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MarketScreener Homepage  >  Equities  >  Nasdaq  >  IF Bancorp Inc    IROQ

IF BANCORP INC

(IROQ)
Delayed Quote. Delayed Nasdaq - 04/25 12:39:57 pm
19.8431 USD   -1.52%
02/13IF BANCORP, INC. : Announces Cash Dividend
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01/30IF BANCORP, INC. : Announces Results for Second Quarter of Fiscal Year 2019
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IF BANCORP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/12/2019 | 11:50am EDT

Cautionary Note Regarding Forward-Looking Statements


This Quarterly Report may contain forward-looking statements within the meaning
of the federal securities laws. These statements are not historical facts, but
rather are statements based on management's current expectations regarding its
business strategies and their intended results and IF Bancorp, Inc.'s ("the
Company") future performance. Forward-looking statements are preceded by terms
such as "expects," "believes," "anticipates," "intends" and similar expressions.

Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
effect on our actual results include, but are not limited to, general economic
conditions, changes in the interest rate environment, legislative or regulatory
changes that may adversely affect our business, changes in accounting policies
and practices, changes in competition and demand for financial services, adverse
changes in the securities markets and changes in the quality or composition of
the Association's loan or investment portfolios. Additional factors that may
affect our results are discussed under "Item 1A.-Risk Factors", in the Company's
Annual Report on Form 10-K for the year ended June 30, 2018, and the Company's
other filings with the SEC. These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such
statements. IF Bancorp, Inc. assumes no obligation to update any forward-looking
statement, except as may be required by law.

Overview


On July 7, 2011 we completed our initial public offering of common stock in
connection with the Association's mutual-to-stock conversion, selling 4,496,500
shares of common stock at $10.00 per share, including 384,900 shares sold to the
Association's employee stock ownership plan, and raising approximately
$45.0 million of gross proceeds. In addition, we issued 314,755 shares of our
common stock and $450,000 in cash to the Iroquois Federal Foundation.

The Company is a savings and loan holding company and is subject to regulation
by the Board of Governors of the Federal Reserve System. The Company's business
activities are limited to oversight of its investment in the Association.

The Association is primarily engaged in providing a full range of banking and
mortgage services to individual and corporate customers within a 100-mile radius
of its locations in Watseka, Danville, Clifton, Hoopeston, Savoy, Champaign, and
Bourbonnais, Illinois, and Osage Beach, Missouri. The principal activity of the
Association's wholly-owned subsidiary, L.C.I. Service Corporation, is the sale
of property and casualty insurance. The Association is subject to regulation by
the Office of the Controller of the Currency and the Federal Deposit Insurance
Corporation.

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, 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,
net gain on foreclosed assets 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,
and federal deposit insurance premiums. 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 2.63% and 2.87% for the six months ended December 31, 2018 and 2017,
respectively.  Net interest income increased to $9.0 million, or $17.9 million
on an annualized basis, for the six months ended December 31, 2018 from
$8.9 million, or $17.7 million on an annualized basis, for the six months ended
December 31, 2017.



                                       38
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Our emphasis on conservative loan underwriting has historically resulted in
relatively low levels of non-performing assets. However, in June 2017, one large
credit in the amount of $7.8 million, secured by 45 one- to four-family
properties, was moved to non-performing when the borrower became involved in
litigation, and subsequently filed for bankruptcy protection. The properties
securing this loan are all existing homes that were acquired by the borrower to
be renovated and resold. During the six months ended December 31, 2018, these 45
properties with an aggregate value of $6.3 million were moved to foreclosed
assets for sale, and 29 of these properties were sold for an aggregate gain of
$86,000. Our non-performing loans totaled $344,000, or 0.1% of total loans at
December 31, 2018 and $6.8 million, or 1.4% of total loans at June 30, 2018. Our
non-performing assets totaled $3.3 million or 0.5% of total assets at
December 31, 2018, and $7.0 million, or 1.1% of total assets at June 30, 2018.

At December 31, 2018, the Association was categorized as "well capitalized" under regulatory capital requirements.


Our net income for the six months ended December 31, 2018 was $1.7 million,
compared to a net income of $247,000 for the six months ended December 31, 2017.
The quarter ended December 31, 2017 included an additional $1.3 million income
tax expense due to a downward adjustment to our net deferred tax asset ("DTA")
related to the Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22,
2017. The Tax Act provides for a reduction in the corporate income tax rate from
35% to 21% effective January 1, 2018, which resulted in the downward adjustment
to our DTA.

Management's discussion and analysis of the financial condition and results of
operations at and for the three and six months ended December 31, 2018 and 2017
is intended to assist in understanding the financial condition and results of
operations of the Association. The information contained in this section should
be read in conjunction with the unaudited financial statements and the notes
thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Critical Accounting Policies


We define critical accounting policies as those 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. 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 provide for 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 the 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.



                                       39
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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 U.S. 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.

There are no material changes to the critical accounting policies disclosed in IF Bancorp, Inc.'s Form 10-K for fiscal year ended June 30, 2018.

