IF Bancorp(IROQ) - 2021 Q2 - Quarterly Report

Part I. Financial Information This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for IF Bancorp, Inc Item 1. Condensed Consolidated Financial Statements Unaudited condensed consolidated financial statements for IF Bancorp, Inc., including balance sheets, income statements, and cash flows, with detailed notes on accounting policies and financial instruments Condensed Consolidated Balance Sheets Presents the company's financial position at December 31, 2020, and June 30, 2020, detailing assets, liabilities, and equity Condensed Consolidated Balance Sheets (Dollars in thousands) | Metric | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Total Assets | $713,399 | $735,517 | | Cash and cash equivalents | $7,665 | $33,467 | | Available-for-sale securities | $167,551 | $162,394 | | Loans, net | $506,786 | $509,817 | | Total Deposits | $587,365 | $601,700 | | Total Liabilities | $628,481 | $652,953 | | Total Stockholders' Equity | $84,918 | $82,564 | Condensed Consolidated Statements of Income Details the company's revenues, expenses, and net income for the three and six months ended December 31, 2020 and 2019 Condensed Consolidated Statements of Income (Dollars in thousands except per share amounts) | Metric | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $5,050 | $4,341 | $9,938 | $8,927 | | Provision (Credit) for Loan Losses | $(49) | $(30) | $266 | $(84) | | Total Noninterest Income | $1,463 | $1,223 | $3,214 | $2,291 | | Total Noninterest Expense | $4,528 | $4,258 | $9,009 | $8,451 | | Net Income | $1,463 | $964 | $2,794 | $2,064 | | Basic Earnings Per Share | $0.48 | $0.32 | $0.92 | $0.65 | | Diluted Earnings Per Share | $0.48 | $0.31 | $0.91 | $0.64 | Condensed Consolidated Statements of Comprehensive Income Outlines net income and other comprehensive income components for the three and six months ended December 31, 2020 and 2019 Condensed Consolidated Statements of Comprehensive Income (Dollars in thousands) | Metric | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $1,463 | $964 | $2,794 | $2,064 | | Other comprehensive income (loss), net of tax | $(272) | $(488) | $(270) | $382 | | Comprehensive Income | $1,191 | $476 | $2,524 | $2,446 | Condensed Consolidated Statements of Stockholders' Equity Summarizes changes in stockholders' equity, including net income, dividends, and stock plan activity, for the six months ended December 31, 2020 and 2019 Condensed Consolidated Statements of Stockholders' Equity (Six Months Ended December 31, 2020, in thousands) | Metric | Balance, July 1, 2020 | Net income | Other comprehensive loss | Dividends on common stock | Stock equity plan | ESOP shares earned | Balance, December 31, 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $82,564 | $2,794 | $(270) | $(454) | $113 | $171 | $84,918 | Condensed Consolidated Statements of Stockholders' Equity (Six Months Ended December 31, 2019, in thousands) | Metric | Balance, July 1, 2019 | Net income | Other comprehensive income | Dividends on common stock | Stock equity plan | Stock repurchase | ESOP shares earned | Balance, December 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $82,461 | $2,064 | $382 | $(487) | $111 | $(7,016) | $213 | $77,728 | Condensed Consolidated Statements of Cash Flows Presents cash flows from operating, investing, and financing activities for the six months ended December 31, 2020 and 2019 Condensed Consolidated Statements of Cash Flows (Six Months Ended December 31, in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,512 | $3,569 | | Net cash used in investing activities | $(4,807) | $(3,296) | | Net cash used in financing activities | $(23,507) | $(49,029) | | Net Decrease in Cash and Cash Equivalents | $(25,802) | $(48,756) | | Cash and Cash Equivalents, End of Period | $7,665 | $10,844 | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1: Basis of Financial Statement Presentation Describes the company's structure, accounting principles, and the impact of the COVID-19 pandemic on financial reporting - IF Bancorp, Inc. is a Maryland corporation, owning Iroquois Federal Savings and Loan Association and its subsidiary L.C.I. Service Corporation. Financial statements are prepared under GAAP for interim reporting, with management estimates and assumptions[24][25] - The COVID-19 pandemic introduces risks and uncertainties, making the full impact on business, financial condition, liquidity, or results of operations difficult to predict[26][27] - Revenue recognition for most transactions (financial instruments, mortgage servicing, bank-owned life insurance) is not subject to ASC 606; specific noninterest income activities like