prior year when the Loan Committee
could approve one- to four-family residential mortgage loans, commercial real estate loans, multi-family real estate loans and land loans up to
$1,000,000 and unsecured loans up to $300,000. All loans above these limits must be approved by the Operating Committee, consisting of the
Chairman, and up to four other Board members. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans
to related parties, including executive officers and the Company’s directors, are reviewed for compliance with regulatory guidelines and the Board of
Directors at least annually.
The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small
commercial loans on a sample basis, and all larger commercial loans on an annual basis. The Company also receives independent loan reviews
performed by a third party on larger commercial loans to be 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, Audit Committee and the Board of Directors.
F-24
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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 borrower.
The Company offers USDA Rural Development loans which are originated and sold servicing released. The Company also offers FHA and VA loans
that are originated through a nationwide wholesale lender.
In addition, the Company also offers home equity loans that are secured by a second mortgage on the borrower’s primary or secondary residence.
Home equity loans are generally underwritten using the same criteria used to underwrite one- to four-family residential mortgage loans.
As one- to four-family residential mortgage and home equity loan underwriting are subject to specific regulations, the Company typically underwrites
its one- to four-family residential mortgage and home equity loans to conform to widely accepted standards. Several factors are considered in
underwriting including the value of the underlying real estate and the debt to income 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.
F-25
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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 are 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 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 the
collateral, if any. The cash flows of the underlying borrower, however, may not perform consistent 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.
F-26
Table of Contents
Consumer Loans
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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 Concentrations
The loan portfolio includes a concentration of loans secured by commercial real estate properties, including commercial real estate construction loans,
amounting to $260,888,000 and $260,671,000 as of June 30, 2019 and 2018, 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 $4,844,000 and $5,855,000 at June 30, 2019 and 2018, 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 $29,524,000 and $32,874,000 at June 30, 2019 and 2018, respectively, of which
$12,025,000 and $11,009,000, at June 30, 2019 and 2018 were outside of our primary market area. These participation loans are secured by real estate
and other business assets.
F-27
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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 June 30, 2019 and 2018:
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of period
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
2019
Real Estate Loans
One- to four-
family
Multi-family Commercial
Home Equity
Lines of Credit
$
$
$
$
$
$
$
997
29
(17)
22
1,031
13
1,018
$
$
$
$
1,650
(8)
—
—
1,642
—
1,642
$
$
$
$
1,604
19
—
—
1,623
—
1,623
129,290
$ 104,663
$ 143,367
1,722
$
—
$
18
127,568
$ 104,663
$ 143,349
$
$
$
$
$
$
$
91
13
(15)
—
89
—
89
8,938
22
8,916
Construction Commercial
Consumer
Total
2019 (Continued)
$
$
$
$
$
$
$
168
45
—
—
213
—
213
16,113
—
16,113
$
$
$
$
$
$
$
1,373
286
—
—
1,659
—
1,659
84,246
60
84,186
$
$
$
$
$
$
$
62
23
(18)
4
71
10
61
7,136
29
7,107
$
$
$
$
$
$
$
5,945
407
(50)
26
6,328
23
6,305
493,753
1,851
491,902
F-28
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of period
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Allowance for loan losses:
Balance, beginning of year
Provision charged to expense
Losses charged off
Recoveries
Balance, end of year
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
Loans:
Ending balance
Ending balance: individually evaluated for impairment
Ending balance: collectively evaluated for impairment
2018
Real Estate Loans
One- to four-
family
Multi-family Commercial
Home Equity
Lines of Credit
$
$
$
$
$
$
$
2,519
85
(1,608)
1
997
—
997
$
$
$
$
1,336
314
—
—
1,650
—
1,650
$
$
$
$
1,520
84
—
—
1,604
3
1,601
134,977
$ 107,436
$ 140,944
7,904
$
1,329
$
50
127,073
$ 106,107
$ 140,894
$
$
$
$
$
$
$
76
39
(24)
—
91
—
91
9,058
26
9,032
Construction Commercial
Consumer
Total
2018 (Continued)
$
$
$
$
$
$
$
75
93
—
—
168
—
168
13,763
—
13,763
$
$
$
$
$
$
$
1,242
161
(30)
—
1,373
—
1,373
68,720
30
68,690
$
$
$
$
$
$
$
67
1
(14)
8
62
—
62
7,366
3
7,363
$
$
$
$
$
$
$
6,835
777
(1,676)
9
5,945
3
5,942
482,264
9,342
472,922
F-29
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
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.
Allowance for Loan Losses
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 that the loan balance is confirmed as
uncollectible. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the reserve to be consistent with prior periods and
adequate to cover the estimated losses in our loan portfolio.
The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances
for estimated credit losses on individual loans that are determined to be impaired through the Company’s review for identified problem loans; and
(2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio.
The specific allowance is measured by determining the present value of expected cash flows, the loan’s observable market value, or for collateral-
dependent loans, the fair value of the collateral adjusted for market conditions and selling expense. Factors used in identifying a specific problem loan
include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or
past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the
borrower’s effort to cure the delinquency. In addition for loans secured by real estate, the Company also considers the extent of any past due and
unpaid property taxes applicable to the property serving as collateral on the mortgage.
The Company establishes a general allowance for loans that are not deemed impaired to recognize the inherent losses associated with lending
activities, but which, unlike specific allowances, has not been allocated to particular problem assets. The general valuation allowance is determined by
segregating the loans by loan category and assigning allowance percentages based on the Company’s historical loss experience, delinquency trends,
and management’s evaluation of the collectability of the loan portfolio. In certain instances, the historical loss experience could be adjusted if similar
risks are not inherent I the remaining portfolio. The allowance is then adjusted for qualitative factors that, in management’s judgment, affect the
collectability of the portfolio as of the evaluation date. These qualitative factors may include: (1) Management’s assumptions regarding the minimal
level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off
and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and
business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes
in the nature and
F-30
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff;
(6) changes in the volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured and other loan
modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value
of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such
concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the existing portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.
Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as
substandard, the Company has historically evaluated every loan classified as substandard, regardless of size, for impairment as part of the review for
establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance, homogenous pools of
loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical
measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.
There have been no changes to the Company’s accounting policies or methodology from the prior periods.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current
financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All
loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim
grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification
system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and
potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:
Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.
Watch – Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
F-31
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and
improbable.
Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted.
The amount of the loss determined will be charged-off.
Risk characteristics applicable to each segment of the loan portfolio are described as follows.
Residential One- to four-family and Equity Lines of Credit Real Estate: The residential one- to four-family real estate loans are generally
secured by owner-occupied one- to four-family residences. Repayment of these loans is primarily dependent on the personal income and
credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that
might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual
amounts and spread over a large number of borrowers.
Commercial and Multi-family Real Estate: Commercial and multi-family real estate loans typically involve larger principal amounts, and
repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on
the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk
in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market
areas.
Construction Real Estate: Construction real estate loans are usually based upon estimates of costs and estimated value of the completed
project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of
these loans may include permanent loans, sales of developed property, or an interim loan commitment from the Company until permanent
financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive
to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted
by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.
F-32
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment
purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business
operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow
stability from business operations.
Consumer: The consumer loan portfolio consists of various term loans such as automobile loans and loans for other personal
purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan
purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s
market area) and the creditworthiness of a borrower.
