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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, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-35226

 

 

IF BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   45-1834449
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
201 East Cherry Street, Watseka, Illinois   60970
(Address of principal executive offices)   (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

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   IROQ   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         ☐   Accelerated filer ☐   Smaller reporting company         ☒
Non-accelerated filer           ☒   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, 2019 was $53,640,260.

The number of shares outstanding of the registrant’s common stock as of September 4, 2020 was 3,240,376.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on November 23, 2020 are incorporated by reference in Part III of this Form 10-K.

 

 

 


INDEX

 

     Page  

PART I

     3  

ITEM 1.

  

BUSINESS

     3  

ITEM 1A.

  

RISK FACTORS

     40  

ITEM 1B.

  

UNRESOLVED STAFF COMMENTS

     48  

ITEM 2.

  

PROPERTIES

     49  

ITEM 3.

  

LEGAL PROCEEDINGS

     49  

ITEM 4.

  

MINE SAFETY DISCLOSURES

     50  

PART II

     50  

ITEM 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     50  

ITEM 6.

  

SELECTED FINANCIAL DATA

     51  

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

     53  

ITEM 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     67  

ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     67  

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     67  

ITEM 9A.

  

CONTROLS AND PROCEDURES

     67  

ITEM 9B.

  

OTHER INFORMATION

     68  

PART III

     69  

ITEM 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     69  

ITEM 11.

  

EXECUTIVE COMPENSATION

     69  

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

     69  

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     70  

ITEM 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     70  

PART IV

        71  

ITEM 15.

  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     71  

ITEM 16.

  

FORM 10-K SUMMARY

     72  

SIGNATURES

     73  


Cautionary Note Regarding Forward-Looking Statements

This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “contemplate,” “continue,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this report. For a discussion of factors that may affect our results of operations and financial condition, and the accuracy of our forward-looking statements, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.

Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus that has caused the COVID-19 pandemic can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, our forward-looking statements are subject to the following additional risks, uncertainties and assumptions:

 

   

demand for our products and services may decline as a result of the COVID-19 pandemic making it difficult to grow assets and income;

 

   

the COVID-19 pandemic may continue to have a negative impact on the economy and overall financial stability of us, the communities where we have our branches, the state of Illinois and the United States, and may also exacerbate the effects of the other factors listed herein under “Item 1A. Risk Factors”;

 

   

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

   

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

   

limitations may be placed on our ability to foreclose on properties during the pandemic;

 

   

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods which will adversely affect our net income, including possibly through the reversal of interest income and fees that we are accruing under COVID-19 related exceptions to normal GAAP accounting;

 

   

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

   

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

   

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

 

   

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

 

2


   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

our wealth management revenues may decline with continuing market turmoil;

 

   

our cyber security risks are increased by the COVID-19 pandemic as the result of an increase in the number of employees working remotely;

 

   

litigation, regulatory enforcement risk and reputation risk regarding our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guaranties;

 

   

the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors;

 

   

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

 

   

Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

PART I

 

ITEM 1.

BUSINESS

General

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, 2020 and 2019, we had consolidated assets of $735.5 million and $723.9 million, consolidated deposits of $601.7 million and $607.0 million and consolidated equity of $82.6 million and $82.5 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.

 

3


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.

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 27,000 in July 2019, a decrease of 8.8% since April 2010, Vermilion County had an estimated population of 76,000 in July 2019, a decrease of 7.2% since April 2010, and Kankakee County had an estimated population of 110,000 in July 2019, a decrease of 3.2% since April 2010, while Champaign County had an estimated population of 210,000 in July 2019, an increase of 4.3% since April 2010. Unemployment rates in our primary market have increased over the last year. According to the Illinois Department of Employment Security, unemployment, on a non-seasonally adjusted basis, increased from 3.3% to 8.5% in Iroquois County, from 4.2% to 14.8% in Vermilion County, from 3.2% to 10.1% in Champaign County, and from 4.0% to 13.3% in Kankakee County.

The economy in our primary market is fairly diversified, with employment in services, wholesale/retail trade, and government serving as the basis of the Iroquois County, Vermilion County, Champaign County and Kankakee economies. Manufacturing jobs, which tend to be higher paying jobs, are also a large source of employment in Vermilion, Champaign and Kankakee Counties, while Iroquois County is heavily influenced by agriculture and agriculture related businesses. Hospitals and other health care providers, local schools and trucking/distribution businesses also serve as major sources of employment.

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.

 

4


Our deposit sources are primarily concentrated in the communities surrounding our banking offices located in Iroquois and Vermilion Counties, Illinois. As of June 30, 2019, 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 26.68% deposit market share. As of the same date, we ranked first of 16 bank and thrift institutions with offices in Vermilion County with a 23.24% deposit market share, we ranked 17th of 29 bank and thrift institutions with offices in Champaign County, with a 0.98% deposit market share and we ranked 12th of 16 bank and thrift institutions with offices in Kankakee County, with a 1.87% deposit market share.

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, 2020 and 2019, the amount of such loans equaled $4.2 million and $4.8 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, 2020 and 2019, the amount of such loans equaled $24.0 million and $29.5 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. Total loans in the SLLP equaled $6.1 million, or 7.1%, of capital and surplus as of June 30, 2020, and $12.2 million, or 15.1%, as of June 30, 2019.

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 $116.7 million and $99.0 million as of June 30, 2020 and 2019, 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.

 

5


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 $552,000, $316,000, $206,000, $186,000 and $0 at June 30, 2020, 2019, 2018, 2017 and 2016, respectively.

 

     At June 30,  
     2020     2019     2018     2017     2016  
     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount      Percent  
     (Dollars in thousands)  

Real estate loans:

          

One- to four-family (1)

   $  128,876       24.98   $  129,290       26.19   $  134,977       27.99   $  140,647       31.47   $  149,538        33.29

Multi-family

     96,195       18.65       104,663       21.20       107,436       22.28       87,228       19.52       84,200        18.15  

Commercial

     145,113       28.13       143,367       29.04       140,944       29.22       133,841       29.94       119,643        26.64  

Home equity lines of credit

     8,551       1.66       8,938       1.81       9,058       1.88       7,520       1.68       8,138        1.81  

Construction

     22,042       4.27       16,113       3.26       13,763       2.85       7,421       1.66       19,698        4.39  

Commercial

     107,581       20.85       84,246       17.06       68,720       14.25       62,392       13.96       57,826        12.87  

Consumer

     7,529       1.46       7,136       1.44       7,366       1.53       7,905       1.77       10,086        2.25  
  

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

     515,887       100.00     493,753       100.00     482,264       100.00     446,954       100.00     449,129        100.00
    

 

 

     

 

 

     

 

 

     

 

 

      

 

 

 

Less:

                     

Unearned fees and discounts, net

     (164       (349       (161       (203       30     

Allowance for loan losses

     6,234         6,328         5,945         6,835         5,351     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

Total loans, net

   $  509,817       $  487,774       $  476,480       $  440,322       $  443,748     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

    

 

(1)

Includes home equity loans.

 

6


Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2020. We had no demand loans or loans having no stated repayment schedule or maturity at June 30, 2020.

 

     One- to four-family
residential real estate (1)
    Multi-family
real estate
    Commercial
real estate
    Home equity lines of
credit
 
   Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
   (Dollars in thousands)  

Due During the Years Ending June 30,

                    

2021

   $ 11,167        4.32   $  10,974        4.13   $ 37,323        3.81   $ 910        4.37

2022

     4,922        4.62       16,260        4.19       13,353        4.10       727        4.29  

2023 to 2024

     21,339        5.17       26,330        4.26       46,598        4.88       1,628        5.50  

2025 to 2029

     23,962        4.58       42,291        4.15       42,200        3.89       789        5.20  

2030 to 2034

     9,411        4.57       —          —         1,991        4.24       3,638        4.00  

2035 and beyond

     58,075        4.18       340        6.33       3,648        5.08       859        3.59  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $  128,876        4.48   $ 96,195        4.19   $ 145,113        4.24   $  8,551        4.42
  

 

 

      

 

 

      

 

 

      

 

 

    

 

     Construction     Commercial     Consumer     Total  
     Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
     (Dollars in thousands)  

Due During the Years Ending June 30,

                    

2021

   $  12,159        3.67   $ 57,257        3.84   $  1,214        4.06   $  131,004        3.89

2022

     504        3.50       29,341        1.41       886        8.45       65,993        3.02  

2023 to 2024

     5,104        3.25       6,659        5.56       2,900        5.13       110,558        4.77  

2025 to 2029

     3,538        4.37       13,742        4.53       2,529        3.98       129,051        4.20  

2030 to 2034

     —          —         546        3.75       —          —         15,586        4.36  

2035 and beyond

     737        4.91       36        5.50       —          —         63,695        4.25  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $  22,042        3.72   $ 107,581        3.37   $  7,529        4.96   $  515,887        4.10
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1)

Includes home equity loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at June 30, 2020 that are contractually due after June 30, 2021.