customer service fees, insurance commissions, brokerage commissions, and other service charges are within ASC 606 scope[28][30][33] Note 2: New Accounting Pronouncements Discusses the adoption of new accounting standards, specifically ASU 2016-13 on credit losses, and its future impact - FASB issued ASU 2016-13 (Topic 326) on credit losses, requiring expected credit loss measurement based on historical experience, current conditions, and reasonable and supportable forecasts[31] - The ASU is effective for smaller reporting companies after December 15, 2022. The Company is preparing for adoption, including data collection and transition modeling, but a reliable impact assessment is not yet available[31] Note 3: Stock-based Compensation Details the company's ESOP and Equity Incentive Plan, including share allocations, stock option activity, and restricted stock awards - The Association established an ESOP for eligible employees, which borrowed funds to purchase 384,900 shares (approximately 8% of common stock). The loan is repaid by contributions and dividends, with shares allocated as the loan is repaid[32][34] - The Company accounts for ESOP under ASC Topic 718, recognizing compensation expense equal to the average market price of shares released from collateral[35] ESOP Shares (in thousands) | Metric | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Allocated shares | 146,347 | 127,102 | | Shares committed for release | 9,622 | 19,245 | | Unearned shares | 202,073 | 211,695 | | Total ESOP shares | 358,042 | 358,042 | | Fair value of unearned ESOP shares | $4,452 | $3,652 | - The 2012 Equity Incentive Plan authorizes up to 673,575 shares for options and restricted stock. As of December 31, 2020, 90,050 restricted stock shares and 314,125 stock option shares were available for future grants[38][39] Stock Option Activity (Six Months Ended Dec 31, 2020, in thousands) | Metric | Options | Weighted-Average Exercise Price/Share | Remaining Contractual Life (in years) | Aggregate Intrinsic Value | | :--- | :--- | :--- | :--- | :--- | | Outstanding, June 30, 2020 | 153,143 | $16.63 | | | | Outstanding, December 31, 2020 | 153,143 | $16.63 | 2.9 | $827 | | Exercisable, December 31, 2020 | 153,143 | $16.63 | 2.9 | $827 | Non-Vested Restricted Stock Activity (Six Months Ended Dec 31, 2020) | Metric | Shares | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | | Balance, June 30, 2020 | 40,250 | $16.79 | | Granted | — | — | | Forfeited | — | — | | Earned and issued | 10,062 | $16.79 | | Balance, December 31, 2020 | 30,188 | $16.79 | - Unrecognized compensation expense for non-vested restricted stock awards was $494,000 at December 31, 2020, and is expected to be recognized over 2.9 years[44] Note 4: Earnings Per Common Share ("EPS") Presents basic and diluted earnings per common share calculations for the three and six months ended December 31, 2020 and 2019 Earnings Per Common Share (in thousands, except per share amounts) | Metric | 3 Months Ended Dec 31, 2020 | 3 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,463 | $964 | $2,794 | $2,064 | | Basic average shares outstanding | 3,035,898 | 3,042,630 | 3,033,492 | 3,173,685 | | Diluted average shares outstanding | 3,072,496 | 3,099,912 | 3,057,633 | 3,228,463 | | Basic earnings per common share | $0.48 | $0.32 | $0.92 | $0.65 | | Diluted earnings per common share | $0.48 | $0.31 | $0.91 | $0.64 | Note 5: Securities Provides details on available-for-sale securities, including fair values, unrealized gains/losses, and temporarily impaired investments Available-for-sale securities (in thousands) | Category | Amortized Cost (Dec 31, 2020) | Fair Value (Dec 31, 2020) | Amortized Cost (Jun 30, 2020) | Fair Value (Jun 30, 2020) | | :--- | :--- | :--- | :--- | :--- | | U.S. Government and federal agency and GSE's | $7,525 | $8,170 | $7,528 | $8,236 | | Mortgage-backed: GSE residential | $148,886 | $154,521 | $143,033 | $148,855 | | Small Business Administration | $3,471 | $3,609 | $3,578 | $3,640 | | State and political subdivisions | $1,251 | $1,251 | $1,449 | $1,663 | | Total | $161,133 | $167,551 | $155,588 | $162,394 | - Gross gains of $204,000 and gross losses of $0 from sales of available-for-sale securities were realized for the six months ended December 31, 2020[52] - Total fair value of investments with unrealized losses was $24.15 million (14% of portfolio) at Dec 31, 2020, and $24.57 million (15% of portfolio) at Jun 30, 2020, primarily due to interest rate increases and considered temporary[53] Temporarily Impaired Securities with Unrealized Losses (in thousands) | Description of Securities | Fair Value (Dec 31, 2020) | Unrealized Losses (Dec 31, 