The following tables present the credit risk profile of the Company’s loan portfolio, as of June 30, 2019 and 2018, based on rating category and
payment activity:
June 30, 2019
Pass
Watch
Substandard
Doubtful
Loss
Total
June 30, 2019, (Continued)
Pass
Watch
Substandard
Doubtful
Loss
Total
Home Equity
Lines of Credit
8,918
$
—
20
—
—
8,938
$
Construction
16,113
$
—
—
—
—
16,113
$
Real Estate Loans
One-
to four-
family
$ 127,386
—
1,904
—
—
$ 129,290
Multi-family
$ 104,504
—
159
—
—
$ 104,663
Consumer
7,107
$
—
19
10
—
7,136
$
Commercial
81,906
$
1,375
965
—
—
84,246
$
F-33
Commercial
$ 142,076
1,040
251
—
—
$ 143,367
Total
$ 488,010
2,415
3,318
10
—
$ 493,753
Table of Contents
June 30, 2018
Pass
Watch
Substandard
Doubtful
Loss
Total
June 30, 2018, (Continued)
Pass
Watch
Substandard
Doubtful
Loss
Total
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
One- to
four-family
$ 127,410
—
1,265
6,302
—
$ 134,977
Real Estate Loans
Multi-
family Commercial
$ 139,805
1,089
50
—
—
$ 140,944
$107,320
—
116
—
—
$107,436
$
Commercial
66,545
1,204
941
30
—
68,720
$
Consumer
7,362
$
1
3
—
—
7,366
$
Total
$ 471,240
2,294
2,398
6,332
—
$ 482,264
$
Home Equity
Lines of Credit Construction
13,763
$
—
—
—
—
13,763
9,035
—
23
—
—
9,058
$
$
The following tables present the Company’s loan portfolio aging analysis as of June 30, 2019 and 2018:
30-59 Days
Past Due
60-89 Days
Past Due
Greater Than
90 Days
Total Past
Due
Current
Total Loans
Receivable
Total Loans
> 90 Days &
Accruing
June 30, 2019
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total
June 30, 2018
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total
$
$
$
$
1,515 $
422
74
—
—
291
99
2,401 $
1,426 $
—
80
14
354
76
10
1,960 $
255 $
—
6
26
—
—
—
287 $
207 $
—
13
23
—
—
29
272 $
F-34
481 $ 2,251 $127,039 $ 129,290 $
—
12
20
—
60
29
602 $ 3,290 $490,463 $ 493,753 $
104,663
143,367
8,938
16,113
84,246
7,136
104,241
143,275
8,892
16,113
83,895
7,008
422
92
46
—
351
128
6,633 $ 8,266 $126,711 $ 134,977 $
2
37
—
—
30
1
2
130
37
354
106
40
107,434
140,814
9,021
13,409
68,614
7,326
107,436
140,944
9,058
13,763
68,720
7,366
6,703 $ 8,935 $473,329 $ 482,264 $
226
—
—
—
—
—
—
226
293
—
—
—
—
—
1
294
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and
events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment
record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or,
for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are
considered impaired in determining the adequacy of the allowance for loan losses.
The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the
borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are
$1.5 million in troubled debt restructurings that were classified as impaired.
F-35
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following tables present impaired loans for year ended June 30, 2019 and 2018:
June 30, 2019
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Average
Investment in
Impaired
Loans
Interest
Income
Recognized
Interest on
Cash Basis
Loans without a specific allowance:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Loans with a specific allowance:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
$ 1,676 $ 1,676 $ — $
—
18
22
—
60
19
—
18
22
—
60
19
—
—
—
—
—
—
$
46 $
46 $
—
—
—
—
—
10
—
—
—
—
—
10
$ 1,722 $ 1,722 $
—
18
22
—
60
29
—
18
22
—
60
29
13 $
—
—
—
—
—
10
13 $
—
—
—
—
—
10
23 $
1,718
1
34
24
—
63
24
47
—
—
—
—
—
11
1,765
1
34
24
—
63
35
1,922
$
$
$
$
63
—
—
1
—
6
2
1
—
—
—
—
—
1
64
—
—
1
—
6
3
74
$
$
$
$
71
—
—
2
—
6
2
1
—
—
—
—
—
1
72
—
—
2
—
6
3
83
Total
$ 1,851 $ 1,851 $
F-36
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Loans without a specific allowance:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Loans with a specific allowance:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total:
Real estate loans:
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total
June 30, 2018
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Average
Investment in
Impaired
Loans
Interest
Income
Recognized
Interest on
Cash Basis
$ 7,904
1,329
47
26
—
30
3
$ 7,904
1,329
47
26
—
30
3
$ —
—
—
—
—
—
—
$ —
—
3
—
—
—
—
$ —
—
3
—
—
—
—
$ —
—
3
—
—
—
—
$ 7,904
1,329
50
26
—
30
3
$ 9,342
$ 7,904
1,329
50
26
—
30
3
$ 9,342
$ —
—
3
—
—
—
—
3
$
$
$
$
$
8,739
1,359
86
28
—
57
4
—
—
5
—
—
—
—
8,739
1,359
91
28
—
57
4
10,278
$
$
$
$
50
85
4
2
—
—
1
—
—
—
—
—
—
—
50
85
4
2
—
—
1
142
$
$
$
$
51
85
5
2
—
—
1
—
—
—
—
—
—
—
51
85
5
2
—
—
1
144
Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well
as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.
F-37
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table presents the Company’s nonaccrual loans at June 30, 2019 and 2018:
Real estate loans
One- to four-family, including home equity loans
Multi-family
Commercial
Home equity lines of credit
Construction
Commercial
Consumer
Total
2019
2018
$414
—
18
20
—
60
29
$541
$6,339
116
50
—
—
30
—
$6,535
At June 30, 2019 and 2018, the Company had a number of loans that were modified in troubled debt restructurings (TDR’s) and impaired. The
modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or
a permanent reduction of the recorded investment in the loan.
The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of June 30, 2019 and 2018. With the exception
of three one- to four-family loans totaling $8,000, one home equity line of credit for $20,000, and one consumer loan for $2,000, all were performing
according to the terms of the restructuring as of June 30, 2019, and with the exception of four one- to four-family loans totaling $169,000, one
commercial real estate loan for $3,000, and one commercial business loan for $30,000, all loans were performing according to the terms of
restructuring as of June 30, 2018. As of June 30, 2019 all loans listed were on nonaccrual except for ten one- to four-family residential loans totaling
$1.3 million, and one home equity line of credit for $1,000. As of June 30, 2018 all loans listed were on nonaccrual except for thirteen one- to four-
family residential loans totaling $1.6 million, one multi-family loan for $1.2 million, two home equity lines of credit totaling $26,000, and one
consumer loan for $4,000.