 

     Due After June 30, 2021  
     Fixed      Adjustable      Total  
     (In thousands)  

Real estate loans:

        

One- to four-family (1)

   $ 53,383      $  64,326      $  117,709  

Multi-family

     75,693        9,528        85,221  

Commercial

     94,004        13,786        107,790  

Home equity lines of credit

     2,711        4,930        7,641  

Construction

     9,146        737        9,883  

Commercial

     46,914        3,410        50,324  

Consumer

     6,315        —          6,315  
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 288,166      $  96,717      $  384,883  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

7


One- to Four-Family Residential Mortgage Loans. At June 30, 2020, $128.9 million, or 25.0% 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, 2020, fixed-rate one- to four-family residential mortgage loans totaled $62.9 million, or 48.8% of our one- to four-family residential mortgage loans, and adjustable-rate one- to four-family residential mortgage loans totaled $66.0 million, or 51.2% 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 $510,400 for single-family homes. At June 30, 2020, our average one- to four-family residential mortgage loan had a principal balance of $47,000. We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.” At June 30, 2020, $24.6 million, or 19.1%, of our total one- to four-family residential loans had principal balances in excess of $510,400. 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 $8.0 million and $3.4 million for the years ended June 30, 2020 and 2019, 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 $33.3 million and $13.7 million for the years ended June 30, 2020 and 2019, 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 3.0% on our five and seven year adjustable-rate mortgage loans.

 

8


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, 2020, approximately $2.0 million, or 1.6% 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, 2020, $145.1 million, or 28.1% of our loan portfolio consisted of commercial real estate loans, and $96.2 million, or 18.7% of our loan portfolio consisted of multi-family (which we consider to be five or more units) residential real estate loans. At June 30, 2020, 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, 2020, loans secured by commercial real estate had an average loan balance of $556,000. 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, 2020, $15.4 million or 10.6% 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, 2020, $9.8 million or 10.2% 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

 

9


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, 2020, our largest commercial real estate loan had an outstanding balance of $6.4 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, 2020, we had $8.6 million, or 1.7% of our total loan portfolio in home equity lines of credit. At that date we had $7.6 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, 2020, we had $107.6 million of commercial business loans outstanding, representing 20.9% of our total loan portfolio. At that date, we also had $44.6 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

 

10


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.

Commercial business loans also include Small Business Administration (SBA) Paycheck Protection Program (PPP) loans which are covered by a 100% government guaranty. As of June 30, 2020, the Company had 295 PPP loans totaling $26.2 million.

At June 30, 2020, our largest commercial business loan outstanding was for $4.9 million and was secured by commercial business assets. At June 30, 2020, 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, 2020, $22.0 million, or 4.3%, 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, 2020, 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, 2020 was for a 93 unit apartment building and had a principal balance of $7.1 million. This loan was performing in accordance with its terms at June 30, 2020.

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

 

11


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 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, 2020 and 2019, the amount of commercial loan participations totaled $24.0 million and $29.5 million, respectively, of which $8.1 million and $12.0 million, at June 30, 2020 and 2019 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, 2020 and 2019, we sold $41.3 million and $17.1 million of loans to the Federal Home Loan Bank of Chicago under the program. Prior to December 2008, we also retained some credit risk associated with loans sold to the Federal Home Loan Bank of Chicago. For additional information regarding retained risk associated with these loans, see “Non-performing and Problem Assets—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

 

12


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.

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, 2020, 2019, 2018, 2017 and 2016, we had troubled debt restructurings of approximately $1.3 million, $1.5 million, $2.9 million, $3.1 million and $2.3 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.

 

13


     At June 30,  
     2020     2019     2018     2017     2016  
     (Dollars in thousands)  

Non-accrual loans:

          

Real estate loans:

          

One- to four-family (1)

   $ 81     $ 414     $  6,339     $ 9,105     $  1,604  

Multi-family

     —         —         116       146       185  

Commercial

     —         18       50       25       63  

Home equity lines of credit

     15       20       —         24       316  

Construction

     —         —         —         —         —    

Commercial

     304       60       30       84       9  

Consumer

     5       29       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     405       541       6,535       9,384       2,177  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans delinquent 90 days or greater and still accruing:

          

Real estate loans:

          

One- to four-family (1)

     304       226       293       155       4  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity line of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Consumer

     —         —         1       —         8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans delinquent 90 days or greater and still accruing

     304       226       294       155       12  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     709       767       6,829       9,539       2,189  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performing troubled debt restructurings

     1,255       1,310       2,675       2,211       2,084  

Total non-performing loans and performing troubled debt restructurings

   $  1,964     $  2,264     $ 9,504     $  11,750     $ 4,273  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned and foreclosed assets:

          

Real estate loans:

          

One- to four-family (1)

     186       539       —         210       338  

Multi-family

     —         —         —         —         —    

Commercial

     200       219       —         —         —    

Home equity lines of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     —         20       219       219       —    

Consumer

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and foreclosed assets

     386       778       219       429       338  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 1,095     $ 1,545     $ 7,048     $ 9,968     $ 2,527  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Non-performing loans to total loans

     0.14     0.16     1.42     2.13     0.49

Non-performing assets to total assets

     0.15     0.21     1.10     1.70     0.42

 

(1)

Includes home equity loans.

For the years ended June 30, 2020 and 2019, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $29,000 and $25,000, respectively. We recognized no interest income on such loans for the years ended June 30, 2020 and 2019.

At June 30, 2020, our non-accrual loans totaled $405,000. These non-accrual loans consisted primarily of three one- to four-family residential loans with aggregate principal balances totaling $81,000 and no specific allowances, one home equity line of credit with a principal balance of $15,000 and no specific allowance, nine commercial business loans with aggregate principal balances totaling $304,000 with no specific allowances, and one consumer loan with a principal balance of $5,000 and no specific allowance.

 

14


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, 2020 and 2019, we had $1.3 million and $1.5 million, respectively, of troubled debt restructurings. At June 30, 2020 our troubled debt restructurings consisted of $1.3 million of residential one- to four-family mortgage loans, $15,000 of home equity lines of credit loans, and $59,000 of commercial business loans, all of which were impaired.

For the years ended June 30, 2020 and 2019, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $69,000 and $84,000, respectively. We recognized interest income of $60,000 and $56,000 on such modified loans for the years ended June 30, 2020 and 2019, respectively.

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed into law on March 27, 2020, certain COVID-19 loan modifications are not designated as TDRs. The CARES Act allows the Company to presume a loan modification is not a TDR if it is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the National Emergency or (b) December 31, 2020. During the year ended June 30, 2020, the Company had 176 COVID-19 loan modifications for a total of $85.6 million. These modifications allowed borrowers to defer the principal component of loan payments for up to six months.

 

15


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, 2020

                                         

Real estate loans:

                 

One- to four-family (1)

     5        225        6        385        11        610  

Multi-family

     —          —          —          —          —          —    

Commercial

     2        95        —          —          2        95  

Home equity lines of credit

     —          —          —          —          —          —    

Construction

     —          —          —          —          —          —    

Commercial

     1        4        8        244        9        248  

Consumer

     2        43        —          —          2        43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     10      $  367        14      $ 629        24      $ 996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2019

                                         

Real estate loans:

                 

One- to four-family (1)

     5        255        10        481        15        736  

Multi-family

     —          —          —          —          —          —    

Commercial

     1        6        2        12        3        18  

Home equity lines of credit

     1        26        1        20        2        46  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          2        60        2        60  

Consumer

     —          —          5        29        5        29  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     7      $ 287        20      $ 602        27      $ 889  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2018

                                         

Real estate loans:

                 

One- to four-family (1)

     4        207        10        6,633        14        6,840  

Multi-family

     —          —          1        2        1        2  

Commercial

     1        13        2        37        3        50  

Home equity lines of credit

     1        23        —          —          1        23  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          1        30        1        30  

Consumer

     2        29        1        1        3        30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     8      $ 272        15      $  6,703        23      $  6,975  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2017

                                         

Real estate loans:

                 

One- to four-family (1)

     4        158        5        540        9        698  

Multi-family

     —          —          —          —          —          —    

Commercial

     1        84        —          —          1        84  

Home equity lines of credit

     —          —          1        24        1        24  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    

Consumer

     3        6        —          —          3        6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     8      $ 248        6      $ 564        14      $ 812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2016

                                         

Real estate loans:

                 

One- to four-family (1)

     6        148        9        1,489        15        1,637  

Multi-family

     —          —          —          —          —          —    

Commercial

     2        97        1        27        3        124  

Home equity lines of credit

     —          —          1        316        1        316  

Construction

     —          —          —          —          —          —    

Commercial

     1        100        —          —          1        100  

Consumer

     1        5        1        8        2        13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     10      $ 350        12      $ 1,840        22      $ 2,190  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

16


Total delinquent loans increased by $107,000 to $996,000 at June 30, 2020 from $889,000 at June 30, 2019. The increase in delinquent loans was due primarily to an increase of $188,000 in commercial business loans, an increase of $77,000 in commercial real estate loans, and an increase of $14,000 in consumer loans, partially offset by a decrease of $126,000 in one- to four-family loans and a decrease of $46,000 in home equity lines of credit.