Comparison of Financial Condition at December 31, 2018 and June 30, 2018


Total assets increased $25.4 million, or 4.0%, to $664.3 million at December 31,
2018 from $638.9 million at June 30, 2018. The increase was primarily due to a
$17.8 million increase in net loans receivable, a $1.7 million increase in
investment securities, a $2.7 million increase in foreclosed assets held for
sale, and a $2.3 million increase in cash and cash equivalents.

Net loans receivable, including loans held for sale, increased by $17.8 million,
or 3.7%, to $494.2 million at December 31, 2018 from $476.5 million at June 30,
2018. The increase in net loans receivable during this period was due primarily
to a $17.3 million, or 12.3%, increase in commercial real estate loans, a
$5.5 million, or 8.0 %, increase in commercial business loans, and a $955,000,
or 0.9%, increase in multi-family loans, partially offset by a $4.2 million, or
3.1%, decrease in one- to four-family loans, a $1.3 million, or 9.6%, decrease
in construction loans, a $145,000, or 1.6%, decrease in home equity lines of
credit, and a $73,000, or 1.0% decrease in consumer loans.

Investment securities, consisting entirely of securities available for sale,
increased $1.7 million, or 1.3%, to $127.6 million at December 31, 2018 from
$126.0 million at June 30, 2018. We had no securities classified as held to
maturity at December 31, 2018 or June 30, 2018.

Between June 30, 2018 and December 31, 2018, foreclosed assets held for sale
increased $2.7 million to $2.9 million, premises and equipment increased
$598,000 to $10.8 million, interest receivable increased $141,000 to
$2.0 million, and Federal Home Loan Bank stock increased $383,000 to
$3.7 million, while deferred income taxes decreased $669,000 to $3.3 million.
The increase in foreclosed assets held for sale was due to the large credit
discussed in "Overview" above that resulted in 45 one- to four-family properties
with an aggregate value of $6.3 million being transferred to foreclosed assets
for sale. The increase in premises and equipment was due to the opening of a new
office building in Champaign, Illinois, the increase in interest receivable was
due to an increase in the average balance of loans, and the increase in Federal
Home Loan Bank stock was due to stock purchases to support loan growth and the
increase in Federal Home Loan Bank advances. The decrease in deferred income
taxes was mostly due to a decrease in unrealized losses on sale of
available-for-sale securities.



                                       40

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At December 31, 2018, our investment in bank-owned life insurance was
$8.9 million, an increase of $135,000 from $8.8 million at June 30, 2018. We
invest in bank-owned life insurance to provide us with a funding source for our
benefit plan obligations. Bank-owned life insurance also generally provides us
noninterest income that is non-taxable. Federal regulations generally limit our
investment in bank-owned life insurance to 25% of our Tier 1 capital plus our
allowance for loan losses, which resulted in a limit of $20.4 million at
December 31, 2018.

Deposits increased $13.3 million, or 2.8%, to $493.7 million at December 31,
2018 from $480.4 million at June 30, 2018. Certificates of deposit, excluding
brokered certificates of deposit, increased $18.8 million, or 8.2%, to
$248.0 million, while brokered certificates of deposit increased $7.2 million,
or 20.9%, to $41.5 million. Savings, NOW, and money market accounts decreased
$14.2 million, or 7.3%, to $181.2 million, and noninterest bearing demand
accounts increased $1.6 million, or 7.5%, to $23.0 million. Repurchase
agreements increased $559,000, or 24.5%, to $2.8 million at December 31, 2018,
from $2.3 million at June 30, 2018. Borrowings, which consisted solely of
advances from the Federal Home Loan Bank of Chicago, increased $14.0 million, or
20.7%, to $81.5 million at December 31, 2018 from $67.5 million at June 30,
2018.

Advances from borrowers for taxes and insurance increased $831,000, or 268.9%,
to $1.1 million at December 31, 2018, from $309,000 at June 30, 2018. Accrued
interest payable increased $279,000, or 148.4%, to $467,000 at December 31,
2018, from $188,000 at June 30, 2018. Other liabilities decreased $479,000, or
12.7%, to $3.3 million at December 31, 2018 from $3.8 million on June 30, 2018.
The increase in advances from borrowers for taxes and insurance was attributable
to the timing of the payment of real estate taxes and insurance, and the
increase in accrued interest payable resulted from increases in both the average
balance and average cost of interest-bearing liabilities. The decrease in other
liabilities was the result of a large payable at June 30, 2018 related to the
credit discussed in the "Overview" above, that was cleared when the 45
properties moved to foreclosed asset held for sale in July, 2018.

Total equity decreased $3.2 million, or 3.9%, to $78.5 million at December 31,
2018 from $81.7 million at June 30, 2018. Equity decreased due to the repurchase
of 255,000 shares of common stock at an aggregate cost of approximately
$5.4 million and the payment of approximately $453,000 in dividends to our
shareholders, partially offset by net income of $1.7 million, an increase of
$673,000 in accumulated other comprehensive income, net of tax, and ESOP and
stock equity plan activity of $335,000. The Company announced a stock repurchase
plan on December 5, 2018, whereby the Company could repurchase up to 290,356
shares of its common stock, or approximately 7.5% of the then current
outstanding shares. As of December 31, 2018, 255,000 shares had been repurchased
under this plan at an average price of $21.30 per share, and there are 35,356
shares that may yet be repurchased under the plan.