Real estate loans
One- to four-family
Multi-family
Commercial
Home equity lines of credit
Total real estate loans
Construction
Commercial
Consumer
Total
F-38
June 30, 2019
June 30, 2018
$
$
1,475
—
6
22
1,503
—
—
2
1,505
$
$
1,588
1,213
17
26
2,844
—
30
3
2,877
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table represents loans modified as troubled debt restructurings during the years ending June 30, 2019 and 2018:
Real estate loans:
One- to four-family
Home equity lines of credit
Multi-family
Commercial
Total real estate loans
Construction
Commercial
Consumer loans
Total
2019 Modifications
Year Ended June 30, 2019
Year Ended June 30, 2018
Number of
Modifications
Recorded
Investment
Number of
Modifications
Recorded
Investment
1
—
—
—
1
—
—
—
1
$
$
159
—
—
—
159
—
—
—
159
2
—
—
1
3
—
—
—
3
$
$
60
—
—
13
73
—
—
—
73
During the year ended June 30, 2019, the Company modified one one- to four-family loan in the amount of $159,000. This modification included a
decrease in interest rate and a maturity concession.
2018 Modifications
During the year ended June 30, 2018, the Company modified two one- to four-family loans totaling $60,000 and one commercial real estate loan in
the amount of $13,000.
TDRs with Defaults
The Company had six TDRs, four one- to four-family residential loans for $144,000, one home equity line of credit for $20,000, and one consumer
loan for $2,000 that were in default as of June 30, 2019, and were restructured in prior years. No restructured loans were in foreclosure at June 30,
2019. The Company had six TDRs, four one- to four-family residential loans for $169,000, one commercial real estate loan for $3,000, and one
commercial business loan for $30,000 that were in default as of June 30, 2018, and was restructured in prior years. No restructured loans were in
foreclosure at June 30, 2018. The Company defines a default as any loan that becomes 90 days or more past due.
Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of
estimating future losses.
F-39
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Management considers the level of defaults within the various portfolios, as well as the current adverse economic environment and negative outlook
in the real estate and collateral markets when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. We
believe the qualitative adjustments more accurately reflect collateral values in light of the sales and economic conditions that we have recently
observed.
We may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance
repossession. As of June 30, 2019 and 2018, the carrying value of foreclosed residential real estate properties as a result of obtaining physical
possession was $539,000 and $0 respectively. In addition, as of June 30, 2019 and 2018, we had residential mortgage loans and home equity loans
with a carrying value of $200,000 and $6.3 million, respectively, collateralized by residential real estate property for which formal foreclosure
proceedings were in process.
Note 4: Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
Land
Buildings and improvements
Furniture and equipment
Less accumulated depreciation
Net premises and equipment
Note 5: Loan Servicing
2019
$ 1,976
11,319
4,756
18,051
7,345
$10,706
2018
$ 1,976
10,932
4,035
16,943
6,717
$10,226
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans
serviced for others was $99,021,000 and $95,825,000 at June 30, 2019 and 2018, respectively.
Custodial escrow balances in connection with the foregoing loan servicing were $652,000 and $408,000 at June 30, 2019 and 2018, respectively.
The aggregate fair value of capitalized mortgage servicing rights at June 30, 2019 and 2018 was $853,000 and $866,000, respectively. Comparable
market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. The valuation model
incorporates assumptions that market participants would use in estimating future net servicing income, such as costs to service, a discount rate,
custodial earnings rate, default rates and losses and prepayment speeds.
F-40
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following summarizes the activity in mortgage servicing rights measured using the fair value method:
Fair value, beginning of period
Additions:
Servicing assets resulting from asset transfers
Subtractions:
Payments received and loans refinanced
Changes in fair value, due to changes in valuation inputs or assumptions
Fair value, end of period
2018
2019
$ 866 $ 710
144
164
(112)
(45)
(102)
94
$ 853 $ 866
For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated
mortgage servicing rights.
Note 6: Interest-bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were $260,311,000 at June 30, 2019 and $218,149,000 at June 30, 2018.
The following table represents interest expense by deposit type:
Savings, NOW, and Money Market
Certificates of deposit
Brokered certificates of deposit
Total deposit interest expense
F-41
2019
$1,574
4,954
789
$7,317
2018
$1,021
2,873
556
$4,450
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
At June 30, 2019, the scheduled maturities of time deposits; including brokered time deposits, are as follows:
2020
2021
2022
2023
2024 and thereafter
$210,936
99,154
13,986
5,211
998
$330,285
Note 7: Federal Home Loan Bank Advances
The Federal Home Loan Bank advances totaled $24,000,000 and $67,500,000 as of June 30, 2019 and 2018, respectively. The Federal Home Loan
Bank advances are secured by mortgage, multi-family, commercial real estate, and HELOC loans totaling $321,046,000 at June 30, 2019. Advances
at June 30, 2019, at interest rates from 0.92 to 2.89 percent are subject to restrictions or penalties in the event of prepayment.
Aggregate annual maturities of Federal Home Loan Bank advances at June 30, 2019, are:
2020
2021
2022
2023
2024
Thereafter
Note 8: Repurchase Agreements
$ —
4,000
—
10,000
10,000
—
$24,000
Securities sold under agreements to repurchase consist of obligations of the Company to other parties. The carrying value of securities sold under
agreement to repurchase amounted to $2.0 million at June 30, 2019 and $2.3 million at June 30, 2018. At June 30, 2019, approximately $472,000 of
our repurchase agreements had an overnight maturity, while the remaining $1.5 million in repurchase agreements had a term of 30 to 90 days. The
maximum amount of outstanding agreements at any month-end during 2019 and 2018 totaled $2,840,000 and $2,980,000, respectively, and the
monthly average of such agreements totaled $2,400,000 and $2,623,000 for 2019 and 2018, respectively. 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.
F-42
Table of Contents
Note 9: Income Taxes
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Company and its subsidiary file income tax returns in the U.S. federal jurisdiction and the States of Illinois and Missouri. During the years ended
June 30, 2019 and 2018, the Company did not recognize expense for interest or penalties.
The provision for income taxes includes these components:
Taxes currently payable
Deferred income taxes
Income tax expense
2019
$1,217
76
$1,293
2018
$1,401
1,324
$2,725
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
Computed at the statutory rate*
Increase (decrease) resulting from
Tax exempt interest
Cash surrender value of life insurance
State income taxes
Adjustment of deferred tax asset and tax rate change for enacted changes in tax
laws
Other
Actual tax expense
Tax rate as a percentage of pre-tax income
2019
$1,019
2018
$1,232
(26)
(56)
329
(37)
(104)
270
—
27
$1,293
1,318
46
$2,725
26.7%
61.1%
*Statutory tax rate of 21.0% for year ended June 30, 2019, and 27.6% (blended rate) for year ended June 30, 2018.
F-43
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:
Deferred tax assets
Allowance for loan losses
Accrued retirement liability
Deferred compensation
Deferred loan fees
Postretirement health plan
Unrealized losses on available-for-sale securities
Accrued vacation
MPF recourse liability
Deferred revenue Mastercard
Stock options - Directors
Other
Deferred tax liabilities
Depreciation
Mortgage servicing rights
Deferred loan expense
Unrealized gains on available-for-sale securities
Other
Net deferred tax asset
2019
2018
$ 1,802
651
422
83
170
—
46
66
27
42
12
3,321
(426)
(243)
(182)
(395)
(9)
(1,255)
$ 2,066
$1,695
602
378
114
174
1,462
40
53
30
34
28
4,610
(198)
(247)
(160)
—
(2)
(607)
$4,003
Retained earnings at both June 30, 2019 and 2018, include approximately $2,217,000, for which no deferred federal income tax liability has been
recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for
purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only,
which would be subject to the then-current corporate income tax rate. The deferred income tax liabilities on the preceding amounts that would have
been recorded if they were expected to reverse into taxable income in the foreseeable future were approximately $466,000 at both June 30, 2019 and
2018.