2020) | Fair Value (Jun 30, 2020) | Unrealized Losses (Jun 30, 2020) | | :--- | :--- | :--- | :--- | :--- | | Mortgage-backed: GSE residential | $23,877 | $(273) | $24,513 | $(222) | | State and political subdivisions | — | — | $61 | $(1) | | Total temporarily impaired securities | $23,877 | $(273) | $24,574 | $(223) | Note 6: Loans and Allowance for Loan Losses Details loan portfolio composition, allowance for loan losses, credit risk profile, nonaccrual loans, and COVID-19 loan modifications Classes of Loans (in thousands) | Loan Type | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | One- to four-family, including home equity loans | $123,493 | $128,876 | | Multi-family | $105,836 | $96,195 | | Commercial | $152,448 | $145,113 | | Home equity lines of credit | $7,858 | $8,551 | | Construction | $13,870 | $22,042 | | Commercial | $101,528 | $107,581 | | Consumer | $8,265 | $7,529 | | Total loans | $513,298 | $515,887 | | Less: Allowance for loan losses | $6,449 | $6,234 | | Loans, net | $506,786 | $509,817 | - The Company's primary lending market is in Illinois and Indiana counties, with an additional office in Missouri. Lending activities include residential, multi-family, commercial real estate, commercial business, home equity, construction, and consumer loans[57] - As of December 31, 2020, the Company had 191 SBA Paycheck Protection Program (PPP) loans totaling $17.4 million, which are covered by a 100% government guaranty[70] - The loan portfolio includes a concentration of commercial real estate loans, totaling $264.8 million at December 31, 2020[73] Allowance for Loan Losses and Loans by Impairment Method (Six Months Ended Dec 31, 2020, in thousands) | Category | Balance, beginning of period | Provision charged to expense | Losses charged off | Recoveries | Balance, end of period | | :--- | :--- | :--- | :--- | :--- | :--- | | Allowance for loan losses: | | | | | | | One- to Four-Family | $1,044 | $(20) | $(15) | $2 | $1,011 | | Multi-Family | $1,514 | $230 | $0 | $0 | $1,744 | | Commercial | $1,706 | $76 | $0 | $0 | $1,782 | | Home Equity Lines of Credit | $87 | $(8) | $0 | $0 | $79 | | Construction | $240 | $(110) | $0 | $0 | $130 | | Commercial | $1,583 | $81 | $(40) | $12 | $1,636 | | Consumer | $60 | $17 | $(16) | $6 | $67 | | Total Allowance | $6,234 | $266 | $(71) | $20 | $6,449 | - The allowance for loan losses increased by $215,000 to $6.4 million at December 31, 2020, from $6.2 million at June 30, 2020, primarily due to increased risk from portfolio mix changes and additional reserves for COVID-19 modified loans[227] - The Company categorizes loans into risk categories (Pass, Watch, Substandard, Doubtful, Loss) based on borrower's ability to service debt, collateral value, and economic trends[87][88][89][90][92] Credit Risk Profile of Loan Portfolio by Rating Category (Dec 31, 2020, in thousands) | Category | One- to Four-Family | Multi-Family | Commercial | Home Equity Lines of Credit | Construction | Commercial | Consumer | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Pass | $122,964 | $105,569 | $151,232 | $7,858 | $13,870 | $99,991 | $8,262 | $509,746 | | Watch | — | — | $979 | — | — | $1,469 | — | $2,448 | | Substandard | $529 | $267 | $237 | — | — | $68 | $3 | $1,104 | | Doubtful | — | — | — | — | — | — | — | — | | Loss | — | — | — | — | — | — | — | — | | Total | $123,493 | $105,836 | $152,448 | $7,858 | $13,870 | $101,528 | $8,265 | $513,298 | Loan Portfolio Aging Analysis (Dec 31, 2020, in thousands) | Category | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or Greater | Total Past Due | Current | Total Loans Receivable | Total Loans 90 Days Past Due & Accruing | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | One- to four-family | $599 | $147 | $226 | $972 | $122,521 | $123,493 | $123 | | Multi-family | — | — | — | — | $105,836 | $105,836 | — | | Commercial | $42 | — | — | $42 | $152,406 | $152,448 | — | | Home equity lines of credit | $23 | — | — | $23 | $7,835 | $7,858 | — | | Construction | — | — | — | — | $13,870 | $13,870 | — | | Commercial | $303 | — | $17 | $320 | $101,208 | $101,528 | $17 | | Consumer | $26 | $40 | — | $66 | $8,199 | $8,265 | — | | Total | $993 | $187 | $243 | $1,423 | $511,875 | $513,298 | $140 | - Nonaccrual loans totaled $157,000 at December 31, 2020, down from $405,000 at June 30, 2020[111] - Troubled Debt Restructurings (TDRs) totaled $1.28 million at December 31, 2020, down from $1.33 million at June 30, 2020. One TDR for $123,000 was in default at Dec 31, 2020[113][117] - 169 loans ($85.7 million) received COVID-19 modifications, allowing interest-only payments for up to six months. As of December 31, 2020, 148 loans ($58.5 