Comparison of Operating Results for the Six Months Ended December 31, 2018 and 2017


General. Net income increased $1.5 million to $1.7 million for the six months
ended December 31, 2018 from $247,000 for the six months ended December 31,
2017. The increase in net income was largely due to the adjustment to the DTA in
the six months ended December 31, 2017, as discussed above under "Overview". The
increase in net income was also due to an increase in net interest income, an
increase in noninterest income, and a decrease in provision for income taxes,
partially offset by an increase in provision for loan losses and an increase in
noninterest expense.

Net Interest Income. Net interest income increased $95,000, or 1.1%, to
$9.0 million for the six months ended December 31, 2018 from $8.9 million for
the six months ended December 31, 2017. This was a result of an increase of
$1.9 million in interest and dividend income, partially offset by an increase of
$1.8 million in interest expense. A $43.8 million, or 7.5%, increase in the
average balance of interest earning assets was offset by a $48.0 million, or
9.6%, increase in average balance of interest bearing liabilities. Our interest
rate spread decreased by 24 basis points to 2.63% for the six months ended
December 31, 2018 compared to 2.87% for the six months ended December 31, 2017,
and our net interest margin decreased by 18 basis points to 2.84% for the six
months ended December 31, 2018 compared to 3.02% for the six months ended
December 31, 2017.



                                       41
--------------------------------------------------------------------------------
Interest and Dividend Income. Interest and dividend income increased
$1.9 million, or 17.4%, to $13.1 million for the six months ended December 31,
2018 from $11.1 million for the six months ended December 31, 2017. The increase
in interest and dividend income was due to a $1.6 million increase in interest
income on loans, a $350,000 increase in interest on securities, and a $26,000
increase in other interest income. The increase in interest income on loans
resulted from a $26.2 million, or 5.6%, increase in the average balance of loans
to $492.4 million for the six months ended December 31, 2018, from
$466.3 million for the six months ended December 31, 2017, and a 42 basis point,
or 10.1%, increase in the average yield on loans to 4.56% for the six months
ended December 31, 2018 from 4.14% for the six months ended December 31, 2017.
The increase in interest income on securities was due to an $18.8 million
increase in the average balance of securities to $130.8 million for the six
months ended December 31, 2018, from $111.9 million for the six months ended
December 31, 2017, and an 18 basis point increase in the average yield on
securities to 2.62% for the six months ended December 31, 2018 from 2.44% for
the six months ended December 31, 2017. The increase in other interest income
was a result of a 98 basis point increase in the average yield in other interest
earning assets, including Federal Home Loan Bank dividends and deposits with
other financial institutions, to 3.35% from 2.37%, partially offset by a
$1.2 million decrease in the average balance of other interest earning assets.

Interest Expense. Interest expense increased $1.8 million, or 80.9%, to $4.1 million for the six months ended December 31, 2018, from $2.3 million for the six months ended December 31, 2017. The increase was primarily due to increases in the average balances and average cost of both deposits and borrowings.


Interest expense on interest-bearing deposits increased by $1.4 million, or
71.4%, to $3.3 million for the six months ended December 31, 2018 from
$1.9 million for the six months ended December 31, 2017. This increase was due
to an increase of $36.6 million in the average balance of interest-bearing
deposits to $469.7 million for the six months ended December 31, 2018 from
$433.1 million for the six months ended December 31, 2017, as well as a 52 basis
point increase in the average cost of interest bearing deposits to 1.40% for the
six months ended December 31, 2018 from 0.88% for the six months ended
December 31, 2017.

Interest expense on borrowings increased $479,000, or 130.2%, to $847,000 for
the six months ended December 31, 2018 from $368,000 for the six months ended
December 31, 2017. This increase was due to an increase in the average balance
of borrowings to $76.2 million for the six months ended December 31, 2018 from
$64.8 million for the six months ended December 31, 2017, and a 108 basis point
increase in the average cost of such borrowings to 2.22% for the six months
ended December 31, 2018 from 1.14% for the six months ended December 31, 2017.

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 probable credit losses inherent in our
loan portfolio. We recorded a provision for loan losses of $375,000 for the six
months ended December 31, 2018, compared to a provision for loan losses of
$358,000 for the six months ended December 31, 2017. The allowance for loan
losses was $6.3 million, or 1.26% of total loans, at December 31, 2018, compared
to $7.1 million, or 1.53% of total loans, at December 31, 2017 and $5.9 million,
or 1.23% of total loans, at June 30, 2018. Non-performing loans decreased
$6.5 million to $344,000, during the six month period ended December 31, 2018,
mostly due to the credit discussed in "Overview" above which resulted in moving
45 properties with an aggregate value of $6.3 million to foreclosed assets held
for sale during the period. During the six months ended December 31, 2018, a net
charge-off of $1,000 was recorded while during the six months ended December 31,
2017, a net charge-off of $71,000 was recorded.