F-44
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Note 10: Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
Net unrealized gains (losses) on securities available for sale
Net unrealized postretirement health benefit plan obligations
Tax effect
Net-of-tax amount
F-45
2019
2018
$1,386 $(4,240)
(504)
(4,744)
1,636
$ 565 $(3,108)
(596)
790
(225)
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Note 11: Changes in Accumulated Other Comprehensive Income (AOCI) by Component
Amounts reclassified from AOCI and the affected line items in the statements of income during the years ended June 30, 2019 and 2018, were as
follows:
Realized gains on available-for-sale securities
Amortization of defined benefit pension items:
Actuarial losses
Prior service costs
Total reclassified amount before tax
Tax expense (benefit)
Total reclassification out of AOCI
Amounts Reclassified
From AOCI
2019
2018
$
11
$
13
Affected Line Item in the Condensed
Consolidated Statements of Income
Net realized gains on sale of available-for-sale
securities
Components are included in computation of net
periodic pension cost
104
(34)
83
29 Provision for Income Tax
54 Net Income
104
—
115
11
104
$
$
F-46
Table of Contents
Note 12: Regulatory Matters
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Association is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by regulators that if undertaken, could have a direct material effect on the
Association’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association
must meet specific capital guidelines involving quantitative measures of the Association’s assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Association’s capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk-weightings and other factors.
The Basel III regulatory capital framework (the “Basel III Capital Rules”) adopted by U.S. federal regulatory authorities, among other things,
(i) establish the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1
Capital” instruments meeting stated requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital and (iv) set forth the acceptable scope of deductions/adjustments to the
specified capital measures. The Basel III Capital Rules became effective for us on January 1, 2015 with certain transition provisions fully phased in
on January 1, 2019.
Additionally, the Basel III Capital Rules require that we maintain a capital conservation buffer with respect to each of the CET1, Tier 1 and total
capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. The capital
conservation buffer was phased in and became fully phased in on January 1, 2019 at 2.5%. A financial institution with a conservation buffer of less
than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain
discretionary bonus payments to executive officers.
Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of total
risk-based capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to adjusted total assets. Management believes, as of June 30, 2019, the
Association meets all capital adequacy requirements to which it is subject.
As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to
develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial
institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all
other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action
statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for
purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at
not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition.
F-47
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
As of June 30, 2019, the Association was categorized as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association has to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in
the table below. There are no conditions or events that management believes have changed the Association’s prompt corrective action category.
F-48
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Association’s actual capital amounts (in thousands) and ratios are also presented in the table.
As of June 30, 2019
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to adjusted total assets)
Tangible capital (to adjusted tangible assets)
As of June 30, 2018
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common Equity Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to adjusted total assets)
Tangible capital (to adjusted tangible assets)
Actual
Minimum Capital
Requirement
Minimum to Be Well
Capitalized Under Prompt
Corrective Action
Provisions
Amount Ratio
Amount Ratio
Amount
Ratio
$81,624
75,355
75,355
75,355
75,355
16.28% $ 40,119
30,090
15.03%
22,567
15.03%
27,513
10.96%
10,317
10.96%
8.00% $
6.00%
4.50%
4.00%
1.50%
$78,988
73,053
73,053
73,053
73,053
16.09% $ 39,276
29,457
14.88%
22,093
14.88%
25,394
11.51%
9,523
11.51%
8.00% $
6.00%
4.50%
4.00%
1.50%
50,149
40,119
32,597
34,392
N/A
49,095
39,276
31,912
31,743
N/A
10.00%
8.00%
6.50%
5.00%
N/A
10.00%
8.00%
6.50%
5.00%
N/A
F-49
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following is a reconciliation of the Association equity amounts included in the consolidated balance sheets to the amounts reflected for regulatory
purposes:
Association equity
Less net unrealized gains
Less postretirement benefit plan
Tier 1 capital
Plus allowance for loan losses subject to limit
Total risk-based capital
2019
2018
$75,920 $69,945
(2,778)
991
(330)
(426)
73,053
75,355
6,269
5,945
$81,624 $78,988
The Association’s ability to pay dividends on its common stock to the Company is restricted to maintain adequate capital as shown in the previous
tables. Additionally, prior regulatory approval is required for the declaration of any dividends generally in excess of the sum of net income for the
calendar year and retained net income for the preceding two calendar years.
Note 13: Related Party Transactions
At June 30, 2019 and 2018, the Company had loans outstanding to executive officers, directors, significant members and their affiliates (related
parties). Changes in loans to executive officers and directors are summarized as follows:
Balance, beginning of year
New loans
Repayments
Balance, end of year
2019
$3,132
756
(855)
$3,033
2018
$ 4,520
139
(1,527)
$ 3,132
Deposits from related parties held by the Company at June 30, 2019 and 2018 totaled $1,482,000 and $1,599,000, respectively.
In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on
substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons.
Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.
F-50
Table of Contents
Note 14: Employee Benefits
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Company sponsors a noncontributory postretirement health benefit plan (postretirement plan). The postretirement plan provides medical coverage
benefits for former employees and their spouses upon retirement. The postretirement plan has no assets to offset the future liabilities incurred under
the postretirement plan. The Company’s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus
such amounts as the Company may determine to be appropriate from time to time. The Company expects to contribute $171,000 to the plan in fiscal
year 2020.
The Company uses a June 30 measurement date for the plan. Information about the plan’s funded status and pension cost follows:
Change in benefit obligation
Beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
End of year
Significant balances, costs and assumptions are:
Benefit obligation
Fair value of plan assets
Funded status
Accumulated benefit obligation
Amounts recognized in the consolidated balance sheets:
2019
2018
$ 2,770 $ 2,874
53
100
(138)
(119)
$ 2,919 $ 2,770
50
107
106
(114)
Postretirement Plan
2018
2019
$ 2,919 $ 2,770
—
—
$(2,919) $(2,770)
$ 2,919 $ 2,770
Accrued benefit cost
$2,919
$2,770
F-51
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Components of net periodic benefit cost:
Service cost
Interest cost
Amortization of prior service credit
Amortization of (Gain) or Loss
2019
$ 50
107
—
16
$173
2018
$ 53
100
(34)
31
$150
Amounts recognized in accumulated other comprehensive income not yet recognized as components of net periodic benefit cost consist of:
Net loss
Prior service credit
Other significant balances and costs are:
Employer contribution
Benefits paid
Benefit costs
2019
$531
—
$531
2018
$440
—
$440
2019
$114
114
173
2018
$119
119
150
Other changes in plan assets and benefit obligations recognized in other comprehensive income are described in Note 11.
The estimated net loss, prior service cost and transition obligation for the postretirement plan that will be amortized from accumulated other
comprehensive income into net periodic benefit cost of the next fiscal year are $25,000, $0, and $0, respectively.
A discount rate of 3.25% and 3.95% were used for 2019 and 2018, to determine the benefit obligations and benefit costs.
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
F-52
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Effect on total of service and interest cost components
Effect on postretirement benefit obligation
One-
Percentage-
Point
$
Increase
4
34
One-
Percentage-
Point
Decrease
(3)
(35)
$
For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2019, 2020 and 2021,
respectively. The rate was assumed to decrease gradually to 5% by the year 2030 and remain at that level thereafter.