million) returned to principal and interest payments, with 21 loans ($27.2 million) still under temporary modifications[116][178] - Foreclosed assets decreased to $377,000 at December 31, 2020, from $386,000 at June 30, 2020[226] Note 7: Federal Home Loan Bank Stock Reports the company's investment in Federal Home Loan Bank stock, a required investment for member institutions Federal Home Loan Bank Stock (in thousands) | Date | Amount | | :--- | :--- | | December 31, 2020 | $4,197.5 | | June 30, 2020 | $3,028.0 | - FHLB stock is a required investment for member institutions, with the investment amount based on a predetermined formula[121] Note 8: Accumulated Other Comprehensive Income Details the components of accumulated other comprehensive income, including unrealized gains on securities and postretirement obligations Components of Accumulated Other Comprehensive Income (in thousands) | Component | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Net unrealized gains on securities available-for-sale | $6,417 | $6,805 | | Net unrealized postretirement health benefit plan obligations | $(916) | $(926) | | Subtotal | $5,501 | $5,879 | | Tax effect | $(1,568) | $(1,676) | | Total | $3,933 | $4,203 | Note 9: Changes in Accumulated Other Comprehensive Income (AOCI) by Component Summarizes amounts reclassified from AOCI into net income, including realized gains/losses on securities and actuarial pension items Amounts Reclassified from AOCI (in thousands) | Metric | 3 Months Ended Dec 31, 2020 | 3 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2019 | Affected Line Item | | :--- | :--- | :--- | :--- | :--- | :--- | | Realized gains (losses) on available-for-sale securities | $0 | $(8) | $204 | $(7) | Net realized gains (losses) on sale of available-for-sale securities | | Actuarial losses (pension items) | $8 | $5 | $10 | $10 | Computation of net periodic pension cost | | Total reclassified amount before tax | $8 | $(3) | $214 | $3 | | | Tax expense (credit) | $2 | $(1) | $61 | $1 | Provision for Income Tax | | Total reclassification out of AOCI | $6 | $(2) | $153 | $2 | Net Income | Note 10: Income Taxes Provides a reconciliation of income tax expense, detailing the impact of statutory rates, tax-exempt interest, and other adjustments Reconciliation of Income Tax Expense (in thousands) | Metric | 3 Months Ended Dec 31, 2020 | 3 Months Ended Dec 31, 2019 | 6 Months Ended Dec 31, 2020 | 6 Months Ended Dec 31, 2019 | | :--- | :--- | :--- | :--- | :--- | | Computed at the statutory rate | $427 | $281 | $814 | $599 | | Decrease resulting from Tax exempt interest | $(2) | $(5) | $(4) | $(11) | | Cash surrender value of life insurance | $(14) | $(14) | $(29) | $(29) | | State income taxes | $153 | $103 | $288 | $213 | | Other | $7 | $7 | $14 | $15 | | Actual expense | $571 | $372 | $1,083 | $787 | Note 11: Regulatory Capital Discusses the company's compliance with Basel III Capital Rules and the Community Bank Leverage Ratio, confirming its 'well capitalized' status - The Association is subject to Basel III Capital Rules, which became fully phased in on January 1, 2019, including a 2.5% capital conservation buffer[128][129] - The Community Bank Leverage Ratio (CBLR) was temporarily reduced to 8% through end of 2020 and 8.5% through 2021 (from 9%) by the CARES Act and Economic Aid Act. The Association opted into the CBLR[130] - As of December 31, 2020, the Association was categorized as "well capitalized" under regulatory framework[131] Note 12: Disclosures About Fair Value of Assets Explains fair value measurements, categorizing assets into Level 1, 2, and 3, and detailing valuation techniques and unobservable inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[132][134] Recurring Fair Value Measurements (Dec 31, 2020, in thousands) | Asset | Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | U.S. Government and federal agency and GSE's | $8,170 | $0 | $8,170 | $0 | | Mortgage-backed: GSE residential | $154,521 | $0 | $154,521 | $0 | | Small Business Administration | $3,609 | $0 | $3,609 | $0 | | State and political subdivisions | $1,251 | $0 | $1,251 | $0 | | Mortgage servicing rights | $756 | $0 | $0 | $756 | - Mortgage servicing rights are classified as Level 3 due to valuation using discounted cash flow models with unobservable inputs[137] Level 3 Reconciliation - Mortgage Servicing Rights (in thousands) | Metric | Amount | | :--- | :--- | | Balance, July 1, 2020 | $715 | | Total realized and unrealized gains and losses included in net income | $(34) | | Servicing rights that result from asset transfers | $191 | | Payments received and loans refinanced | $(116) | | Balance, December 31, 2020 | $756 | Nonrecurring