                                       42

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



                                                      At or for the
                                                       Six Months
                                                          Ended                At or for the
                                                      December 31,              Year Ended
                                                          2018                 June 30, 2018
Allowance to non-performing loans at the end
of the period                                               1,836.92 %                  87.06 %
Allowance to total loans outstanding at the
end of the period                                               1.26 %                   1.23 %
Net charge-offs to average total loans
outstanding during the period, annualized                       0.00 %                   0.35 %
Total non-performing loans to total loans at
the end of the period                                           0.07 %                   1.42 %
Total non-performing assets to total assets at
the end of the period                                           0.49 %                   1.10 %


Noninterest Income. Noninterest income increased $176,000, or 8.2%, to
$2.3 million for the six months ended December 31, 2018 from $2.1 million for
the six months ended December 31, 2017. The increase was primarily due to an
increase in brokerage commissions, an increase in gain on foreclosed assets,
net, an increase in gain on sale of loans and an increase in mortgage banking
income, net, partially offset by a decrease in bank-owned life insurance, net,
and a decrease in other service charges and fees. For the six months ended
December 31, 2018, brokerage commissions increased $118,000 to $523,000, gain on
foreclosed assets, net increased $98,000 to $98,000, gain on sale of loans
increased $29,000 to $179,000, and mortgage banking income, net increased
$17,000 to $152,000, while bank-owned life insurance, net decreased $111,000 to
$135,000, and other service charges and fees decreased $45,000 to $155,000. The
increase in brokerage commissions was due to a change in the timing of
commission payments, while the increase in gain on foreclosed assets, net was
mostly due to the sale of 29 of the 45 properties transferred to foreclosed
assets held for sale and discussed in "Overview" above. The increase in gain on
sale of loans and the increase in mortgage banking income, net resulted from an
increase in the loans sold and increase in valuation of mortgage servicing
rights. The decrease in bank-owned life insurance, net, was due to a benefit
claim during the six months ended December 31, 2017, and the decrease in other
service charges and fees was due to a decrease in the number of loan fees.

Noninterest Expense. Noninterest expense increased $373,000, or 4.6%, to
$8.6 million for the six months ended December 31, 2018 from $8.2 million for
the six months ended December 31, 2017. The largest components of this increase
were compensation and benefits, which increased $319,000, or 6.5%, office
occupancy, which increased $77,000, or 21.2%, and advertising expense, which
increased $41,000, or 19.2%, partially offset by a $53,000, or 19.9%, decrease
in professional services. Compensation and benefits increased due to increased
staffing changes including additional staff for the Champaign office that opened
in August 2018, normal salary increases and increased medical costs. Office
occupancy and advertising increased as a result of the addition of the new
Champaign office. The decrease in professional services was due to additional
services received in the six months ended December 31, 2017 than in the six
months ended December 31, 2018.

Income Tax Expense. We recorded a provision for income tax of $624,000 for the
six months ended December 31, 2018, compared to a provision for income tax of
$2.2 million for the six months ended December 31, 2017, reflecting effective
tax rates of 26.6% and 90.0%, respectively. The effective tax rate for the six
months ended December 31, 2017, reflects the impact of the adjustment to the
DTA, as discussed above under "Overview".

Comparison of Operating Results for the Three Months Ended December 31, 2018 and 2017


General. Net income increased $1.5 million to $787,000 for the three months
ended December 31, 2018 from $728,000 net loss for the three months ended
December 31, 2017. The increase in net income was largely due to the adjustment
to the DTA in the six months ended December 31, 2017, as discussed above under
"Overview". Net income was also impacted by an increase in net interest income,
an increase in noninterest income, a decrease in noninterest expense and a
decrease in provision for income taxes, partially offset by an increase in the
provision for loan losses.



                                       43
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Net Interest Income. Net interest income increased $44,000 to $4.5 million for
the three months ended December 31, 2018 from $4.4 million for the three months
ended December 31, 2017. The increase was a result of a $988,000 increase in
interest and dividend income, partially offset by a $944,000 increase in
interest expense. Our interest rate spread decreased 25 basis points to 2.61%
for the three months ended December 31, 2018 compared to 2.86% for the three
months ended December 31, 2017, and our net interest margin decreased by 19
basis points to 2.82% for the three months ended December 31, 2018 compared to
3.01% for the three months ended December 31, 2017. A $44.6 million, or 7.5%,
increase in the average balance of interest earning assets was offset by a
$46.8 million, or 9.3% increase in average balance of interest bearing
liabilities.

Interest and Dividend Income. Interest and dividend income increased $988,000,
or 17.4%, to $6.7 million for the three months ended December 31, 2018 from
$5.7 million for the three months ended December 31, 2017. The increase in
interest and dividend income was primarily due to a $798,000 increase in
interest income on loans, which resulted from a $28.1 million, or 6.0%, increase
in the average balance of loans to $497.2 million from $469.1 million, and a 40
basis point, or 9.7%, increase in the average yield on loans to 4.60% from
4.20%. Interest on securities increased $176,000, or 27.1%, as the average
balance increased by $18.3 million, or 16.3%, to $130.7 million from
$112.4 million and the average yield increased 18 basis points to 2.62% from
2.44%.