The following postretirement plan benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of June 30, 2019:
2020
2021
2022
2023
2024
2025-2029
$124
142
167
181
197
947
The Company has a 401(k) plan covering substantially all employees. The Company matches 25% of the first 5% of compensation that a participant
defers. Employer contributions charged to expense for 2019 and 2018 were $68,000 and $63,000, respectively. The plan also includes an Employer
Profit Sharing contribution which allows all eligible participants to receive at least 5% of their Plan year salary. The Company’s contributions for the
plan years ended June 30, 2019 and 2018 were $510,000 and $466,000, respectively.
The Company has deferred compensation agreements for directors, which provides benefits payable upon normal retirement age of 72. The present
value of the estimated liability under the agreement is being accrued using a discount rate of 6 percent. The deferred compensation charged to expense
totaled $220,000 and $224,000 for the years ended June 30, 2019 and 2018, respectively. The agreements’ accrued liability of $1.5 million and
$1.3 million as of June 30, 2019 and 2018, respectively, is included in other liabilities in the consolidated balance sheets. The following benefit
payments are expected to be paid for these agreements:
2020
2021
2022
2023
2024
Thereafter
F-53
$
65
104
150
131
130
3,872
$4,452
Table of Contents
Note 15: Stock-based Compensation
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
In connection with the conversion to stock form, the Association established an ESOP for the exclusive benefit of eligible employees (all salaried
employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 21). The ESOP borrowed funds
from the Company in an amount sufficient to purchase 384,900 shares (approximately 8% of the Common Stock issued in the stock offering). The
loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Association and dividends
received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and 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.
F-54
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
A summary of ESOP shares at June 30, 2019 and 2018 are as follows (dollars in thousands):
Allocated shares
Shares committed for release
Unearned shares
Total ESOP shares
Fair value of unearned ESOP shares (1)
2019
109,018
19,245
230,940
359,203
2018
96,133
19,245
250,185
365,563
$
4,829
$
5,979
(1) Based on closing price of $20.91 and $23.90 per share on June 30, 2019, and 2018, respectively.
During the year ended June 30, 2019 and 2018, 6,360 and 6,116 ESOP shares, respectively, 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 be awarded to
senior officers and directors of the Association. The restricted stock will vest in equal installments over 10 years and the stock options will 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 will vest in equal installments over 8 years,
starting in December 2016. As of June 30, 2018, there were 90,050 shares of restricted stock and 314,125 stock option shares available for future
grants under this plan.
F-55
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table summarizes stock option activity for the year ended June 30, 2019 (dollars in thousands):
Outstanding, June 30, 2018
Granted
Exercised
Forfeited
Outstanding, June 30, 2019
Exercisable, June 30, 2019
Weighted-
Average
Exercise
Price/Share
16.63
$
—
—
—
16.63
$
Shares
153,143
—
—
—
153,143
108,571
$
16.63
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
4.4
4.4
$
$
655(1)
465(1)
(1) Based on closing price of $20.91 per share on June 30, 2019.
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 year ended June 30, 2019.
There were 22,286 options that vested during the year ended June 30, 2019 compared to 22,285 stock options that vested during the year ended
June 30, 2018. Stock-based compensation expense and related tax benefit was $57,000 and $16,000, respectively, for both the year ended June 30,
2019, and the year ended June 30, 2018, and was recognized in non-interest expense. Total unrecognized compensation cost related to non-vested
stock options was $80,000 at June 30, 2019 and is expected to be recognized over a weighted-average period of 1.4 years.
F-56
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table summarizes non-vested restricted stock activity for the year ended June 30, 2019:
Balance, June 30, 2018
Granted
Forfeited
Earned and issued
Balance, June 30, 2019
Weighted-
Average
Grant-Date
Fair Value
16.79
$
—
—
16.79
16.79
Shares
60,375
—
—
10,062
50,313
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 was $160,000 and $46,000, respectively, for the year ended June 30, 2019, and was $160,000 and $44,000,
respectively, for the year ended June 30, 2018, and was recognized in non-interest expense. Unrecognized compensation expense for non-vested
restricted stock awards was $766,000 and is expected to be recognized over 4.4 years with a corresponding credit to paid-in capital.
Note 16: Earnings Per Share (“EPS”)
Basic and diluted earnings per common share are presented for the years ended June 30, 2019 and 2018. The factors used in the earnings per common
share computation follow:
Net income
Basic weighted average shares outstanding
Less: Average unallocated ESOP shares
Average shares outstanding
Diluted effect of restricted stock awards and stock options
Diluted average shares outstanding
Basic earnings per common share
Diluted earnings per common share
F-57
Year Ended
June 30, 2019
3,558
$
3,716,924
(240,563)
3,476,361
Year Ended
June 30, 2018
1,738
$
3,918,676
(259,808)
3,658,868
53,856
39,716
3,530,217
3,698,584
$
$
1.02
1.01
$
$
0.47
0.47
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The Company announced a stock repurchase plan on December 10, 2018, which allowed the Company to repurchase up to 290,356 shares of its
common stock, or approximately 7.5% of its then current outstanding shares. As of March 31, 2019, all 290,356 shares had been repurchased under
this plan at an average price of $21.23 per share. The Company announced another stock repurchase plan on June 12, 2019, which allowed the
Company to repurchase up to 89,526 shares of its common stock, or approximately 2.5% of its then current outstanding shares. As of June 30, 2019,
2,800 shares had been repurchased at an average price of $21.02 per share.
Note 17: Disclosures about Fair Value of Assets
Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Fair value
measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs
that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
F-58
Table of Contents
Recurring Measurements
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value
on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2019 and 2018:
June 30, 2019:
Available-for-sale securities:
US Government and federal agency
Mortgage-backed securities – GSE residential
Small Business Administration
State and political subdivisions
Mortgage servicing rights
June 30, 2018:
Available-for-sale securities:
US Government and federal agency
Mortgage-backed securities – GSE residential
Small Business Administration
State and political subdivisions
Mortgage servicing rights
F-59
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
$
$ 12,950
125,510
4,935
2,896
853
$
—
—
—
—
—
$ 12,950
125,510
4,935
2,896
—
—
—
—
—
853
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
$
$ 23,922
97,059
1,891
3,124
866
$
—
—
—
—
—
$ 23,922
97,059
1,891
3,124
—
—
—
—
—
866
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant
changes in the valuation techniques during the year ended June 30, 2019. For assets classified within Level 3 of the fair value hierarchy, the process
used to develop the reported fair value is described below.
Available-for-sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There were no
Level 1 securities as of June 30, 2019 or 2018. If quoted market prices are not available, then fair values are estimated by using pricing models,
quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to
determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bid, offers and reference data market research publications and are classified within Level 2 of the
valuation hierarchy. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE—residential) and state and
political subdivisions. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
There were no Level 3 securities as of June 30, 2019 or 2018.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted
cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
Management measures mortgage servicing rights through the completion of a proprietary model. Inputs to the model are developed by the accounting
staff and are reviewed by management. The model is tested annually using baseline data to check its accuracy.