During the year ended June 30, 2020, the Company had 176 COVID-19 loan modifications for a total of $85.6 million that allowed borrowers to defer the principal component of loan payments for up to six months. These modifications included 63 one- to four-family loans for $7.7 million, 25 multi-family loans for $37.0 million, 44 commercial real estate loans for $23.6 million, 2 home equity lines of credit for $114,000, 2 construction loans for $7.5 million, 38 commercial business loans for $9.7 million and 2 consumer loans for $27,000.

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, 2020, we had $386,000 in foreclosed assets compared to $778,000 as of June 30, 2019. Foreclosed assets at June 30, 2020, consisted of $186,000 in residential real estate, and $200,000 in commercial non-occupied property, while foreclosed assets at June 30, 2019, consisted of of $539,000 in residential real estate properties, $219,000 in commercial non-occupied property, and $20,000 in business assets.

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, 2020 and 2019, include approximately $709,000 and $767,000 of nonperforming loans, respectfully. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $0 and $23,000 at June 30, 2020 and 2019, respectively. Substandard assets shown include foreclosed assets.

 

17


     At June 30,  
     2020      2019  
     (In thousands)  

Classified assets:

     

Substandard

   $  1,892      $  4,096  

Doubtful

     244        10  

Loss

     —          —    
  

 

 

    

 

 

 

Total classified assets

     2,136        4,106  

Watch

     3,633        2,415  
  

 

 

    

 

 

 

Total criticized assets

   $ 5,769      $ 6,521  
  

 

 

    

 

 

 

At June 30, 2020, substandard assets consisted of $822,000 of one- to four-family residential mortgage loans, $270,000 in multi-family loans, $313,000 of commercial real estate loans, $15,000 in home equity lines of credit, $81,000 of commercial business loans, $5,000 of consumer loans, and $386,000 of foreclosed assets held for sale. At June 30, 2020, watch assets consisted of $775,000 of one- to four-family loans, $1.1 million of commercial real estate loans, $134,000 of home equity lines of credit, and $1.7 million of commercial business loans, while doubtful assets consisted of $244,000 in commercial business loans. At June 30, 2020, no assets were classified as loss.

Other Loans of Concern. At June 30, 2020, 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 Mortgage Partnership Finance (MPF) Original Program. However, while we retain the servicing of these loans and receive both servicing fees and credit enhancement fees, they are not our assets. We sold $33.3 million in loans under the MPF Original program in the year ended June 30, 2020, and we continue to service approximately $64.5 million of loans in the MPF 100 and MPF Original programs combined, for which our maximum potential credit risk is approximately $2.6 million. We established an FHLB Recourse Liability reserve of $320,000 against this $2.6 million in potential credit risk, and we have received $447,000 in credit enhancement income on these loans since 2004. From June 2000 to June 30, 2020, we experienced only $134,000 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.

 

18


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.

 

   

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.

 

19


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.

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 decreased $94,000 to $6.2 million at June 30, 2020, from $6.3 million at June 30, 2019. The decrease was a result of a decrease in the multi-family loan portfolio and the addition of SBA PPP loans that do not require a reserve since they are 100% guaranteed by the Small Business Administration (“SBA”), partially offset by an adjustment for COVID-19 concerns.

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. 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, 2020 and June 30, 2019:

 

Portfolio segment

  June 30, 2020
Net charge-offs –
12 quarter weighted historical
    June 30, 2019
Net charge-offs –
12 quarter weighted historical
 

Real Estate:

   

One- to four-family

    0.25%       0.38%  

Multi-family

    0.00%       0.00%  

Commercial

    0.00%       0.00%  

HELOC

    0.11%       0.17%  

Construction

    0.00%       0.00%  

Commercial business

    0.08%       0.01%  

Consumer

    0.06%       0.02%  

Entire portfolio total

    0.09%       0.12%  

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:

 

20


Portfolio segment

   Qualitative factor applied at
June 30, 2020
    Qualitative factor applied at
June 30, 2019
 

Real Estate:

    

One- to four-family

     0.57%       0.42%  

Multi-family

     1.57%       1.57%  

Commercial

     1.20%       1.18%  

HELOC

     0.90%       0.83%  

Construction

     1.09%       1.32%  

Commercial business

     1.85%(1)       1.96%  

Consumer

     0.70%       0.75%  

Entire portfolio total

     1.18%(1)       1.16%  

 

(1)

At June 30, 2020, $26.2 million in PPP loans with no associated allowance, were excluded from the calculation of qualitative factors since they are guaranteed by the SBA.

At June 30, 2020, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $5.8 million, as compared to $5.7 million at June 30, 2019. The general increase in qualitative factors was attributable primarily to an adjustment for COVID-19 concerns, partially offset by a change in loan portfolio mix.

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.

 

21


     At or For the Fiscal Years Ended June 30,  
     2020     2019     2018     2017     2016  
     (Dollars in thousands)  

Balance at beginning of period

   $ 6,328     $ 5,945     $ 6,835     $  5,351     $ 4,211  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

          

Real estate loans:

          

One- to four-family (1)

     (40     (17     (1,608     (232     (188

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         (8     (3

Home equity lines of credit

     —         (15     (24     —         (32

Construction

     —         —         —         —         —    

Commercial

     (191     —         (30     —         —    

Consumer

     (37     (18     (14     (35     (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (268     (50     (1,676     (275     (233

Recoveries:

          

Real estate loans:

          

One- to four-family (1)

     3       22       1       32       5  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity lines of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     31       —         —         —         —    

Consumer

     12       4       8       6       2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     46       26       9       38       7  

Net charge-offs

     (222     (24     (1,667     (237     (226
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     128       407       777       1,721       1,366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 6,234     $ 6,328     $ 5,945     $ 6,835     $ 5,351  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net charge-offs to average loans outstanding

     0.04     0.01     0.35     0.05     0.05

Allowance for loan losses to non-performing loans at end of period

     879.27     825.03     87.06     71.66     244.39

Allowance for loan losses to total loans at end of period

     1.21     1.28     1.23     1.53     1.19

Allowance for loan losses to total loans excluding PPP loans at end of period

     1.27     1.28     1.23     1.53     1.19

 

(1)

Includes home equity loans.

 

22


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.

 

     At June 30,  
     2020     2019     2018  
     Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
     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)  

Real estate loans:

               

One- to four-family (1)

   $  1,044        25.0   $  1,031        26.2   $ 997        28.0

Multi-family

     1,514        18.6       1,642        21.2       1,650        22.3  

Commercial

     1,706        28.1       1,623        29.0       1,604        29.2  

Home equity lines of credit

     87        1.7       89        1.8       91        1.9  

Construction

     240        4.3       213        3.3       168        2.9  

Commercial

     1,583        20.8       1,659        17.1       1,373        14.2  

Consumer

     60        1.5       71        1.4       62        1.5  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     6,234          6,328          5,945     

Unallocated

     —            —            —       
  

 

 

      

 

 

      

 

 

    

Total

   $ 6,234        100.0   $ 6,328        100.0   $  5,945        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

     At June 30,  
     2017     2016  
     Allowance for
Loan Losses
     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)  

Real estate loans:

          

One- to four-family (1)

   $  2,519        31.5   $  1,198        33.3

Multi-family

     1,336        19.5       1,202        18.8  

Commercial

     1,520        29.9       1,399        26.6  

Home equity lines of credit

     76        1.7       94        1.8  

Construction

     75        1.6       227        4.4  

Commercial

     1,242        14.0       1,140        12.9  

Consumer

     67        1.8       91        2.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     6,835          5,351     

Unallocated

     —            —       
  

 

 

      

 

 

    

Total

   $ 6,835        100.0   $ 5,351        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes home equity loans.

Net charge-offs increased to $222,000 for the year ended June 30, 2020, from $24,000 for the year ended June 30, 2019. Charge-offs for the year ended June 30, 2020 involved one- to four-family residential real estate loans, commercial business loans, and consumer loans, while most of the charge-offs during the year ended June 30, 2019, involved one- to four-family residential real estate loans, home equity lines of credit and consumer loans. In addition, non-performing loans decreased by $58,000 during the year ended June 30, 2020.

The allowance for loan losses decreased $94,000, or 1.5%, to $6.2 million at June 30, 2020 from $6.3 million at June 30, 2019. The decrease was due to a decrease in the multi-family loan portfolio and the addition of SBA PPP loans that do not require a reserve since they are 100% guaranteed by the SBA. At June 30, 2020, the allowance for loan losses represented 1.21% of total loans compared to 1.28% of total loans at June 30, 2019. At June 30, 2020, the allowance for loan losses, excluding PPP loans of $26.2 million, represented 1.27% of total loans.