Interest Expense. Interest expense increased $944,000, or 77.2%, to $2.2 million
for the three months ended December 31, 2018 from $1.2 million for the three
months ended December 31, 2017. This increase was due to a $46.8 million
increase in the average balance of interest-bearing liabilities and a 61 basis
point increase in average cost of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $711,000, or 69.2%,
to $1.7 million for the three months ended December 31, 2018 from $1.0 million
for the three months ended December 31, 2017. This increase was due to a
$35.6 million, or 8.1%, increase in the average balance of interest-bearing
deposits to $474.4 million for the three months ended December 30, 2018 from
$438.8 million for the three months ended December 31, 2017, and an increase in
the average cost of interest-bearing deposits to 1.47% for the three months
ended December 31, 2018 from 0.94% for the three months ended December 31, 2017.

Interest expense on borrowings increased $233,000, or 118.9%, to $429,000 for
the three months ended December 31, 2018, from $196,000 for the three months
ended December 31, 2017. This increase was due to a 106 basis point increase in
the average cost of such borrowings to 2.30% for the three months ended
December 31, 2018 from 1.24% for the three months ended December 31, 2017, and
an increase in the average balance of borrowings to $74.6 million for the three
months ended December 31, 2018, from $63.5 million for the three months ended
December 31, 2017.

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 probable credit losses inherent in our
loan portfolio. We recorded a provision for loan losses of $138,000 for the
three months ended December 31, 2018, compared to a reduction in provision for
loan losses or credit of $50,000 for the three months ended December 31, 2017.
During the three months ended December 31, 2018, there were no net charge-offs,
while during the three months ended December 31, 2017, a net charge-off of
$68,000 was recorded.

Noninterest Income. Noninterest income increased $66,000, or 6.8%, to
$1.0 million for the three months ended December 31, 2018 from $977,000 for the
three months ended December 31, 2017. The increase was primarily due to an
increase in net gain on sale of loans and an increase in brokerage commissions,
partially offset by a decrease in other service charges and fees.  For the three
months ended December 31, 2018, the net gain on the sale of loans increased
$36,000 to $86,000, brokerage commissions increased $19,000 to $247,000, while
other service charges and fees decreased $27,000 to $67,000.  The increase in
net gain on sale of loans was primarily due to a larger number of loans sold to
the Federal Home Loan Bank of Chicago in the three months ending December 31,
2018, than in the three months ended December 31, 2017, while the increase in
brokerage commissions was due to a change in the timing of commission payments.
The decrease in other service charges and fees was due to a decrease in the
number of loan fees.



                                       44
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Noninterest Expense. Noninterest expense decreased $193,000, or 4.3%, to
$4.3 million for the three months ended December 31, 2018 from $4.5 million for
the three months ended December 31, 2017. The largest components of this
decrease were other expenses, which decreased $270,000, or 32.3%, and
professional services, which decreased $94,000, or 50.0%. These decreases were
partially offset by increases in compensation and benefits, which increased
$155,000, or 6.1%, and office occupancy, which increased $35,000, or 18.0%. The
other expenses decreased as a result of the accrual of real estate taxes on a
large credit in bankruptcy in the three months ended December 31, 2017, and the
decrease in professional services was due to additional services received during
the three months ended December 31, 2017 when we went through a core system
conversion. Compensation and benefits increased due to increased staffing
changes including additional staff for the Champaign office that opened in
August of 2018, normal salary increases and increased medical costs. Office
occupancy increased as a result of the addition of the new Champaign office.

Income Tax Expense. We recorded a provision for income tax of $279,000 for the
three months ended December 31, 2018, compared to a provision for income tax of
$1.7 million for the three months ended December 31, 2017, reflecting effective
tax rates of 26.2% and 176.6%, respectively. The effective tax rate for the
three months ended December 31, 2017, reflects the impact of the adjustment to
the DTA, as discussed above under "Overview".

Asset Quality


At December 31, 2018, our non-accrual loans totaled $92,000, including $33,000
in one- to four-family loans, $38,000 in commercial real estate loans, $15,000
in home equity lines of credit, and $6,000 in commercial business loans. The
commercial real estate loans are secured by commercial rental properties. At
December 31, 2018, we had two one- to four family loans totaling $303,000, which
were delinquent 90 days or greater and still accruing interest.

At December 31, 2018, loans classified as substandard equaled $2.2 million.
Loans classified as substandard consisted of $1.3 million in one- to four-family
loans, $38,000 in commercial real estate loans, $36,000 in home equity lines of
credit, $869,000 in commercial business loans and $3,000 in consumer loans. At
December 31, 2018, no loans were classified as doubtful or loss.

At December 31, 2018, watch assets consisted of $1.1 million in commercial real estate loans and $1.5 million in commercial business loans.