F-60
Table of Contents
Level 3 Reconciliation
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance
sheet using significant unobservable (Level 3) inputs:
Balance, July 1, 2017
Total realized and unrealized gains and losses included in net income
Servicing rights that result from asset transfers
Payments received and loans refinanced
Balance, June 30, 2018
Total realized and unrealized gains and losses included in net income
Servicing rights that result from asset transfers
Payments received and loans refinanced
Balance, June 30, 2019
Total gains or losses for the period included in net income attributable to the
change in unrealized gains or losses related to assets and liabilities still
held at the reporting date
Mortgage
Servicing Rights
710
$
94
164
(102)
866
(45)
144
(112)
853
$
$
(45)
Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as
noninterest income.
Nonrecurring Measurements
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at June 30, 2019 and 2018:
June 30, 2019:
Impaired loans (collateral dependent)
Foreclosed assets
June 30, 2018:
Impaired loans (collateral dependent)
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
$
$
—
—
—
Significant
Other
Observable
Inputs
(Level 2)
$
$
—
—
—
Significant
Unobservable
Inputs
(Level 3)
$
$
33
512
—
Fair Value
$
33
512
$ —
F-61
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
The following table presents (losses)/recoveries recognized on assets measured on a non-recurring basis for the years ended June 30, 2019 and 2018:
Impaired loans (collateral dependent)
Foreclosed and repossessed assets held for sale
2019
$ (20)
(196)
2018
$
3
—
Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within
Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral-dependent Impaired Loans, Net of the Allowance for Loan Losses
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell.
Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the
environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined
to be collateral-dependent and subsequently as deemed necessary by the senior lending officer. Appraisals are reviewed for accuracy and consistency
by the senior lending officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are
reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the
collateral. These discounts and estimates are developed by the senior lending officer by comparison to historical results.
F-62
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
Mortgage servicing rights
Impaired loans (collateral dependent)
Foreclosed assets
Mortgage servicing rights
Fair Value at
June 30, 2019
$
853
Valuation
Technique
Discounted
cash flow
Unobservable Inputs
Range (Weighted
Average)
Discount rate
Constant prepayment rate
Probability of default
9.5% - 11.5% (9.5%)
8.3% - 11.0% (9.0%)
0.05% - 0.12% (0.11%)
33
512
Fair Value at
June 30, 2018
$
866
Market
comparable
properties
Market
comparable
properties
Valuation
Technique
Discounted
cash flow
F-63
Marketability discount
11.1% (11.1%)
Comparability adjustments (%)
7.8% (7.8%)
Unobservable Inputs
Range (Weighted
Average)
Discount rate
Constant prepayment rate
Probability of default
9.5% - 11.5% (9.5%)
6.3% - 10.3% (6.6%)
0.00% -0.17% (0.16%)
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Fair Value of Financial Instruments
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the
fair value measurements fall at June 30, 2019 and 2018.
June 30, 2019:
Financial assets
Cash and cash equivalents
Interest-bearing time deposits in banks
Loans, net of allowance for loan losses
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities
Deposits
Repurchase agreements
Federal Home Loan Bank advances
Advances from borrowers for taxes and insurance
Accrued interest payable
Unrecognized financial instruments (net of contract
amount)
Commitments to originate loans
Lines of credit
Fair Value
Measurements
Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
$
59,600
3,000
—
—
—
—
—
—
—
—
—
—
Significant
Other
Observable
Inputs
(Level 2)
$
—
—
—
1,174
2,142
276,738
2,015
24,419
747
801
—
—
Significant
Unobservable
Inputs
(Level 3)
$
—
—
480,479
—
—
331,865
—
—
—
—
—
—
Carrying
Amount
$ 59,600
3,000
487,774
1,174
2,142
607,023
2,015
24,000
747
801
—
—
F-64
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
June 30, 2018:
Financial assets
Cash and cash equivalents
Interest-bearing time deposits in banks
Loans, net of allowance for loan losses
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities
Deposits
Repurchase agreements
Federal Home Loan Bank advances
Advances from borrowers for taxes and insurance
Accrued interest payable
Unrecognized financial instruments (net of contract
amount)
Commitments to originate loans
Lines of credit
Fair Value
Measurements
Using
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
$
4,754
1,750
—
—
—
—
—
—
—
—
—
—
Carrying
Amount
$
4,754
1,750
476,480
3,285
1,821
480,421
2,281
67,500
309
188
—
—
Significant
Other
Observable
Inputs
(Level 2)
$
—
—
—
3,285
1,821
216,841
2,281
67,355
309
188
Significant
Unobservable
Inputs
(Level 3)
$
—
—
468,932
—
—
261,898
—
—
—
—
—
—
—
—
The methods utilized to estimate the fair value of financial instruments at June 30, 2018 did not necessarily represent an exit price. In accordance with
the Company’s adoption of ASU 2016-01 as of July 1, 2018, the methods utilized to measure the fair value of financial instruments at June 30, 2019
represent an approximation of exit price; however, an actual exit price may differ.
F-65
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Note 18: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities
due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities
due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.
Note 19: Commitments and Credit Risk
The Company generates commercial, mortgage and consumer loans and receives deposits from customers located in the Illinois counties of
Vermilion, Iroquois, Champaign, and Kankakee, as well as adjacent counties in Illinois and Indiana within 30 miles of a branch or loan production
office. The Company generates commercial, mortgage and consumer loans from its location in Osage Beach, Missouri. The Company’s loans are
generally secured by specific items of collateral including real property and consumer assets. Although the Company has a diversified loan portfolio,
a substantial portion of its debtors’ ability to honor their contracts is dependent upon economic conditions in the Company’s various locations.
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the
commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each
customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s
credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment,
commercial real estate and residential real estate.
At June 30, 2019 and 2018, the Company had outstanding commitments to originate loans aggregating approximately $5,430,000 and $9,246,000,
respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. Loan commitments
at fixed rates of interest amounted to $2,959,000 and $8,890,000 at June 30, 2019 and 2018, respectively, with the remainder subject to adjustable
interest rates. The weighted average interest rates for fixed rate loan commitments were 5.03% and 5.29% as of June 30, 2019 and 2018, respectively.
F-66
Table of Contents
Lines of Credit
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and residential real estate.
Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
At June 30, 2019, the Company had granted unused lines of credit to borrowers aggregating approximately $44,070,000 and $6,726,000 for
commercial lines and open-end consumer lines, respectively. At June 30, 2018, the Company had granted unused lines of credit to borrowers
aggregating approximately $47,997,000 and $5,545,000 for commercial lines and open-end consumer lines, respectively.
Other Credit Risks
At June 30, 2019 and 2018, the interest-bearing demand deposits on the consolidated balance sheets represent amounts on deposit with one financial
institution, the Federal Home Loan Bank of Chicago.
