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IROQ > SEC Filings for IROQ > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for IF BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for IF BANCORP, INC.


14-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 the Company's 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, 2011. 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 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 bringing our total shares to 4,811,255. The 314,755 shares donated to the foundation were valued at $3,147,550 ($10.00 per share) at the time of the conversion. This $3,147,550 and a $450,000 cash donation to the foundation were both expensed during the quarter ended September 30, 2011.

IF Bancorp, Inc. ("Company") is a savings and loan holding company and is subject to regulation by the Federal Reserve Board of Governors. The Company's business activities are limited to oversight of its investment in Iroquois Federal Savings & Loan Association ("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 and Hoopeston, Illinois and Osage Beach, Missouri. The principal activity of the Association's wholly-owned subsidiary, L.C.I. Service Corporation ("L.C.I."), is the sale of property and casualty insurance. The Association is subject to regulation by the Office of the Controller of the Currency, Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation.

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, 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.


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Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) decreased to 2.89% for the three months ended September 30, 2011 from 3.06% for the three months ended September 30, 2010. Due to an increase in earning assets, this contributed to an increase in net interest income to $13.8 million on an annualized basis for the three months ended September 30, 2011 from $11.7 million for the three months ended September 30, 2010.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets at a time when many financial institutions are experiencing significant asset quality issues. Our non-performing assets totaled $7.4 million or 1.6% of total assets at September 30, 2011, and $6.0 million, or 1.2% of total assets at June 30, 2011.

At September 30, 2011, the Association was categorized as "well capitalized" under regulatory capital requirements.

Our net loss for the three months ended September 30, 2011 was $1.4 million, compared to our net income of $888,000 for the three months ended September 30, 2010. The decrease in net income was due to an increase in noninterest expense, which included a $3.6 million contribution to our newly established charitable foundation, and a decrease in noninterest income, partially offset by an increase in interest income, and decreases in interest expense and the provision for loan losses.

Management's discussion and analysis of the financial condition and results of operations at and for three months ended September 30, 2011 and 2010 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 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


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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.

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 prospectus dated May 13, 2011, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 20, 2011.

Comparison of Financial Condition at September 30, 2011 and June 30, 2011

Total assets decreased $33.0 million, or 6.5%, to $477.8 million at September 30, 2011 from $510.8 million at June 30, 2011. The decrease was primarily due to a $38.8 million decrease in cash and cash equivalents partially offset by an increase of $5.9 million in investment securities. This large change was a result of our mutual to stock conversion that closed on July 7, 2011. The stock offering in connection with the conversion was oversubscribed which resulted in $68.9 million in over subscriptions being refunded to subscribers shortly after the closing of the conversion. This was somewhat offset by an increase of $36.5 million in FHLB advances during the period.

Net loans receivable, including loans held for sale, increased slightly by $356,000, or 0.2%, to $240.4 million at September 30, 2011 from $240.0 million at June 30, 2011. The increase in net loans receivable during this period was due primarily to a $1.6 million, or 5.8%, increase in commercial real estate loans and a $662,000, or 16.4%, increase in construction loans. These increases were partially offset by a $1.3 million, or 0.8%, decrease in one-to-four family residential loans (due primarily to increased sales of loans originated), a decrease of $496,000, or 3.1%, in consumer loans and a $450,000, or 3.7%, decrease in commercial business loans.

Investment securities, consisting entirely of securities available for sale, increased $5.9 million, or 3.1%, to $196.2 million at September 30, 2011 from $190.3 million at June 30, 2011. Purchased investment securities, consisted primarily of agency debt obligations with terms of four to six years and fixed-rate GSE mortgage backed securities with terms of 15 years, all of which are held as available for sale. We had no securities held to maturity at September 30, 2011 or June 30, 2011.


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As of September 30, 2011, other assets decreased $710,000 to $1.4 million, accrued interest receivable increased $613,000 to $2.3 million, and mortgage servicing rights decreased $110,000 to $298,000 from the balance as of June 30, 2011. The decrease in other assets was attributable to prepaid conversion costs which were $766,000 at June 30, 2011 and reduced to zero at September 30, 2011. Accrued interest receivable increased as a result of the increase in available-for-sale securities portfolio. Mortgage servicing rights decreased by $110,000 to $298,000 due to a reduction in the fair value mortgage servicing rights as a result of decreased market interest rates at September 30, 2011.

At September 30, 2011, our investment in bank-owned life insurance was $7.3 million, an increase of $66,000 from $7.2 million at June 30, 2011. 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 totaled $14.7 million at September 30, 2011.

Deposits decreased $112.9 million, or 25.4%, to $331.2 million at September 30,, 2011 from $444.1 million at June 30, 2011. Certificates of deposit decreased $6.5 million, or 3.2%, to $192.9 million, savings, NOW, and money market accounts decreased $112.4 million, or 48.8%, to $117.9 million, brokered certificates of deposit increased $5.0 million, or 83.3.0%, to $11.0 million, and noninterest bearing demand accounts increased $969,000, or 11.5%, to $9.4 million. The primary reason for the large decrease in deposits was due to our mutual to stock conversion which closed on July 7, 2011, for which we held approximately $113 million in escrow deposit balances at June 30, 2011.

Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, increased $36.5 million, or 162.2%, to $59.0 million at September 30, 2011 from $22.5 million at June 30, 2011. We increased our borrowings to purchase investment securities as we reposition our portfolio in anticipation of securities being called over the next several months. Current interest rates on borrowings are more favorable than rates paid on deposits.

Other liabilities decreased $478,000, or 25.4%, to $1.4 million at September 30, 2011 from $1.9 million on June 30, 2011. The decrease was attributable to a general decrease in accounts payable and accrued expenses payable due to timing of payments.