Troubled Debt Restructuring. Troubled debt restructurings include loans for
which economic concessions have been granted to borrowers with financial
difficulties. 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 December 31, 2018 and June 30, 2018, we had $2.7 million and
$2.9 million, respectively, of troubled debt restructurings. At December 31,
2018 our troubled debt restructurings consisted of $1.4 million in one- to
four-family loans, $1.2 million in multi-family loans, $12,000 in commercial
real estate loans, $23,000 in home equity lines of credit, and $3,000 in
consumer loans.

Foreclosed Assets. At December 31 2018, we had $2.9 million in foreclosed assets
compared to $219,000 as of June 30, 2018. Foreclosed assets at December 31, 2018
consisted of $2.7 million in residential real estate properties, $219,000 in
commercial non-occupied property, and $20,000 in business assets, while
foreclosed assets at June 30, 2018 consisted of $219,000 in commercial
non-occupied property.

Allowance for Loan Loss Activity


The Company regularly reviews its allowance for loan losses and makes
adjustments to its balance based on management's analysis of the loan portfolio,
the amount of non-performing and classified loans, as well as general economic
conditions. Although the Company maintains its allowance for loan losses at a
level that it considers sufficient to provide for losses, there can be no
assurance that future losses will not exceed internal estimates. In addition,
the amount of the allowance for loan losses is subject to review by regulatory
agencies, which can order the establishment of additional loss provisions. The
following table summarizes changes in the allowance for loan losses over the
six-month periods ended December 31, 2018 and 2017:



                                       45

--------------------------------------------------------------------------------
                                                        Six months ended
                                                          December 31,
                                                        2018         2017
         Balance, beginning of period                 $  5,945$ 6,835
         Loans charged off
         Real estate loans
         One- to four-family                                -           (45 )
         Multi-family                                       -            -
         Commercial                                         -            -
         HELOC                                              -           (24 )
         Construction                                       -            -
         Commercial business                                -            -
         Consumer                                           (5 )         (8 )

         Gross charged off loans                            (5 )        (77 )

         Recoveries of loans previously charged off
         Real estate loans
         One- to four-family                                 1           -
         Multi-family                                       -            -
         Commercial                                         -            -
         HELOC                                              -            -
         Construction                                       -            -
         Commercial business                                -            -
         Consumer                                            3            6

         Gross recoveries of charged off loans               4            6

         Net charge offs                                    (1 )        (71 )

         Provision charged to expense                      375          358

         Balance, end of period                       $  6,319$ 7,122



The allowance for loan losses has been calculated based upon an evaluation of
pertinent factors underlying the various types and quality of the Company's
loans. Management considers such factors as the repayment status of a loan, the
estimated net fair value of the underlying collateral, the borrower's intent and
ability to repay the loan, local economic conditions, and the Company's
historical loss ratios. We maintain the allowance for loan losses through the
provisions for loan losses that we charge to income. We charge losses on loans
against the allowance for loan losses when we believe the collection of loan
principal is unlikely. The allowance for loan losses increased $374,000 to
$6.3 million at December 31, 2018, from $5.9 million at June 30, 2018. This
increase was primarily the result of an increase in outstanding loans, and was
necessary in order to bring the allowance for loan losses to a level that
reflects management's estimate of the probable loan loss in the Company's loan
portfolio at December 31, 2018.

In its quarterly evaluation of the adequacy of its allowance for loan losses,
the Company employs historical data including past due percentages, charge offs,
and recoveries. The Company's allowance methodology weights the most recent
twelve-quarter period's net charge offs and uses this information as one of the
primary factors for evaluation of allowance adequacy. The most recent
four-quarter net charge offs are given a higher weight of 50%, while quarters
5-8 are given a 30% weight and quarters 9-12 are given only a 20% weight. The
average net charge offs in each period are calculated as net charge offs by
portfolio type for the period as a percentage of the quarter end balance of
respective portfolio type over the same period. As the Company has seen
increases in loan defaults in the past several years, the Company believes that
it is prudent to emphasize more recent historical factors in the allowance
evaluation. The following table sets forth the Company's weighted average
historical net charge offs as of December 31 and June 30, 2018:



                                       46

--------------------------------------------------------------------------------
                                 December 31, 2018            June 30, 2018
                                 Net charge-offs -          Net charge-offs -
                                12 quarter weighted       12 quarter  weighted
      Portfolio segment             historical                 historical
      Real Estate:
      One- to four-family                       0.64 %                     0.65 %
      Multi-family                              0.00 %                     0.00 %
      Commercial                                0.00 %                     0.00 %
      HELOC                                     0.17 %                     0.23 %
      Construction                              0.00 %                     0.00 %
      Commercial business                       0.02 %                     0.02 %
      Consumer                                  0.03 %                     0.04 %

      Entire portfolio total                    0.20 %                     0.20 %


Additionally, in its quarterly evaluation of the adequacy of the allowance for
loan losses, the Company evaluates changes in financial conditions of individual
borrowers; changes in local, regional, and national economic conditions; the
Company's historical loss experience; and changes in market conditions for
property pledged to the Company as collateral. 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:



                                 Qualitative factor        Qualitative factor
                                     applied at                applied at
       Portfolio segment         December 31, 2018           June 30, 2018
       Real Estate:
       One- to four-family                      0.15 %                    0.13 %
       Multi-family                             1.56 %                    1.56 %
       Commercial                               1.19 %                    1.21 %
       HELOC                                    0.83 %                    0.77 %
       Construction                             1.36 %                    1.22 %
       Commercial business                      1.97 %                    1.98 %
       Consumer                                 0.75 %                    0.74 %

       Entire portfolio total                   1.07 %                    1.05 %


At December 31, 2018, the amount of our allowance for loan losses attributable
to these qualitative factors was approximately $5.4 million, as compared to
$5.1 million at June 30, 2018. The general increase in qualitative factors was
attributable primarily to a change in the portfolio mix which resulted in higher
balances in loans with slightly higher qualitative factors at December 31, 2018.

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 charge-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.



                                       47

--------------------------------------------------------------------------------

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. 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 three months ended December 31, 2018 and the year ended
June 30, 2018, our liquidity ratio averaged 20.1% and 19.8% of our total assets,
respectively. We believe that we had enough sources of liquidity to satisfy our
short- and long-term liquidity needs as of December 31, 2018.

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 December 31, 2018, cash and cash equivalents totaled
$7.0 million. Interest-earning time deposits which can offer additional sources
of liquidity, totaled $2.5 million at December 31, 2018.

Our cash flows are derived from operating activities, investing activities and
financing activities as reported in our Condensed Consolidated Statement of Cash
Flows included in our financial statements. Net cash provided by operating
activities were $2.7 million and $1.3 million for the six months ended
December 31, 2018 and 2017 respectively. Net cash used in investing activities
consisted primarily of disbursements for loan originations and the purchase of
securities, offset by net cash provided by principal collections on loans, and
proceeds from maturing securities, the sale of securities and pay-downs on
mortgage-backed securities. Net cash used in investing activities was
$23.3 million and $29.0 million for the six months ended December 31, 2018 and
2017, respectively. Net cash provided by (used in) financing activities
consisted primarily of the activity in deposit accounts and FHLB Advances. The
net cash provided by financing activities was $22.8 million and $26.6 million
for the six months ended December 31, 2018 and 2017, respectively.

The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments. The Company anticipates that
it will have sufficient funds available to meet its current commitments
principally through the use of current liquid assets and through its borrowing
capacity discussed above. The following table summarizes these commitments at
December 31, 2018 and June 30, 2018.



                                      December 31, 2018       June 30, 2018
                                             (Dollars in thousands)
         Commitments to fund loans   $             8,126     $         9,246
         Lines of credit                          56,502              53,542




                                       48
--------------------------------------------------------------------------------
At December 31, 2018, certificates of deposit due within one year of
December 31, 2018 totaled $167.4 million, or 33.9% 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 December 31, 2019. Moreover, 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.

Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Chicago, which
provides an additional source of funds. Federal Home Loan Bank advances were
$81.5 million at December 31, 2018. At December 31, 2018 we had the ability to
borrow up to an additional $141.0 million from the Federal Home Loan Bank of
Chicago and also had the ability to borrow $16.8 million from the Federal
Reserve based on current collateral pledged.

During the six months ended December 31, 2018, 255,000 shares were repurchased
as part of the stock repurchase program that was announced by the Company on
December 5, 2018, which allowed the Company to repurchase up to 290,356 shares
of its common stock, or approximately 7.5% of the then current outstanding
shares. Repurchases are made at management's discretion at prices management
considers to be attractive and in the best interests of both the Company and its
stockholders, subject to the availability of stock, general market conditions,
the trading price of the stock, alternative uses for capital, and the Company's
financial performance. The repurchase plan may be suspended, terminated, or
modified at any time for any reason, including market conditions, the cost of
purchasing shares, the availability of alternative investment opportunities,
liquidity, and other factors deemed appropriate. The repurchase program does not
obligate the Company to purchase any particular number of shares. As of
December 31, 2018, the Company had repurchased 255,000 shares at an average
price of $21.30 per share, and the maximum number of shares that may yet be
purchased under the plan was 35,356.

The Association is subject to various regulatory capital requirements, including
a risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. The OCC's prompt corrective action standards changed effective
January 1, 2015. Under the new standards, in order to be considered
well-capitalized, the Association must have a Tier 1 capital to total assets
ratio of 5.0% (unchanged), a common equity Tier 1 to risk-weighted assets ratio
(CETI) of 6.5% (new ratio), a Tier 1 capital to risk-weighted assets ratio of
8.0% (increased from 6.0%), and a total capital to risk-weighted assets ratio of
10.0% (unchanged). The Association exceeds all these new regulatory capital
requirements. The Association is considered "well capitalized" under regulatory
guidelines.