Fair Value Measurements (Dec 31, 2020, in thousands) | Asset | Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Foreclosed assets | $170 | $0 | $0 | $170 | - Collateral-dependent impaired loans are classified as Level 3, with fair value based on appraised collateral value less estimated selling costs[141][142] Quantitative Information about Unobservable (Level 3) Inputs (Dec 31, 2020) | Asset | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | | :--- | :--- | :--- | :--- | | Mortgage servicing rights | Discounted cash flow | Discount rate | 9.5% - 11.5% (9.5%) | | | | Constant prepayment rate | 15.2% - 18.1% (15.5%) | | | | Probability of default | 0.04% - 0.12% (0.11%) | | Foreclosed assets | Market comparable properties | Comparability adjustments (%) | 15.0% (15.0%) | Note 13: Commitments Outlines commitments to extend credit and lines of credit, noting that total amounts do not necessarily represent future cash requirements - Commitments to extend credit and lines of credit are agreements to lend, subject to contract conditions. Total commitment amounts do not necessarily represent future cash requirements as a portion may expire undrawn[149][150] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and operating results, including COVID-19 impacts, asset quality, liquidity, and capital resources Overview Provides a high-level summary of IF Bancorp, Inc.'s business, key financial metrics, and regulatory capital status - IF Bancorp, Inc. is a savings and loan holding company, primarily engaged in banking and mortgage services through its subsidiary, Iroquois Federal Savings and Loan Association, in Illinois and Missouri[155][156] - The Company's results depend on net interest income, provision for loan losses, noninterest income (customer service fees, brokerage/insurance commissions, loan sales, mortgage banking), and noninterest expense (compensation, occupancy, equipment)[157] Key Financial Metrics (Six Months Ended December 31) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net interest rate spread | 2.73% | 2.48% | +0.25% | | Net interest income | $9.9 million | $8.9 million | +$1.0 million | | Net income | $2.8 million | $2.1 million | +$0.7 million | Asset Quality Metrics | Metric | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.1% ($297k) | 0.1% ($709k) | | Non-performing assets to total assets | 0.1% ($674k) | 0.2% ($1.1M) | - The Association was categorized as "well capitalized" under regulatory capital requirements at December 31, 2020[161] Recent Developments: COVID-19 and the CARES Act Discusses the economic impact of the COVID-19 pandemic, government responses, and the company's operational and financial adjustments - The COVID-19 pandemic has caused significant economic and social disruption, leading to federal government actions like the CARES Act and Economic Aid Act to provide financial aid and economic stimulus[163][164] - The ultimate impact of COVID-19 on the Company's operations, financial performance, asset valuations, and liquidity remains uncertain, with potential for material adverse impacts[165][166] - The Company's December 31, 2020 financial condition was not significantly impacted by COVID-19, though the allowance for loan losses increased due to economic forecasts and reserves for modified loans[168] - Fee income and interest income could be reduced due to temporary fee waivers and payment deferrals for affected borrowers, though the materiality of future impacts is uncertain[169][170] - The Company maintains sufficient capital and liquidity, with access to wholesale funding markets, but prolonged elevated funding costs or deposit withdrawals could have adverse effects[171][172] - The Company activated its Disaster Recovery/Business Continuity Plan, including a Pandemic Response Plan, implementing employee safety protocols, remote work, and limited branch access, resulting in minimal operational impacts[174][175] - 169 loans totaling $85.7 million received COVID-19 modifications, allowing interest-only payments for up to six months. As of December 31, 2020, 148 loans ($58.5 million) returned to principal and interest payments, with 21 loans ($27.2 million) still under temporary modifications[116][178] - The Company participated in the SBA PPP, closing 305 loans ($26.3 million). After forgiveness, 191 loans totaling $17.4 million remained at December 31, 2020, fully guaranteed by the U.S. government[179] - Food and accommodation loans, identified as high-risk industries, totaled $8.3 million (1.6% of total loans) at December 31, 2020, with $1.4 million in COVID-19 modifications. None were 90+ days past due[181] Critical Accounting Policies Highlights key