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

 

23


changes to the policy are subject to ratification by the full Board of Directors. This policy dictates that investment 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, 2020, 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, 2020, we held $1.7 million of municipal securities, all of which were issued by local governments and school districts within our market area.

 

24


Federal Home Loan Bank Stock. At June 30, 2020, we held $3.0 million of Federal Home Loan Bank of Chicago common stock in connection with our borrowing activities totaling $34.5 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, 2020, we had $9.3 million invested in bank-owned life insurance, which was 11.3% 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, 2020, 2019 and 2018 all of such securities were classified as available for sale.

 

     At June 30,  
     2020      2019      2018  
     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

   $ 7,528      $ 8,236      $ 12,654      $ 12,950      $ 24,757      $ 23,922  

U.S. government sponsored mortgage-backed securities

     143,033        148,855        124,615        125,510        100,534        97,059  

Small Business Administration

     3,578        3,640        4,911        4,935        1,965        1,891  

State and political subdivisions

     1,449        1,663        2,725        2,896        2,980        3,124  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  155,588      $  162,394      $  144,905      $  146,291      $  130,236      $  125,996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2020 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     More than One Year
through Five Years
    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
    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

  $ —         —     $ 6,038       2.56   $ 1,490       2.24   $ —         —     $ 7,528     $ 8,236       2.49

U.S. government sponsored mortgage-backed securities

    —         —         8,263       2.46       45,148       2.56       89,622       2.11       143,033       148,855       2.27  

Small Business Administration

    —         —         —         —         1,581       2.61       1,997       2.40       3,578       3,640       2.49  

State and political subdivisions

    —         —         62       4.83       1,387       2.97       —         —         1,449       1,663       3.05  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

Total

  $ —         —     $  14,363       2.51   $  49,606       2.56   $  91,619       2.12   $  155,588     $  162,394       2.29
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

26


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, 2020, we had $12.4 million in brokered certificates of deposit and $5.7 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.

 

     For the Fiscal Year Ended
June 30, 2020
    For the Fiscal Year Ended
June 30, 2019
 
     Average
Balance
     Percent     Weighted
Average Rate
    Average
Balance
     Percent     Weighted
Average Rate
 
     (Dollars in thousands)  

Deposit type:

              

Noninterest bearing demand

   $ 37,874        6.77     0.00   $ 28,429        5.50     0.00

Interest-bearing checking or NOW

     63,964        11.43       0.29       50,668        9.81       0.28  

Savings accounts

     46,552        8.32       0.35       43,183        8.36       0.41  

Money market accounts

     103,150        18.43       1.02       97,555        18.89       1.29  

Certificates of deposit

     308,089        55.05       2.11       296,692        57.44       1.94  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $  559,629        100.00     1.41   $  516,527        100.00     1.42
  

 

 

    

 

 

     

 

 

    

 

 

   

 

     For the Fiscal Year Ended
June 30, 2018
 
     Average
Balance
     Percent     Weighted
Average Rate
 
     (Dollars in thousands)  

Deposit type:

       

Noninterest bearing demand

   $ 21,029        4.53     0.00

Interest-bearing checking or NOW

     46,299        9.98       0.14  

Savings accounts

     43,159        9.31       0.24  

Money market accounts

     96,984        20.92       0.88  

Certificates of deposit

     256,250        55.26       1.34  
  

 

 

    

 

 

   

Total deposits

   $  453,721        100.00     0.96
  

 

 

    

 

 

   

 

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As of June 30, 2020, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $151.5 million. The following table sets forth the maturity of those certificates as of June 30, 2020.

 

     At
June 30, 2020
 
     (In thousands)  

Three months or less

   $ 40,287  

Over three months through six months

     28,413  

Over six months through one year

     67,135  

Over one year to three years

     15,113  

Over three years

     508  
  

 

 

 

Total

   $  151,456  
  

 

 

 

The following table sets forth the amount of our certificates of deposit classified by interest rate as of the dates indicated.

 

     At June 30,  
     2020      2019      2018  
     (In thousands)  

Interest Rate:

        

Less than 2.00%

   $  205,757      $  125,493      $  216,275  

2.00% to 2.99%

     73,725        199,791        45,565  

3.00% to 3.99%

     2,009        5,001        1,740  

4.00% to 4.99%

     —          —          —    

5.00% to 5.99%

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 281,491      $ 330,285      $ 263,580  
  

 

 

    

 

 

    

 

 

 

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Chicago, a line of credit from CIBC Bank USA, and repurchase agreements. At June 30, 2020, we had access to additional Federal Home Loan Bank of Chicago advances of up to $126.8 million based on our collateral and an additional $4.5 million on the line of credit from CIBC Bank USA. 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.

 

28


     At or For the Fiscal Years Ended
June 30,
 
     2020     2019     2018  
     (Dollars in thousands)  

Federal Home Loan Bank of Chicago

      

Balance at end of period

   $  34,500     $  24,000     $  67,500  

Average balance during period

     35,625       61,017       61,374  

Maximum outstanding at any month end

     65,500       81,500       67,500  

Weighted average interest rate at end of period

     1.44     2.11     1.88

Average interest rate during period

     1.74     2.48     1.34

CIBC Bank USA

      

Balance at end of period

   $ 3,000       N/A       N/A  

Average balance during period

     4,000       N/A       N/A  

Maximum outstanding at any month end

     5,000       N/A       N/A  

Weighted average interest rate at end of period

     2.50     N/A       N/A  

Average interest rate during period

     3.34     N/A       N/A  

Repurchase Agreements

      

Balance at end of period

   $ 3,738     $ 2,015     $ 2,281  

Average balance during period

     3,398       2,400       2,623  

Maximum outstanding at any month end

     3,939       2,840       2,980  

Weighted average interest rate at end of period

     0.58     1.12     0.94

Average interest rate during period

     0.87     0.84     0.63

Personnel

At June 30, 2020, the Association had 104 full-time employees and 6 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. 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.

 

29


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.

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.

Effective July 1, 2019, the OCC issued a final rule, pursuant to federal legislation, that permits a federal savings association to elect to exercise national bank powers without converting to a national bank charter. The election is available to any federal savings association that had total consolidated assets of $20 billion or less as of December 31, 2017. The effect of the so-called “covered savings association” election is that a federal savings association generally has the same rights and privileges, including broad commercial lending authority as a national bank, that has its main office in the same location as the home office of the covered savings association. The covered savings association is also subject to the same duties, restrictions, liabilities and limitations applicable to a national bank.    A covered savings association retains its federal savings association charter and continues to be subject to the corporate governance laws and regulations applicable to such associations, including as to its bylaws, board of directors and shareholders, capital distributions and mergers. Iroquois Federal has not made such an election.

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 Wall Street Reform and Consumer Protection Act of 2010 (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

 

30


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 beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

Legislation enacted in May 2018, required the federal banking agencies, including the OCC, to establish for institutions with assets of less than $10 billion a “community bank leverage ratio” of between 8 to 10%. Institutions with capital equaling or exceeding the ratio and otherwise meeting the specified requirements (including off-balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing the alternative framework are considered to comply with the applicable regulatory capital requirements, including the risk-based requirements.

The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. An institution that temporarily ceases to meet any qualifying criteria is provided with a two quarter grace period to again achieve compliance. Failure to meet the qualifying criteria within the grace period or maintain a leverage ratio of 8% or greater requires the institution to comply with the generally applicable capital requirements.

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 required that the community bank leverage ratio be temporarily lowered to 8%. The federal regulators issued a rule making the reduced ratio effective April 23, 2020. The rules also established a two quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% community bank leverage ratio requirement, or fails to meet other qualifying criteria, so long as the bank maintains a leverage ratio of 7% or greater. Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.

At June 30, 2020, 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 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

 

31


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, 2020, Iroquois Federal was in compliance with its loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank that has not exercised the covered savings association election, 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, 2020, Iroquois Federal held 71.9% 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.

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

 

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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.

In June 2020, the OCC published amendments to its Community Reinvestment Act regulations. The final rule clarifies and expands the activities that qualify for Community Reinvestment Act credit, updates where activities count for such credit and, according to the agency, seeks to create a more consistent and objective method for evaluating Community Reinvestment Act performance. The final rule is effective October 1, 2020 but compliance with the revised requirements is not mandatory until January 1, 2024 for institutions of Iroquois Federal Bank’s size.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited 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.

 

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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, 2020, Iroquois Federal met the criteria for being considered “well-capitalized.”

The previously referenced 2018 legislation provides that qualifying institutions that elect and comply with the alternative community bank ratio framework will be considered to be “well-capitalized.”

“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

 

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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 (along with certain specified adjustments), 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.

Currently, the assessment range (inclusive of possible adjustments) for insured institutions of less than $10 billion of total assets is 1.5 basis points to 30 basis points. 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%.

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.

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 11 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, 2020, Iroquois Federal was in compliance with this requirement.