F-67
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Note 20: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company as of and for the
years ended June 30, 2019 and 2018:
Assets
Cash and due from banks
Investment in common stock of subsidiary
ESOP loan
Total assets
Liabilities
Other liabilities
Total liabilities
Stockholders’ Equity
Total liabilities and stockholders’ equity
Condensed Balance Sheet
F-68
June 30,
2019
June 30,
2018
$ 4,058 $ 9,060
69,945
2,785
$82,606 $81,790
75,920
2,628
$
145 $
145
82,461
115
115
81,675
$82,606 $81,790
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Condensed Statement of Income and Comprehensive Income (Loss)
Income
Interest on ESOP loan
Deposits with financial institutions
Total income
Expense
Loss Before Income Tax and Equity in Undistributed Income of Subsidiary
Benefit for Income Taxes
Loss Before Equity in Undistributed Loss of Subsidiary
Equity in Undistributed Income of Subsidiary
Net Income
Comprehensive Income (Loss)
F-69
Year Ending
June 30,
2019
Year Ending
June 30,
2018
$
$
$
136
—
136
183
(47)
(11)
(36)
3,594
3,558
7,231
$
$
$
123
—
123
179
(56)
(19)
(37)
1,775
1,738
(797)
Table of Contents
IF Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 2019 and 2018
(Table dollar amounts in thousands)
Condensed Statement of Cash Flows
Cash flows from operating activities
Net income
Items not requiring (providing) cash
Deferred income tax
Net change in other liabilities
Earnings from subsidiary
Net cash provided by operating activities
Cash flows from financing activities
Stock purchase per stock repurchase plan
Dividends paid
Dividends received
Loan for ESOP
Net cash used in financing activities
Net Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
F-70
Year Ended
June 30,
2019
Year Ended
June 30,
2018
$
3,558
$
1,738
—
30
(3,594)
(6)
(6,222)
(930)
2,000
156
(4,996)
(5,002)
9,060
4,058
(39)
87
(1,775)
11
(1,380)
(784)
—
157
(2,007)
(1,996)
11,056
9,060
$
$
Exhibit 4.6
DESCRIPTION OF CAPITAL STOCK
General
IF Bancorp, Inc. is authorized to issue 100,000,000 shares of common stock, par value of $0.01 per share, and 50,000,000 shares of preferred stock,
par value $0.01 per share. Each share of IF Bancorp, Inc. common stock has the same relative rights as, and is identical in all respects to, each other share of
common stock. The shares of common stock of IF Bancorp, Inc. represent nonwithdrawable capital, are not an account of an insurable type, and are not
insured by the Federal Deposit Insurance Corporation or any other government agency.
Common Stock
Dividends. IF Bancorp, Inc. can pay dividends on its common stock if, after giving effect to such distribution, (i) it would be able to pay its
indebtedness as the indebtedness comes due in the usual course of business and (ii) its total assets exceed the sum of its liabilities and the amount needed, if
IF Bancorp, Inc. were to be dissolved at the time of the distribution, to satisfy the preferential rights in the event of dissolution of any holders of capital
stock who have a preference in the event of dissolution; provided, however, that even if IF Bancorp, Inc.’s assets are less than the amount necessary to
satisfy the requirement set forth in (ii) above, IF Bancorp, Inc. may make a distribution from: (A) IF Bancorp, Inc.’s net earnings for the fiscal year in which
the distribution is made; (B) IF Bancorp, Inc.’s net earnings for the preceding fiscal year; or (C) the sum of IF Bancorp, Inc.’s net earnings for the preceding
eight fiscal quarters. The holders of common stock of IF Bancorp, Inc. are entitled to receive and share equally in dividends as may be declared by our
Board of Directors out of funds legally available therefor. If IF Bancorp, Inc. issues shares of preferred stock, the holders thereof may have a priority over
the holders of the common stock with respect to dividends.
Voting Rights. The holders of common stock of IF Bancorp, Inc. have exclusive voting rights in IF Bancorp, Inc. They elect IF Bancorp, Inc.’s Board
of Directors and act on other matters as are required to be presented to them under Maryland law or as are otherwise presented to them by the Board of
Directors. Generally, each holder of common stock is entitled to one vote per share and does not have any right to cumulate votes in the election of
directors. Any person who beneficially owns more than 10% of the then-outstanding shares of IF Bancorp, Inc.’s common stock, however, is not entitled or
permitted to vote any shares of common stock held in excess of the 10% limit. If IF Bancorp, Inc. issues shares of preferred stock, holders of the preferred
stock may also possess voting rights. Certain matters require an 80% stockholder vote.
As a federal stock savings association, corporate powers and control of Iroquois Federal Savings and Loan Association (“Iroquois Federal”) are
vested in its Board of Directors, who elect the officers of Iroquois Federal and who fill any vacancies on the Board of Directors. Voting rights of Iroquois
Federal are vested exclusively in the owner of the shares of capital stock of Iroquois Federal, which is IF Bancorp, Inc., and voted at the direction of IF
Bancorp, Inc.’s Board of Directors. Consequently, the holders of the common stock of IF Bancorp, Inc. do not have direct control of Iroquois Federal.
Liquidation. In the event of any liquidation, dissolution or winding up of Iroquois Federal, IF Bancorp, Inc., as the holder of 100% of Iroquois
Federal’s capital stock, would be entitled to receive all assets of Iroquois Federal available for distribution, after payment or provision for payment of all
debts and liabilities of Iroquois Federal, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the liquidation
account to Eligible Account Holders. In the event of liquidation, dissolution or winding up of IF Bancorp, Inc., the holders of its common stock would be
entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of IF Bancorp, Inc. available for distribution. If
preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the common stock of IF Bancorp, Inc. are not entitled to preemptive rights with respect to any shares that may be
issued, unless such preemptive rights are approved by the Board of Directors. The common stock is not subject to redemption.
Preferred Stock
Preferred stock may be issued with preferences and designations as our Board of Directors may from time to time determine. Our Board of Directors
may, without stockholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
RESTRICTIONS ON ACQUISITION OF IF BANCORP, INC.
The following discussion is a general summary of the material provisions of IF Bancorp, Inc.’s articles of incorporation and bylaws, Iroquois
Federal’s federal stock charter, Maryland corporate law and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The
following description of certain of these provisions is necessarily general and, with respect to provisions contained in IF Bancorp, Inc.’s articles of
incorporation and bylaws and Iroquois Federal’s federal stock charter, reference should be made in each case to the document in question.
IF Bancorp, Inc.’s Articles of Incorporation and Bylaws
IF Bancorp, Inc.’s articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of stockholders that
might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do
so. In addition, these provisions also render the removal of the Board of Directors or management of IF Bancorp, Inc. more difficult.
Directors. The Board of Directors is divided into three classes. The members of each class are elected for a term of three years and only one class of
directors is elected annually. Thus, it would take at least two annual elections to replace a majority of our directors. The bylaws establish qualifications for
Board members, including restrictions on affiliations with competitors of Iroquois Federal and prior legal or regulatory violations.
Evaluation of Offers. The articles of incorporation of IF Bancorp, Inc. provide that its Board of Directors, when evaluating a transaction that would
or may involve a change in control of IF Bancorp, Inc. (whether by purchases of its securities, merger, consolidation, share exchange, dissolution,
liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in
determining what is in the best interests of IF Bancorp, Inc. and its stockholders and in making any recommendation to the stockholders, give due
consideration to all relevant factors, including, but not limited to:
•
•
•
•
•
•
the economic effect, both immediate and long-term, upon IF Bancorp, Inc.’s stockholders, including stockholders, if any, who do not
participate in the transaction;
the social and economic effect on the present and future employees, creditors and customers of, and others dealing with, IF Bancorp, Inc. and
its subsidiaries and on the communities in which IF Bancorp, Inc. and its subsidiaries operate or are located;
whether the proposal is acceptable based on the historical, current or projected future operating results or financial condition of IF Bancorp,
Inc.;
whether a more favorable price could be obtained for IF Bancorp, Inc.’s stock or other securities in the future;
the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would
affect the employees of IF Bancorp, Inc. and its subsidiaries;
the future value of the stock or any other securities of IF Bancorp, Inc. or the other entity to be involved in the proposed transaction;
2
•
•
any antitrust or other legal and regulatory issues that are raised by the proposal;
the business and historical, current or expected future financial condition or operating results of the other entity to be involved in the
transaction, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in
connection with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed transaction;
and
•
the ability of IF Bancorp, Inc. to fulfill its objectives as a financial institution holding company and on the ability of its subsidiary financial
institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations.