accounting policies, including the allowance for loan losses and income tax accounting, which involve significant management judgment - The allowance for loan losses is a critical policy, highly susceptible to changes in credit quality, charge-offs, and past due loans, especially given the substantial commercial real estate portfolio[184] - The allowance is estimated based on current economic conditions, historical loss experience, portfolio nature, borrower strength, and collateral value, requiring significant judgment and subject to revision[185] - Income tax accounting involves recognizing deferred tax assets and liabilities, with a valuation allowance required if realization is unlikely. This depends on subjective judgments about future income and economic conditions[186][187] Comparison of Financial Condition at December 31, 2020 and June 30, 2020 Compares the company's balance sheet items, including assets, liabilities, and equity, between December 31, 2020, and June 30, 2020 Key Balance Sheet Changes (in millions) | Metric | Dec 31, 2020 | Jun 30, 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total assets | $713.4 | $735.5 | $(22.1) | (3.0%) | | Cash and cash equivalents | $7.7 | $33.5 | $(25.8) | (77.0%) | | Net loans receivable | $506.8 | $509.8 | $(3.0) | (0.6%) | | Investment securities | $167.6 | $162.4 | $5.2 | 3.2% | | Total Deposits | $587.4 | $601.7 | $(14.3) | (2.4%) | | Noninterest bearing demand accounts | $35.6 | $87.5 | $(51.9) | (59.3%) | | Savings, NOW, and money market accounts | $274.8 | $232.7 | $42.0 | 18.1% | | FHLB advances | $24.0 | $34.5 | $(10.5) | (30.4%) | | Total equity | $84.9 | $82.6 | $2.4 | 2.9% | - The decrease in total assets was primarily due to a $25.8 million decrease in cash and cash equivalents and a $3.0 million decrease in net loans, partially offset by a $5.2 million increase in investment securities[189] - The $51.9 million decrease in noninterest bearing demand accounts was mainly due to a $45.3 million withdrawal by a public entity, while savings, NOW, and money market accounts increased $42.0 million due to other public entity deposits and brokered money market funds[195] - Total equity increased $2.4 million due to net income of $2.8 million and ESOP/stock equity plan activity, partially offset by a decrease in accumulated other comprehensive income and dividend payments[197] Comparison of Operating Results for the Six Months Ended December 31, 2020 and 2019 Analyzes the company's operating performance, including net income, net interest income, and expenses, for the six months ended December 31, 2020 and 2019 Key Operating Results (Six Months Ended December 31, in thousands) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,794 | $2,064 | $730 | 35.4% | | Net interest income | $9,938 | $8,927 | $1,011 | 11.3% | | Interest and dividend income | $12,503 | $13,797 | $(1,294) | (9.4%) | | Interest expense | $2,565 | $4,870 | $(2,305) | (47.3%) | | Provision for loan losses | $266 | $(84) | $350 | N/A | | Noninterest income | $3,214 | $2,291 | $923 | 40.3% | | Noninterest expense | $9,009 | $8,451 | $558 | 6.6% | | Effective tax rate | 27.9% | 27.6% | +0.3% | | - Net interest income increased due to a significant decrease in interest expense (down 47.3%) despite a decrease in interest and dividend income (down 9.4%)[199] - The average cost of interest-bearing deposits decreased by 87 basis points to 0.84%, and the average cost of borrowings decreased by 88 basis points to 1.34%[203][204] - Noninterest income increased primarily due to a $763,000 increase in gain on sale of loans and a $211,000 increase in net realized gain on sale of available-for-sale securities, driven by historically low interest rates[207] - Noninterest expense increased due to higher compensation and benefits ($484,000), deposit insurance premium ($62,000), and equipment expense ($72,000)[208] Allowance for Loan Losses and Nonperforming Assets | Metric | Dec 31, 2020 | Jun 30, 2020 | | :--- | :--- | :--- | | Allowance to non-performing loans | 2,173.59% | 879.27% | | Allowance to total loans outstanding | 1.26% | 1.21% | | Allowance to total loans outstanding, excluding PPP loans | 1.30% | 1.27% | | Net charge-offs to average total loans outstanding (annualized) | 0.02% | 0.04% | | Total non-performing loans to total loans | 0.06% | 0.14% | | Total non-performing assets to total assets | 0.09% | 0.15% | Comparison of Operating Results for the Three Months Ended December 31, 2020 and 2019 Examines the company's operating performance, including net income, net interest income, and expenses, for the three months ended December 31, 2020 and 2019 Key Operating Results (Three Months