 

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Federal Reserve System

Federal Reserve Board regulations historically required savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At June 30, 2020, Iroquois Federal was in compliance with these reserve requirements. Due to a change in its approach to monetary policy, the Federal Reserve Board reduced the reserve requirement to zero, effective March 26, 2020. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.

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.

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;

 

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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, 2020, 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, 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.

 

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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. Pursuant to federal legislation, the Federal Reserve Board has established for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository institution subsidiaries. However, subsequent legislation extended the applicability of the “Small Bank Holding Company” exception to the Federal Reserve Board’s consolidated capital requirements to bank and savings and loan holding companies with less than $3.0 billion in consolidated assets.. Consequently, holding companies with up to $3 billion of consolidated assets are generally not subject to the holding company capital requirements unless otherwise directed by the Federal Reserve Board.

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 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.

In addition, the federal Bank Holding Company Act provides that no “company” may acquire control of a savings and loan holding company without the prior approval of the Federal Reserve Board. Any company that acquires such “control,” as defined in the applicable regulations, becomes a “savings and loan holding company” subject to registration, examination and regulation by the Federal Reserve Board. In March 2020, the Federal Reserve Board adopted a final rule, effective September 30, 2020, that revises its framework for determining whether a company has a “controlling influence” over a bank or savings and loan holding company for that purpose.

 

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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.

 

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ITEM 1A.

RISK FACTORS

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

The coronavirus 2019 (COVID-19) pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees prepared to work remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations and could exacerbate the effects of other risk factors disclosed herein:

 

   

demand for our products and services may decline, making it difficult to grow assets and income;

 

   

extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

 

   

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

 

   

limitations may be placed on our ability to foreclose on properties during the pandemic;

 

   

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods which will adversely affect our net income, including possibly through the reversal of interest income and fees that we are accruing under COVID-19 related exceptions to normal GAAP accounting;

 

   

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

 

   

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

 

   

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

 

   

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

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

   

our wealth management revenues may decline with continuing market turmoil;

 

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our cyber security risks are increased by the COVID-19 pandemic as the result of an increase in the number of employees working remotely;

 

   

litigation, regulatory enforcement risk and reputation risk regarding our participation in the PPP and the risk that the SBA may not fund some or all PPP loan guaranties;

 

   

the unanticipated loss or unavailability of key employees due to the outbreak, which could harm our ability to operate our business or execute our business strategy, especially as we may not be successful in finding and integrating suitable successors;

 

   

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

 

   

Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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. Since our mutual-to-stock conversion in 2011 we have emphasized the origination of our commercial loans. At June 30, 2020, $145.1 million, or 28.1%, of our total loan portfolio consisted of commercial real estate loans, $96.2 million, or 18.7%, of our total loan portfolio consisted of multi-family loans, and $107.6 million, or 20.9%, 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.

A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.

In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease, and our interest expense may increase as we access non-core funding sources or increase deposit rates to fund our operations. A continuation of a low interest rate environment or an increase in our cost of funds may adversely affect our net interest income, which would have an adverse effect on our profitability.

 

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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, 2020, 7.6% of our loans had remaining maturities of, or reprice after, 5 years or longer, while 88.2% 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.”

Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition, liquidity and results of operations. Changes in the level of interest rates also may negatively affect the value of our assets and ultimately affect our earnings.

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. 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.

 

42


A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.

Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans. A deterioration in economic conditions, especially local conditions, as a result of COVID-19 or otherwise, could have the following consequences, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations, and could more negatively affect us compare to a financial institution that operates with more geographic diversity:

 

   

demand for our products and services may decline;

 

   

loan delinquencies, problem assets and foreclosures may increase;

 

   

collateral for loans, especially real estate, may decline in value, thereby reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and

 

   

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

Moreover, a significant decline in general economic conditions caused by inflation, recession, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, an epidemic or pandemic, unemployment or other factors beyond our control could further impact these local economic conditions and could further negatively affect the financial results of our banking operations. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.

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

 

43


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.

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, 2020, our loan participations totaled $24.0 million, or 4.6% 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, 2020, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent and still accruing, and real estate owned) totaled $1.1 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

 

44


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 was1.21% of total loans, and 1.27% of total loans excluding PPP loans, at June 30, 2020. Additions to our allowance could materially decrease our net income.

The Financial Accounting Standards Board has delayed the effective date of the Current Expected Credit Loss, or CECL, standard. CECL will be effective for us on July 1, 2023. CECL will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for loan losses that are incurred or probable, which may require us to increase our allowance for credit losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses.

In addition, bank regulators periodically review our allowance for loan losses and, as a result of such reviews, we may be required 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.

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.

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.

The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are suspected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations

 

45


could result in fines or sanctions, including restrictions on pursuing acquisitions or establishing new branches. The policies and procedures we have adopted that are designed to assist in compliance with these laws and regulations may not be effective in preventing violations of these laws and regulations. Furthermore, these rules and regulations continue to evolve and expand. We have not been subject to fines or other penalties, or have suffered business or reputational harm, as a result of money laundering activities in the past.

We are subject to stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or limit our ability to pay dividends or repurchase shares.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and defines “capital” for calculating these ratios. The application of these capital requirements could, among other things, result in lower returns on equity, and result in regulatory actions if we are unable to comply with such requirements. In addition, our ability to pay dividends to could be limited if we do not meet a minimum capital conservation buffer required by the capital rules. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements.”

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.

Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes, and the like. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

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

 

46


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.

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. As a result of the COVID-19 pandemic, our potential information security risks have amplified, as employees work remotely and customers have substantially increased their use of online and mobile banking. 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.

 

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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.

 

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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 $10.2 million at June 30, 2020. The following tables set forth information with respect to our banking offices, including the expiration date of leases with respect to leased facilities.

 

Location

   Year
Opened
     Owned/
Leased
 

Main Office:

     

201 East Cherry Street

Watseka, Illinois 60970

     1964        Owned  

Branches:

     

619 North Gilbert Street

Danville, Illinois 61832

     1973        Owned  

175 East Fourth Avenue

Clifton, Illinois 60927

     1977        Owned  

511 South Chicago Road

Hoopeston, Illinois 60942

     1979        Owned  

108 Arbours Drive

Savoy, Illinois 61874

     2014        Owned  

421 Brown Boulevard

Bourbonnais, Illinois 60914

     2017        Owned  

2411 Village Green Place

Champaign, Illinois 61822

     2018        Owned  

Loan Production Office:

     

3535 Highway 54

Osage Beach, Missouri 65065

     2006        Owned  

Administrative Office:

     

204 East Cherry Street

Watseka, Illinois 60970

     2001        Owned  

Data Center:

     

183 Bethel Drive

Bourbonnais, Illinois 60914

     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.

 

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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

Holders.

As of September 1, 2020, there were 361 holders of record of the Company’s common stock.

Dividends.

The Company paid dividends of $0.15 per share in October 2019 and April 2020, and $0.125 per share in October 2018 and April 2019. 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.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

There were no share repurchases during the quarter ended June 30, 2020. The Company does not have an active stock repurchase plan in place.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

     At June 30,  
     2020      2019      2018      2017      2016  
     (In thousands)  

Selected Financial Condition Data:

              

Total assets

   $  735,517      $  723,870      $  638,923      $  585,474      $  595,565  

Cash and cash equivalents

     33,467        59,600        4,754        7,766        6,449  

Investment securities available for sale

     162,394        146,291        125,996        111,611        121,328  

Federal Home Loan Bank of Chicago stock

     3,028        1,174        3,285        2,543        5,425  

Loans held for sale

     552        316        206        186        —    

Loans receivable, net

     509,265        487,458        476,274        440,136        443,748  

Foreclosed assets held for sale

     386        778        219        429        338  

Bank-owned life insurance

     9,345        9,072        8,803        8,823        8,555  

Deposits

     601,700        607,023        480,421        439,146        433,708  

Federal Home Loan Bank of Chicago advances

     34,500        24,000        67,500        53,500        67,000  

Total equity

     82,564        82,461        81,675        83,969        83,972  

 

     For the Fiscal Year Ended June 30,  
     2020      2019      2018      2017      2016  
     (In thousands)  

Selected Operating Data:

              

Interest income

   $  26,982      $  26,725      $  22,794      $  21,338      $  20,373  

Interest expense

     8,694        8,854        5,289        3,617        3,313  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     18,288        17,871        17,505        17,721        17,060  

Provision for loan losses

     128        407        777        1,721        1,366  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     18,160        17,464        16,728        16,000        15,694  

Noninterest income

     4,810        4,159        4,091        4,728        4,095  

Noninterest expense

     17,086        16,772        16,356        14,535        14,209  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     5,884        4,851        4,463        6,193        5,580  

Income tax expense

     1,639        1,293        2,725        2,274        2,014  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,245      $ 3,558      $ 1,738      $ 3,919      $ 3,566  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