If the Board of Directors determines that any proposed transaction should be rejected, it may take any lawful action to defeat such transaction.
Restrictions on Calling Special Meetings. The bylaws provide that special meetings of stockholders can be called by only the President, a majority of
the total number of directors that IF Bancorp, Inc. would have if there were no vacancies on the Board of Directors, or the Secretary upon the written
request of stockholders entitled to cast at least a majority of all votes entitled to vote at the meeting.
Prohibition of Cumulative Voting. The articles of incorporation prohibit cumulative voting for the election of directors.
Limitation of Voting Rights. The articles of incorporation provide that in no event is any person who beneficially owns more than 10% of the then-
outstanding shares of common stock, entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit; provided that such
10% limit shall not apply if a majority of the unaffiliated directors approve the acquisition of shares in excess of the 10% limit prior to such acquisition.
Restrictions on Removing Directors from Office. The articles of incorporation provide that directors may be removed only for cause, and only by the
affirmative vote of the holders of a majority of the voting power of all of our then-outstanding capital stock entitled to vote generally in the election of
directors (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”), voting together as a single class.
Authorized but Unissued Shares. IF Bancorp, Inc. has authorized but unissued shares of common and preferred stock. The articles of incorporation
authorize 50,000,000 shares of serial preferred stock. IF Bancorp, Inc. is authorized to issue preferred stock from time to time in one or more series subject
to applicable provisions of law, and the Board of Directors is authorized to fix the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of redemption of such shares. In addition, the articles of incorporation provide that a
majority of the total number of directors that IF Bancorp, Inc. would have if there were no vacancies on the Board of Directors may, without action by the
stockholders, amend the articles of incorporation to increase or decrease the aggregate number of shares of stock of any class or series that IF Bancorp, Inc.
has the authority to issue. In the event of a proposed merger, tender offer or other attempt to gain control of IF Bancorp, Inc. that the Board of Directors
does not approve, it would be possible for the Board of Directors to authorize the issuance of a series of preferred stock with rights and preferences that
would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future attempt to gain
control of IF Bancorp, Inc.
Amendments to Articles of Incorporation and Bylaws. Except as provided under “— Authorized but Unissued Shares,” above, regarding the
amendment of the articles of incorporation by the Board of Directors to increase or decrease the number of shares authorized for issuance, or as otherwise
allowed by law, any amendment to the articles of incorporation must be approved by our Board of Directors and also by a majority of the outstanding shares
of our voting stock; provided, however, that approval by at least 80% of the outstanding voting stock is generally required to amend the following
provisions:
(i)
The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common
stock;
3
(ii)
(iii)
(iv)
(v)
(vi)
The division of the Board of Directors into three staggered classes;
The ability of the Board of Directors to fill vacancies on the Board;
The requirement that at least a majority of stockholders must vote to remove directors, and can only remove directors for cause;
The ability of the Board of Directors to amend and repeal the bylaws;
The ability of the Board of Directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire IF Bancorp, Inc.;
(vii)
The authority of the Board of Directors to provide for the issuance of preferred stock;
(viii) The validity and effectiveness of any action lawfully authorized by the affirmative vote of the holders of a majority of the total number of
(ix)
(x)
(xi)
(xii)
outstanding shares of common stock;
The number of stockholders constituting a quorum or required for stockholder consent;
The indemnification of current and former directors and officers, as well as employees and other agents, by IF Bancorp, Inc.;
The limitation of liability of officers and directors to IF Bancorp, Inc. for money damages; and
The provision of the articles of incorporation requiring approval of at least 80% of the outstanding voting stock to amend the provisions of the
articles of incorporation provided in (i) through (xi) of this list.
The articles of incorporation also provide that the bylaws may be amended by the affirmative vote of a majority of our directors or by the stockholders
by the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Any amendment of this
supermajority requirement for amendment of the bylaws would also require the approval of 80% of the outstanding voting stock.
Maryland Corporate Law
Business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for
five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger,
consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers,
liquidation plans and reclassifications involving interested stockholders and their affiliates or issuance or reclassification of equity securities. Maryland law
defines an interested stockholder as: (i) any person who beneficially owns 10% or more of the voting power of a corporation’s voting stock after the date on
which the corporation had 100 or more beneficial owners of its stock; or (ii) an affiliate or associate of the corporation at any time after the date on which
the corporation had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then-outstanding voting stock of the corporation. A person is not an interested stockholder under the statute if the
Board of Directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in
approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and
conditions determined by the Board.
4
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be
recommended by the Board of Directors of the corporation and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by
holders of outstanding shares of voting stock of the corporation; and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the
corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an
affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the corporation’s common stockholders receive a
minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the
interested stockholder for its shares.
Change in Control Laws
Under the Change in Bank Control Act, no person may acquire control of an insured savings association or its parent holding company unless the
Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition. The Federal Reserve
Board takes into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
In addition, federal regulations provide that no company may acquire control of a savings association without the prior approval of the Federal Reserve
Board. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the
Federal Reserve Board.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the company’s directors, or a determination by the Federal Reserve Board that the acquirer has
the power to direct, or directly or indirectly exercise a controlling influence over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain
circumstances including where, as is the case with Iroquois Federal, the issuer has registered securities under Section 12 of the Securities Exchange Act of
1934. Federal Reserve Board regulations provide that parties seeking to rebut control will be provided an opportunity to do so in writing.
5
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.0
We consent to the incorporation by reference in Registration Statements No. 333-176222 and No. 333-185075 on Form S-8 of our report dated
September 12, 2019 relating to the consolidated financial statements of IF Bancorp, Inc. and subsidiary as of June 30, 2019 and 2018 and for the years then
ended appearing in this Annual Report on Form 10-K.
/s/ BKD, LLP
Decatur, Illinois
September 12, 2019
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
CERTIFICATION
I, Walter H. Hasselbring, III certify that:
1. I have reviewed this annual report on Form 10-K of IF Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: September 12, 2019
/s/ Walter H. Hasselbring, III
Walter H. Hasselbring, III
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
CERTIFICATION
I, Pamela J. Verkler, certify that:
1. I have reviewed this annual report on Form 10-K of IF Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: September 12, 2019
/s/ Pamela J. Verkler
Pamela J. Verkler
Senior Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Exhibit 32.0
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADDED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of IF Bancorp, Inc. (the “Company”) on Form 10-K for the period ended June 30, 2019 as filed with the
Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company as of and for the period covered by the Report.
/s/ Walter H. Hasselbring, III
Walter H. Hasselbring, III
President and Chief Executive Officer
/s/ Pamela J. Verkler
Pamela J. Verkler
Senior Executive Vice President and
Chief Financial Officer
September 12, 2019