Ended December 31, in thousands) | Metric | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net income | $1,463 | $964 | $499 | 51.8% | | Net interest income | $5,050 | $4,341 | $709 | 16.3% | | Interest and dividend income | $6,238 | $6,789 | $(551) | (8.1%) | | Interest expense | $1,188 | $2,448 | $(1,260) | (51.5%) | | Provision for loan losses | $(49) | $(30) | $(19) | N/A | | Noninterest income | $1,463 | $1,223 | $240 | 19.6% | | Noninterest expense | $4,528 | $4,258 | $270 | 6.3% | | Effective tax rate | 28.1% | 27.8% | +0.3% | | - Net interest income increased by 16.3% due to a 51.5% decrease in interest expense, despite an 8.1% decrease in interest and dividend income[211] - The average cost of interest-bearing deposits decreased to 0.77% from 1.70%, and the average cost of borrowings decreased to 1.46% from 2.33%[215][216] - Noninterest income increased primarily due to a $340,000 increase in net gain on sale of loans, driven by higher agent fees on loans sold to the Federal Home Loan Bank of Chicago[218] - Noninterest expense increased due to higher compensation and benefits ($272,000), deposit insurance premium ($46,000), equipment expense ($35,000), and advertising ($39,000)[219] Asset Quality Assesses the quality of the loan portfolio, including non-accrual loans, substandard assets, troubled debt restructurings, and foreclosed assets Non-Accrual Loans (in thousands) | Loan Type | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | One- to four-family | $103 | $81 | | Commercial | $51 | $304 | | Consumer | $3 | $5 | | Total | $157 | $405 | - Loans classified as substandard totaled $1.1 million at December 31, 2020, including one- to four-family, multi-family, commercial real estate, commercial business, and consumer loans[223] - Watch rated assets totaled $2.4 million at December 31, 2020, comprising commercial real estate loans ($979,000) and commercial business loans ($1.5 million)[224] - Troubled debt restructurings (TDRs) were $1.3 million at December 31, 2020, consisting of one- to four-family and commercial business loans[225] - Foreclosed assets decreased to $377,000 at December 31, 2020, from $386,000 at June 30, 2020[226] Net Charge-offs by Portfolio Segment (Weighted 12-quarter historical) | Portfolio segment | Dec 31, 2020 | Jun 30, 2020 | | :--- | :--- | :--- | | One- to four-family | 0.25% | 0.25% | | Multi-family | 0.00% | 0.00% | | Commercial | 0.00% | 0.00% | | HELOC | 0.05% | 0.11% | | Construction | 0.00% | 0.00% | | Commercial business | 0.10% | 0.08% | | Consumer | 0.03% | 0.06% | | Entire portfolio total | 0.09% | 0.09% | - The allowance for loan losses attributable to qualitative factors increased to $6.0 million at December 31, 2020, from $5.8 million at June 30, 2020, primarily due to COVID-19 concerns[231] Liquidity and Capital Resources Evaluates the company's liquidity position, cash flow, borrowing capacity, and regulatory capital compliance - The Company's liquidity ratio averaged 23.6% of total assets for the three months ended December 31, 2020, indicating sufficient liquidity[233] Cash Flow Summary (Six Months Ended December 31, in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2.5 | $3.6 | | Net cash used in investing activities | $(4.8) | $(3.3) | | Net cash used in financing activities | $(23.5) | $(49.0) | | Net Decrease in Cash and Cash Equivalents | $(25.8) | $(48.8) | | Cash and Cash Equivalents, End of Period | $7.7 | $10.8 | Commitments (in thousands) | Commitment Type | December 31, 2020 | June 30, 2020 | | :--- | :--- | :--- | | Commitments to fund loans | $20,014 | $16,873 | | Lines of credit | $88,602 | $86,182 | - At December 31, 2020, certificates of deposit due within one year totaled $232.3 million (39.6% of total deposits). The Company aims to replace higher-cost certificates with lower-cost deposits[239] - The Company has significant borrowing capacity: $107.3 million from FHLB, $4.5 million from CIBC Bank line of credit, and $27.5 million from the Federal Reserve[240] - The Association is "well capitalized" with a Community Bank Leverage Ratio of 11.1% at December 31, 2020, exceeding the temporary 8.0% minimum[246][247] Average Balances and Yields Presents average balances, yields, and costs for interest-earning assets and interest-bearing liabilities for the three and six months ended December 31 Average Balances, Yields, and Costs (Three Months Ended December 31, in thousands) | Metric | 2020 Average Balance | 2020 Yield/Cost | 2019 Average Balance | 2019 Yield/Cost | | :--- | :--- | :--- | :--- | :--- | | Loans | $515,408 | 4.16% | $495,715 | 4.68% | | Total interest-earning assets | $691,271 | 3.61% | $651,007 | 4.17% | | Total