51


     At or For the Fiscal Years Ended June 30,  
     2020     2019     2018     2017     2016  

Selected Financial Ratios and Other Data:

          

Performance Ratios:

          

Return on average assets (net income as a percentage of average total assets)

     0.61     0.53     0.28     0.67     0.62

Return on average equity (net income as a percentage of average equity)

     5.30     4.41     2.09     4.69     4.35

Interest rate spread (1)

     2.52     2.54     2.77     3.02     3.00

Net interest margin (2)

     2.75     2.78     2.93     3.14     3.11

Efficiency ratio (3)

     73.97     76.14     75.76     64.75     67.17

Dividend payout ratio

     21.90     24.51     42.55     15.09     13.54

Noninterest expense to average total assets

     2.46     2.52     2.66     2.48     2.49

Average interest-earning assets to average interest-bearing liabilities

     117.80     116.69     118.01     118.30     117.85

Average equity to average total assets

     11.55     12.10     13.48     14.27     14.33

Asset Quality Ratios:

          

Non-performing assets to total assets

     0.15     0.21     1.10     1.70     0.42

Non-performing loans to total loans

     0.14     0.16     1.42     2.13     0.49

Allowance for loan losses to non-performing loans

     879.27     825.03     87.06     71.66     244.39

Allowance for loan losses to total loans

     1.21     1.28     1.23     1.53     1.19

Allowance for loan losses to total loans excluding PPP loans

     1.27     1.28     1.23     1.53     1.19

Net charge-offs (recoveries) to average
loans

     0.04     0.01     0.35     0.05     0.05

Capital Ratios:

          

Community Bank Leverage Ratio:

          

Company (5)

     11.0     N/A       N/A       N/A       N/A  

Association (5)

     10.7     N/A       N/A       N/A       N/A  

Total capital (to risk-weighted assets):

          

Company (6)

     N/A       17.6     18.5     20.09     19.7

Association (6)

     N/A       16.3     16.1     16.9     16.1

Tier 1 capital (to risk-weighted assets):

          

Company (6)

     N/A       16.3     17.3     18.8     18.5

Association (6)

     N/A       15.0     14.9     15.7     14.9

Common Equity Tier 1 Capital (to risk-weighted assets):

          

Company (4)(6)

     N/A       16.3     17.3     18.8     18.5

Association (4)(6)

     N/A       15.0     14.9     15.7     14.9

Tier 1 capital (to adjusted total assets):

          

Company

     11.0     11.9     13.4     14.3     14.4

Association

     10.7     11.0     11.5     12.0     11.1

Tangible capital (to adjusted total assets):

          

Company

     11.0     11.9     13.4     14.3     14.4

Association

     10.7     11.0     11.5     12.0     11.1

Other Data:

          

Number of full service offices

     7       7       6       6       5  

Full time equivalent employees

     107       103       104       100       95  

 

(1)

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.

(2)

The net interest margin represents net interest income as a percent of average interest-earning assets for the period.

(3)

The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.

(4)

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.

(5)

The Community Bank Leverage Ratio (CBLR) is a new capital requirement which the Association chose to become effective for the Association for the quarter ended March 31, 2020.

(6)

Institutions that adopt and meet the capital requirements of the CBLR capital ratio are considered to comply with the applicable capital requirements, including the risk-based requirements. Since our CBLR exceeded the required minimum of 8% as of June 30, 2020, we were not required to calculate any risk-based capital ratios.

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

Historically, we 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.

We have grown our organization to $735.5 million in assets at June 30, 2020 from $377.2 million in assets at June 30, 2009. We have increased our assets primarily through increased investment securities and loan growth.

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 2.52% and 2.54% for the year ended June 30, 2020 and 2019, respectively. Net interest income increased to $18.3 million for the year ended June 30, 2020, from $17.9 million for the year ended June 30, 2019.

Our net income for the year ended June 30, 2020 was $4.2 million, compared to a net income of $3.6 million for the year ended June 30, 2019.

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

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

 

53


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.

Recent Developments: COVID-19 and the CARES Act

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

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and healthcare providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations.

Due to the uncertainty surrounding the emergence and future effects of the COVID-19 pandemic, it is not possible to determine the overall impact of the pandemic on the Company’s business. To the extent that customers are not able to fulfill their contractual obligations to the Company, the Company’s business operations, asset valuations, financial condition, cash flows and results of operations could be materially impacted. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, deferred tax assets, or other real estate owned.

The ultimate impact of the COVID-19 pandemic on the Company’s operations and financial performance will depend on future developments related to the duration, extent and severity of the pandemic and the length of time that mandated business and school and school closures, restrictions on travel and social distancing remain in place. The Company’s operations rely on third-party vendors to process, record and monitor transactions. If any of these vendors are unable to provide these services, our ability to serve customers could be disrupted. The pandemic could negatively impact customers’ ability to conduct banking and other financial transactions. The Company’s operations could be adversely impacted if key personnel or a significant number of employees were unable to work due to illness or restrictions.

Financial position and results of operations

Our June 30, 2020 financial condition and results of operations reflect a slightly negative impact on the general element of our allowance for loan losses as a result of COVID-19. While we have not yet experienced any charge-offs related to COVID-19, the general element of our allowance for loan losses calculation and resulting provision for credit losses were impacted by changes in forecasted economic conditions. Given that forecasted economic scenarios have darkened since the pandemic was declared in early March 2020, our need for additional

 

54


reserve for credit loss increased. Refer to our discussions in “Business-Allowance for Loan Losses-Determination of General Allowance for Remainder of the Loan Portfolio”, MD&A below and under Risk Factors. Should economic conditions worsen, we could experience further increases in our required allowance for loan losses and record additional credit loss expense. The execution of the payment deferrals discussed in the following commentary assisted our ratio of past due loans to total loans. It is possible that our asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.

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

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

Capital and liquidity

As of June 30, 2020, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.

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

Asset valuation

Currently, we do not expect COVID-19 to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. As of June 30, 2020 we did not have any impairment with respect to our intangible assets, premises and equipment or other long-lived assets.

Our Business Continuity and Pandemic Response Plan

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

 

55


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

Lending operations and accommodations to borrowers

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

In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company is executing payment deferrals for our lending clients that are adversely affected by the pandemic. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed into law on March 27, 2020, certain COVID-19 loan modifications are not designated as TDRs. The CARES Act allows the Company to presume a loan modification is not a TDR if it is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the National Emergency or (b) December 31, 2020. During the year ended June 30, 2020, the Company granted 176 COVID-19 loan modifications for a total of $85.6 million. These modifications allowed borrowers to defer the principal component of loan payments for up to six months.

With the passage of the Paycheck Protection Program (“PPP”), administered by the SBA, the Company is actively participating in assisting our customers with applications for resources through the program. PPP loans have a two-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of June 30, 2020, we closed 295 SBA PPP loans representing $26.2 million in funding. It is our understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for credit loss through additional credit loss expense charged to earnings.

In response to the COVID-19 pandemic, Management identified food and accommodations as industries that were most likely to be adversely impacted in the near-term by economic disruption caused by the pandemic. As of June 30, 2020, our food and accommodation loans were $5.8 million, or 1.1% of total loans. These loans are mostly to restaurants and bars, and include $4.0 million in PPP loans and no COVID-19 modifications.

Retail operations

With the health and safety of our customers and staff in mind, the drive-up facilities of our Watseka and Danville offices are open, while lobby services are available by appointment only. The drive-up and lobby of the Hoopeston office remain open with protective screening. The Bourbonnais, Champaign, Clifton, and Savoy offices are operating as drive-up only facilities at this time. Most banking transactions continue through the drive-ups, including opening new deposit accounts. In addition, Online and Mobile Banking are available for customers to open an account, check their balance, transfer funds, and pay bills. Checks can be deposited using Mobile Banking. Our network of over 50,000 ATMs are available for cash withdrawals with no service charge. Although some of our lobbies remain closed, we continue to operate and serve our customers with uninterrupted access to their account information and the ability to complete banking transactions.

 

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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.”

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.

 

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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, 2020 and no valuation allowance was necessary.

Comparison of Financial Condition at June 30, 2020 and June 30, 2019

Total assets increased $11.6 million, or 1.6%, to $735.5 million at June 30, 2020 from $723.9 million at June 30, 2019. The increase was primarily due to a $22.0 million increase in net loans and a $16.1 million increase in investments, partially offset by a $26.1 million decrease in cash and cash equivalents.

Cash and cash equivalents decreased by $26.1 million to $33.5 million at June 30, 2020, from $59.6 million at June 30, 2019. This decrease was partially the result of a fluctuation in the balance of one large public entity deposit account and the purchase of investment securities. The public entity collects real estate taxes in two installments, due in June and September, and then makes distributions from the account in early July and September. Amounts received prior to June 30, and subsequently distributed the first week of July were $45.3 million and $55.3 million in 2020 and 2019, respectively.