                                                December 31, 2018        June 30, 2018        Minimum to Be Well
                                                     Actual                 Actual               Capitalized
Tier 1 capital to total assets
Association                                                   11.3 %               11.5 %                     5.0 %
Company                                                       12.2 %               13.4 %                     N/A
Common equity tier 1 to risk-weighted assets
Association                                                   14.8 %               14.9 %                     6.5 %
Company                                                       15.9 %               17.3 %                     N/A
Tier 1 capital to risk-weighted assets
Association                                                   14.8 %               14.9 %                     8.0 %
Company                                                       15.9 %               17.3 %                     N/A
Total capital to risk-weighted assets
Association                                                   16.0 %               16.1 %                    10.0 %
Company                                                       17.1 %               18.5 %                     N/A




                                       49

--------------------------------------------------------------------------------

Average Balances and Yields


The following tables set forth average balance sheets, average yields and costs,
and certain other information at and for the periods indicated. Yields and costs
are presented on an annualized basis. 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 the
Company. 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.



                                                                 For the 

Three Months Ended December 31,

                                                             2018                                           2017
                                                                                                           Interest
                                          Average        Interest Income/      Yield/        Average        Income/      Yield/
                                          Balance            Expense            Cost         Balance        Expense       Cost
                                                                         (Dollars in thousands)
Assets
Loans                                    $  497,203     $            5,721        4.60 %    $  469,126$   4,923        4.20 %
Securities:
U.S. government, federal agency and
government-sponsored enterprises             30,131                    192        2.55 %        16,831           100        2.38 %
U.S. government-sponsored enterprise
MBS                                          97,714                    652        2.67 %        92,377           568        2.46 %
State and political subdivisions              2,816                     12        1.70 %         3,176            17        2.14 %

Total securities                            130,661                    856        2.62 %       112,384           685        2.44 %
Other interest-earning assets                 8,153                     81        3.97 %         9,921            62        2.50 %

Total interest-earning assets               636,017                  6,658        4.19 %       591,431         5,670        3.83 %
Non-interest earning assets                  22,576                                             21,521

Total assets                             $  658,593$  612,952

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing checking or NOW         $   49,618                     34        0.27 %    $   47,568            11        0.09 %
Savings accounts                             42,435                     45        0.42 %        42,569            16        0.15 %
Money market accounts                        94,194                    300        1.27 %        95,302           184        0.77 %
Certificates of deposit                     288,197                  1,359        1.89 %       253,396           816        1.29 %

Total interest-bearing deposits             474,444                  1,738  

1.47 % 438,835 1,027 0.94 % Federal Home Loan Bank Advances and repurchase agreements

                        74,617                    429        2.30 %        63,460           196        1.24 %

Total interest-bearing liabilities          549,061                  2,167  

1.58 % 502,295 1,223 0.97 % Noninterest-bearing liabilities

              28,998                                             26,311

Total liabilities                           578,059                                            528,606
Stockholders' equity                         80,534                                             84,346

Total liabilities and stockholders'
equity                                   $  658,593$  612,952





                                       50
--------------------------------------------------------------------------------
                                                              For the Three Months Ended December 31,
                                                           2018                                          2017
                                                                                                        Interest
                                       Average        Interest Income/      Yield/       Average        Income/       Yield/
                                       Balance            Expense            Cost        Balance        Expense        Cost
                                                                       (Dollars in thousands)
Net interest income                                  $            4,491                                $    4,447

Interest rate spread (1)                                                       2.61 %                                    2.86 %
Net interest margin (2)                                                        2.82 %                                    3.01 %
Net interest-earning assets (3)        $ 86,956$ 89,136

Average interest-earning assets to
interest-bearing liabilities                116 %                                             118 %






(1)  Net interest rate spread represents the difference between the yield on

average interest-earning assets and the cost of average interest-bearing

liabilities.

(2) Net interest margin represents net interest income divided by average total

interest-earning assets.

(3) Net interest-earning assets represents total interest-earning assets less

total interest-bearing liabilities.

(4) Tax exempt income is not recorded on a tax equivalent basis.




                                                           For the Six Months Ended December 31,
                                                       2018                                     2017
                                                      Interest                                 Interest
                                         Average       Income/      Yield/        Average       Income/      Yield/
                                         Balance       Expense       Cost         Balance       Expense       Cost
                                                                   (Dollars in thousands)
Assets
Loans                                   $ 492,427$  11,226        4.56 %    $ 466,277$   9,663        4.14 %
Securities:
U.S. government, federal agency and
government-sponsored enterprises           29,414           368        2.50 %       20,557           247        2.40 %
U.S. government-sponsored enterprise
MBS                                        98,472         1,320        2.68 %       88,155         1,085        2.46 %
State and political subdivisions            2,898            28        1.93 %        3,225            34        2.11 %

Total securities                          130,784         1,716        2.62 %      111,937         1,366        2.44 %
Other interest-earning assets               8,056           135        3.35 %        9,208           109        2.37 %

Total interest-earning assets             631,267        13,077        4.14 %      587,422        11,138        3.79 %
Non-interest earning assets                22,891                                   20,181

Total assets                            $ 654,158$ 607,603





                                       51

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