interest-bearing deposits | $560,113 | 0.77% | $522,006 | 1.70% | | Total interest-bearing liabilities | $591,725 | 0.80% | $561,238 | 1.74% | | Net interest income | | $5,050 | | $4,341 | | Interest rate spread | | 2.81% | | 2.43% | | Net interest margin | | 2.92% | | 2.67% | Average Balances, Yields, and Costs (Six Months Ended December 31, in thousands) | Metric | 2020 Average Balance | 2020 Yield/Cost | 2019 Average Balance | 2019 Yield/Cost | | :--- | :--- | :--- | :--- | :--- | | Loans | $517,550 | 4.14% | $495,808 | 4.72% | | Total interest-earning assets | $694,773 | 3.60% | $653,748 | 4.22% | | Total interest-bearing deposits | $552,333 | 0.84% | $525,253 | 1.71% | | Total interest-bearing liabilities | $590,755 | 0.87% | $558,359 | 1.74% | | Net interest income | | $9,938 | | $8,927 | | Interest rate spread | | 2.73% | | 2.48% | | Net interest margin | | 2.86% | | 2.73% | Rate/Volume Analysis Analyzes the impact of changes in interest rates and volumes on net interest income for the six months ended December 31 Change in Net Interest Income Due to Volume and Rate (Six Months Ended December 31, in thousands) | Category | Volume Change | Rate Change | Total Change | | :--- | :--- | :--- | :--- | | Interest-earning assets | $1,823 | $(3,117) | $(1,294) | | Interest-bearing liabilities | $296 | $(2,601) | $(2,305) | | Change in net interest income | $1,527 | $(516) | $1,011 | - For the six months ended December 31, 2020, the increase in net interest income was primarily driven by volume changes in interest-earning assets and interest-bearing liabilities, which offset the negative impact of rate changes[256] Item 3. Quantitative and Qualitative Disclosures about Market Risk Assesses the company's market risk, particularly interest rate risk, through quarterly internal analysis of Earnings at Risk and Value at Risk - An internal interest rate risk analysis is performed at least quarterly to assess Earnings at Risk and Value at Risk[257] - As of December 31, 2020, there were no material changes in interest rate risk from the analysis disclosed in the Company's Form 10-K for the fiscal year ended June 30, 2020[257] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective with no material changes in internal controls - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2020[258] - No material changes in the Company's internal controls over financial reporting occurred during the quarter ended December 31, 2020[259] Part II. Other Information This section includes disclosures on legal proceedings, risk factors, sales of equity securities, defaults, mine safety, and exhibits Item 1. Legal Proceedings Details ongoing legal actions, with management assessing no material adverse effect on the company's financial condition or operations - The Company is subject to various legal actions arising in the normal course of business[261] - Management believes the resolution of these legal actions is not expected to have a material adverse effect on the Association's or the Company's financial condition or results of operations[261] Item 1A. Risk Factors Refers investors to the Annual Report on Form 10-K for detailed risk factors, noting potential material impacts from known and unknown risks - Investors should carefully consider the risk factors discussed in "Item 1A.—Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2020[262] - Additional risks and uncertainties not currently known or deemed immaterial could also materially adversely affect the business, financial condition, or results of operations[262] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or related use of proceeds during the period - None[263] Item 3. Defaults upon Senior Securities Indicates no defaults occurred on senior securities during the reporting period - None[264] Item 4. Mine Safety Disclosures States that there are no mine safety disclosures required for this reporting period - None[265] Item 5. Other Information Confirms that no other material information requires disclosure in this section - None[266] Item 6. Exhibits Lists exhibits filed with the report, including CEO/CFO certifications and interactive data files for financial statements - Exhibits include certifications of Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[268] - Interactive data files (XBRL) are provided for the Condensed Consolidated Financial Statements and notes[268] Signature Page The report was signed by the President and CEO, and Senior Executive Vice President and CFO, on February 11, 2020 - The report was signed on February 11, 2020, by Walter H. Hasselbring III (President and CEO) and Pamela J. Verkler (Senior Executive Vice President and CFO)[271][272]