Investment securities, consisting entirely of securities available for sale, increased $16.1 million, or 11.0%, to $162.4 million at June 30, 2020 from $146.3 million at June 30, 2019. We had no held-to-maturity securities at June 30, 2020 or June 30, 2019.

Net loans receivable, including loans held for sale, increased by $22.0 million, or 4.5%, to $509.8 million at June 30, 2020 from $487.8 million at June 30, 2019. The increase in net loans receivable during this period was due primarily to a $23.3 million, or 27.7%, increase in commercial business loans, a $5.9 million, or 36.8% increase in construction loans, a $1.7 million, or 1.2%, increase in commercial real estate loans, and a $393,000, or 5.5% increase in consumer loans, partially offset by a $8.5 million, or 8.1%, decrease in multi-family loans, a $414,000, or 0.3%, decrease in one- to four-family loans, and a $387,000, or 4.3%, decrease in home equity lines of credit.

Between June 30, 2019 and June 30, 2020, premises and equipment decreased $513,000 to $10.2 million, accrued interest receivable decreased $234,000 to $1.9 million, foreclosed assets held for sale decreased $392,000 to $386,000, deferred income taxes decreased $1.4 million, to $630,000, and mortgage servicing rights decreased $138,000 to $715,000, while Federal Home Loan Bank (FHLB) stock increased $1.9 million to $3.0 million, and other assets increased $220,000 to $634,000. The decrease in premises and equipment was the result of ordinary depreciation, and the decrease in accrued interest receivable was due to decreases in the average rates of both loans and securities. The decrease in foreclosed assets held for sale was due to the sale of property and the decrease in deferred income taxes was mostly due to an increase in unrealized gains on the sale of available-for sale securities. The decrease in mortgage servicing rights was the result of a decrease in valuation. The increase in FHLB stock was the result of a higher stock requirement due to an increased balance of FHLB advances, and the increase in other assets resulted from a year-over-year fluctuation in items in process.

At June 30, 2020, our investment in bank-owned life insurance was $9.3 million, an increase of $273,000 from $9.1 million at June 30, 2019. 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, 2020, our investment of $9.3 million in bank-owned life insurance was 11.3% of our Tier 1 capital plus our allowance for loan losses.

Deposits decreased $5.3 million, or 0.9%, to $601.7 million at June 30, 2020 from $607.0 million at June 30, 2019. Savings, NOW, and money market accounts increased $36.4 million, or 18.6%, to $232.7 million, noninterest bearing demand accounts increased $7.0 million, or 8.8%, to $87.5 million, certificates of deposit, excluding brokered certificates of deposit, decreased $21.6 million, or 7.4%, to $269.2 million, and brokered certificates of deposit decreased $27.2 million, or 68.8%, to $12.3 million.

Repurchase agreements increased $1.7 million to $3.7 million, while advances from the Federal Home Loan Bank of Chicago increased $10.5 million, or 43.8%, to $34.5 million at June 30, 2020 from $24.0 million at June 30, 2019. During the year ended June 30, 2020, we established a line of credit at CIBC Bank USA, which had a balance of $3.0 million at June 30, 2020.

 

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Total equity increased $103,000, or 0.1%, to $82.6 million at June 30, 2020 from $82.5 million at June 30, 2019. Equity increased due to net income of $4.2 million, an increase of $3.7 million in accumulated other comprehensive income, net of tax, and ESOP and stock equity plan activity of $618,000, partially offset by the repurchase of 337,876 shares of common stock at an aggregate cost of approximately $7.5 million, and the payment of approximately $939,000 in dividends to our shareholders. The Company announced a stock repurchase plan on June 12, 2019, whereby the Company could repurchase up to 89,526 shares of its common stock, or approximately 2.5% of its then current outstanding shares. On September 13, 2019, after repurchasing 20,200 shares at an average price od $21.17 per share, the Company announced an increase in the number of shares that may be repurchased under the Company’s existing repurchase plan, whereby the Company could repurchase up to 320,476 shares, or approximately 9.0% of its then outstanding shares. As of June 30, 2020, the Company had repurchased all shares under this plan at an average price of $22.12 per share.

Comparison of Operating Results for the Years Ended June 30, 2020 and 2019

General. Net income increased $687,000, or 19.3%, to $4.2 million net income for the year ended June 30, 2020 from $3.6 million net income for the year ended June 30, 2019. The increase was due to 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 $417,000, or 2.3%, to $18.3 million for the year ended June 30, 2020 from $17.9 million for the year ended June 30, 2019. The increase was due to an increase of $257,000 in interest and dividend income and a decrease of $160,000 in interest expense. A $21.7 million, or 3.4%, increase in the average balance of interest earning assets was partially offset by a $13.3 million, or 2.4%, increase in the average balance of interest bearing liabilities. Our interest rate spread decreased 2 basis points to 2.52% for the year ended June 30, 2020 from 2.54% for the year ended June 30, 2019, and our net interest margin decreased by 3 basis points to 2.75% for the year ended June 30, 2020 from 2.78% for the year ended June 30, 2019.

Interest and Dividend Income. Interest and dividend income increased $257,000, or 1.0%, to $27.0 million for the year ended June 30, 2020 from $26.7 million for the year ended June 30, 2019. The increase in interest income was due to a $84,000 increase in interest income on loans, and a $264,000 increase in interest income on securities, partially offset by a $91,000 decrease in other interest income. An increase of $84,000, or 0.4%, in interest on loans resulted from a $8.1 million, or 1.6%, increase in the average balance of loans to $503.1 million for the year ended June 30, 2020, partially offset by a 6 basis point, or 1.3%, decrease in the average yield on loans to 4.56% from 4.61%. Interest on securities increased $264,000, or 7.6%, due to a $14.5 million increase in the average balance of securities to $146.7 million at June 30, 2020 from $132.2 million at June 30, 2019, partially offset by a 8 basis point, or 3.0%, decrease in the average yield on securities to 2.54% for the year ended June 30, 2020 from 2.62% for the year ended June 30, 2019.

Interest Expense. Interest expense decreased $160,000, or 1.8%, to $8.7 million for the year ended June 30, 2020 from $8.9 million for the year ended June 30, 2019. The decrease was primarily due to lower market rates of interest on FHLB advances during the period, partially offset by increased average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased $593,000, or 8.1%, to $7.9 million for the year ended June 30, 2020, from $7.3 million for the year ended June 30, 2019. This increase was primarily due to an increase in the average balance of interest-bearing deposits to $521.8 million for the year ended June 30, 2020, from $488.1 million for the year ended June 30, 2019, and also a 2 basis point, or 1.1% increase in the average cost of interest-bearing deposits to 1.52% from 1.50%.    

Interest expense on borrowings, including FHLB advances, our line of credit at CIBC Bank USA, and repurchase agreements, decreased $753,000, or 49.0%, to $784,000 for the year ended June 30, 2020 from $1.5 million for the year ended June 30, 2019. This decrease was due to an 60 basis point decrease in the average cost of such borrowings to 1.82% for the year ended June 30, 2020 from 2.42% for the year ended June 30, 2019, and by a $20.4 million, or 32.2%, decrease in the average balance of borrowings to $43.0 million for the year ended June 30, 2020 from $63.4 million for the year ended June 30, 2019.

 

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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 $128,000 for the year ended June 30, 2020, compared to a provision for loan losses of $407,000 for the year ended June 30, 2019. The allowance for loan losses was $6.2 million, or 1.21% of total loans, or 1.27% of total loans excluding PPP loans, at June 30, 2020, compared to $6.3 million, or 1.28% of total loans, at June 30, 2019. Non-performing loans decreased during the year ended June 30, 2020, to $709,000, from $767,000 at June 30, 2019. During the year ended June 30, 2020, net charge-offs of $222,000 were recorded, while during the year ended June 30, 2019, $24,000 in net charge-offs were recorded.

The following table sets forth information regarding the allowance for loan losses and nonperforming assets at the dates indicated:

 

     Year Ended
June 30, 2020
    Year Ended
June 30, 2019
 

Allowance to non-performing loans

     879.27     825.03

Allowance to total loans outstanding at the end of the period

     1.21     1.28

Allowance to total loans outstanding, excluding PPP loans, at end of the period

     1.27     1.28

Net charge-offs to average total loans outstanding during the period, annualized

     0.04     0.00

Total non-performing loans to total loans

     0.14     0.16

Total non-performing assets to total assets

     0.15     0.21

Noninterest Income. Noninterest income increased $651,000, or 15.7%, to $4.8 million for the year ended June 30, 2020 from $4.2 million for the year ended June 30, 2019. The increase was primarily due to an increase in in the gain on the sale of loans, an increase in the net realized gain on sale of available-for-sale securities, and an increase in other service charges and fees, partially offset by a decrease in mortgage banking income, net, and a decrease in brokerage commissions. For the year ended June 30, 2020, gains on the sale of loans increased $458,000 to $801,000, the net realized gain on sale of available-for-sale securities increased $256,000 to $267,000, and other service charges and fees increased $88,000 to $367,000, while mortgage banking income, net decreased $117,000 to $119,000, and brokerage commissions decreased $70,000 to $911,000. The increase in the gain on the sale of loans was the result of an increase in loans sold, the increase in the gain on sale of available-for-sale securities was due to more securities sold for a gain in the year ended June 30, 2020, and the increase in other service charges and fees was due to more fees collected in the year ended June 30, 2020. The decrease in mortgage banking income, net was the result of a decrease in the valuation of mortgage servicing rights, and the decrease in brokerage commissions due to a decrease in commissions on annuities.

Noninterest Expense. Noninterest expense increased $314,000, or 1.9%, to $17.1 million for the year ended June 30, 2020 from $16.8 million for the year ended June 30, 2019. The largest components of this increase were compensation and benefits, which increased $426,000, or 4.0%, office occupancy, which increased $56,000, or 6.3%, equipment expense, which increased $187,000, or 13.6%, and professional services, which increased $87,000, or 24.5%. These increases were partially offset by decreases in federal deposit insurance fees, which decreased $148,000, or 87.6%, and other expenses, which decreased $336,000, or 16.7%. Compensation and benefits increased due to increased staffing changes, normal salary increases and increased medical costs. Office occupancy and equipment expense increased as a result of the addition of the Champaign office. The increase in professional services was due to additional legal services received in the year ended June 30, 2020, compared to the year ended June 30, 2019. The federal deposit insurance premium decreased as a result of receiving an FDIC small bank assessment credit in the year ended June 30, 2020. Other expenses decreased due to expenses related to foreclosed assets held for sale in the year ended June 30, 2019.

Income Tax Expense. We recorded a provision for income tax of $1.6 million for the year ended June 30, 2020, compared to a provision for income tax of $1.3 million for the year ended June 30, 2019, reflecting effective tax rates of 27.9% and 26.7%, respectively.

 

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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.

 

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     For the Fiscal Years Ended June 30,  
     2020     2019     2018  
     Average
Outstanding
Balance
    Interest      Yield/
Rate
    Average
Outstanding
Balance
    Interest      Yield/
Rate
    Average
Outstanding
Balance
    Interest      Yield/
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                     

Loans:

                     

Real estate loans:

                     

One- to four-family (1)

   $  128,915     $ 5,950        4.62   $  131,494     $ 5,909        4.49   $  139,529     $ 5,866        4.20

Multi-family

     103,710       4,414        4.26       107,282       4,543        4.23       97,767       3,857        3.95  

Commercial

     145,978       6,544        4.48       148,344       6,672        4.50       138,351       5,584        4.04  

Home equity lines of credit

     8,916       420        4.71       9,033       437        4.84       8,269       358        4.33  

Construction loans

     19,098       946        4.95       13,931       745        5.35       10,945       491        4.49  

Commercial business loans

     89,023       4,254        4.78       77,548       4,148        5.35       66,962       3,092        4.62  

Consumer loans

     7,410       389        5.25       7,288       379        5.20       7,923       368        4.64  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     503,050       22,917        4.56       494,920       22,833        4.61       469,746       19,616        4.18  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Securities:

                     

U.S. government, federal agency and government-sponsored enterprises

     13,636       354        2.60       27,816       711        2.56       22,594       543        2.40  

U.S. government sponsored mortgage-backed securities

     131,059       3,327        2.54       101,530       2,700        2.66       93,247       2,345        2.51  

State and political subdivisions

     1,981       46        2.32       2,812       52        1.85       3,103       65        2.09  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     146,676       3,727        2.54       132,158       3,463        2.62       118,944       2,953        2.48  

Other

     15,586       338        2.17       16,512       429        2.60       9,276       225        2.43  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     665,312       26,982        4.06       643,590       26,725        4.15       597,966       22,794        3.81  
    

 

 

        

 

 

        

 

 

    

Noninterest-earning assets

     28,160            23,054            17,948       
  

 

 

        

 

 

        

 

 

      

Total assets

   $ 693,472          $ 666,644          $ 615,914       
  

 

 

        

 

 

        

 

 

      

Interest-bearing liabilities:

                     

Interest-bearing checking or NOW

   $ 63,964       188        0.29     $ 50,668       141        0.28     $ 46,299       66        0.14  

Savings accounts

     46,552       164        0.35       43,183       178        0.41       43,159       102        0.24  

Money market accounts

     103,150       1,053        1.02       97,555       1,254        1.29       96,984       853        0.88  

Certificates of deposit

     308,089       6,505        2.11       296,692       5,744        1.94       256,250       3,429        1.34  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     521,755       7,910        1.52       488,098       7,317        1.50       442,692       4,450        1.01  

Borrowings and repurchase agreements

     43,023       784        1.82       63,417       1,537        2.42       63,997       839        1.31  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     564,778       8,694        1.54       551,515       8,854        1.61       506,689       5,289        1.04  
    

 

 

        

 

 

        

 

 

    

Noninterest-bearing liabilities

     48,577            34,440            26,193       
  

 

 

        

 

 

        

 

 

      

Total liabilities

     613,355            585,955            532,882       

Equity

     80,117            80,689            83,032       
  

 

 

        

 

 

        

 

 

      

Total liabilities and equity

     693,472            666,644            615,914       
  

 

 

        

 

 

        

 

 

      

Net interest income

     $ 18,288          $ 17,871          $ 17,505     
    

 

 

        

 

 

        

 

 

    

Net interest rate spread (2)

          2.52          2.54          2.77

Net interest-earning assets (3)

   $ 100,534          $ 92,075          $ 91,277       
  

 

 

        

 

 

        

 

 

      

Net interest margin (4)

          2.75          2.78          2.93

Average interest-earning assets to interest-bearing liabilities

     118          117          118     

 

(1)

Includes home equity loans.

(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.

 

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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,
2020 vs. 2019
     Fiscal Years Ended June 30,
2019 vs. 2018
 
     Increase (Decrease)
Due to
     Total
Increase
(Decrease)
     Increase (Decrease)
Due to
     Total
Increase
(Decrease)
 
     Volume      Rate      Volume      Rate  
     (In thousands)  

Interest-earning assets:

                 

Loans

   $ 348      $  (264)      $ 84      $  1,102      $  2,115      $  3,217  

Securities

     372        (108      264        338        172        510  

Other

     (23      (68      (91      187        17        204  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-earning assets

   $ 697      $  (440)      $ 257      $ 1,627      $ 2,304      $ 3,931  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

                 

Interest-bearing checking or NOW

   $ 41      $ 6      $ 47      $ 6      $ 69      $ 75  

Savings accounts

     13        (27      (14      —          76        76  

Certificates of deposit

     232        529        761        603        1,712        2,315  

Money market accounts

     70        (271      (201      5        396        401  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     356        237        593        614        2,253        2,867  

Federal Home Loan Bank advances

     (425      (328      (753      (8      706        698  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

   $  (69)      $ (91)      $  (160)      $ 606      $ 2,959      $ 3,565  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 766      $ (349)      $ 417      $ 1,021      $ (655)      $ 366  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

63


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)

sell the majority of our long-term, fixed-rate one- to four-family residential mortgage loans that we originate;

 

  (ii)

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;

 

  (iii)

invest in shorter- to medium-term investment securities and interest-earning time deposits;

 

  (iv)

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 18 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

 

64


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 decreasing in a rising rate environment. 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, 2020 resulting from immediate rate shocks ranging from -400 basis points to +400 basis points..

Earnings at Risk

 

Change in Interest

Rates (basis points)

   % Change in Net Interest Income  
   6/30/21      6/30/22  

+400

     (1.55      (1.32

+300

     (0.91      (0.43

+200

     (0.69      (0.18

+100

     (0.69      (0.48

0

     

-100

     (3.63      (4.50

-200

     (7.70      (8.77

-300

     (11.75      (13.03

-400

     (12.79      (14.14
Net Economic Value of Equity (NEVE) at Risk      

Change in Interest

Rates (basis points)

   Estimated NEVE      % Change NEVE  

+400

     75,872        (13.75

+300

     80,690        (8.27

+200

     85,784        (2.48

+100

     88,713        0.85  

0

     87,966     

-100

     90,789        3.21  

-200

     93,016        5.74  

-300

     95,404        8.46  

-400

     96,100        9.25  

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, 2020 and 2019, our liquidity ratio averaged 22.9% and 21.4% 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, 2020.

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, 2020, cash and cash equivalents totaled $33.5 million.

 

65


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, 2020, we had $16.9 million in loan commitments outstanding, and $86.2 million in unused lines of credit to borrowers. Certificates of deposit due within one year of June 30, 2020 totaled $248.4 million, or 41.3% 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, 2019. 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, 2020 and 2019, we originated $283.1 million and $156.2 million of loans, respectively.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We had a net decrease in total deposits of $5.3 million for the year ended June 30, 2020, and a net increase in total deposits of $126.6 million for the year ended June 30, 2019. 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. Fe