Total equity increased $43.9 million, or 111.3%, to $83.3 million at September 30, 2011 from $39.4 million at June 30, 2011. The increase was primarily the result of our mutual to stock conversion which increased capital $46.4 million net of conversion costs of $1.73 million. Equity increased due to an increase in unrealized gains on securities available for sale of $2.1 million, offset by the purchase of ESOP shares of $3.8 million and a net loss of $1.4 million. The increase in unrealized gains on securities available-for-sale was due to higher market values of available-for-sale securities. The employee stock ownership plan was established at the time of conversion. The net loss was impacted by a contribution to our newly established charitable foundation, Iroquois Federal Foundation, Inc, of 314,755 shares of IF Bancorp, Inc. stock (valued at $3,147,550 at time of conversion) as well as a cash donation of $450,000.

Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010

General. Net income decreased $2.3 million, or 254.8%, to a ($1.4 million) net loss for the three months ended September 30, 2011 from $888,000 net income for the three months ended September 30, 2010. The decrease was primarily due to a $3.8 million increase in noninterest expense and a $474,000 decrease in noninterest income, partially offset by $510,000 increase in net interest income, an $86,000 decrease in provision for loan losses, and a $1.4 million reduction in income tax expense. The increase in noninterest expense was primarily due to contributions to the charitable foundation that was established at the time of our mutual to stock conversion. IF Bancorp, Inc. donated 314,755 shares of its stock (valued at $3,147,550 at the time of conversion) and the Association made a cash donation of $450,000.

Net Interest Income. Net interest income increased by $510,000, or 17.4%, to $3.4 million for the three months ended September 30, 2011 from $2.9 million for the three months ended September 30, 2010. The increase was due to a decrease of $406,000 in interest expense and an increase in $104,000 in interest income. The increase in net interest income was primarily the result of a $79.7 million, or 21.5% increase in the average balance of interest earning assets, partially offset by a $33.9 million, or 9.8% increase in average balance of interest bearing liabilities. Our net interest


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margin decreased 11 basis points to 3.06% for the three months ended September 30, 2011 compared to 3.17% for the three months ended September 30, 2010, and our net interest rate spread decreased 17 basis points to 2.89% for the three months ended September 30, 2011 compared to 3.06% for the three months ended September 30, 2010.

Interest Income. Interest income increased $104,000, or 2.4%, to $4.5 million for the three months ended September 30, 2011 from $4.4 million for the three months ended September 30, 2010. The increase in interest income was primarily due to a $276,000 increase in interest income on securities, which resulted from an increase in the average balance of securities of $70.8 million, or 55.3%, to $198.7 million for the three months ended September 30, 2011 from $128.0 million for the three months ended September 30, 2010. The average balance of securities increased due to the investment of the proceeds received in the mutual to stock conversion. This growth was partially offset by a 69 basis point, or 19.7% decrease in the average yield on securities from 3.51% to 2.82%. The decrease in the average yield was primarily due to lower market interest rates during the period.

Interest income on loans decreased $183,000 as a $6.7 million increase in the average balance of loans to $243.1 million at September 30, 2011 was more than offset by a 45 basis point decrease in the average yield on loans from 5.50% to 5.05%. The decrease in the average yield on loans reflected both a reduction in the current interest rates charged on loans originated during the period versus the average rates on existing loans in the portfolio, and a portion of our adjustable rate one-to-four family residential loans that adjusted to a lower rate at the contractual adjustment term.

Interest Expense. Interest expense decreased $406,000, or 28.2%, to $1.0 million for the three months ended September 30, 2011 from $1.4 million for the three months ended September 30, 2010. The decrease occurred due to lower market interest rates during the period partially offset by higher deposit balances.

Interest expense on interest-bearing deposits decreased by $393,000, or 32.7%, to $809,000 for the three months ended September 30, 2011 from $1.2 million for the three months ended September 30, 2010. This decrease was primarily due to a decrease of 50 basis points in the average cost of interest-bearing deposits to 1.50% for the three months ended September 30, 2011 from 1.00% for the three months ended September 30, 2010. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended September 30, 2011, reflecting lower market interest rates as compared to the prior period. The decrease in average cost was partially offset by a $4.4 million, or 1.4%, increase in the average balance of interest-bearing deposits to $324.0 million for the three months ended September 30, 2011 from $319.6 million for the three months ended September 30, 2010.

Interest expense on borrowings decreased $13,000, or 5.4%, to $226,000 for the three months ended September 30, 2011 from $239,000 for the three months ended September 30, 2010. This decrease was due to a 208 basis point decrease in the average cost of such borrowings to 1.64% for the three months ended September 30, 2011 from 3.72% for the three months ended September 30, 2010. This was partially offset by an increase in the average balance of borrowings to $55.2 million for the three months ended September 30, 2011 from $25.7 million for the three months ended September 30, 2010.

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 $139,000 for the three months ended September 30, 2011, compared to a provision for loan losses of $225,000 for the three months ended September 30, 2010. The allowance for loan losses was $3.0 million, or 1.24% of total loans, at September 30, 2011, compared to $2.6 million, or 1.11% of total loans, at September 30, 2010 and $3.1 million, or 1.29% of total loans, at June 30, 2011. The increase in the non-performing loans was due to the addition of one loan relationship totaling $2.1 million due to a troubled debt restructure during the quarter. The loans were substantially collateralized, thus the impact to the allowance for loan losses was minimal.

During the three months ended September 30, 2011 and 2010, $268,000 and $368,000 in net charge-offs were recorded. One-to-four family real estate loans experienced gross charge-offs of $262,000 compared to a provision expense of $107,000 for the three months ended September 30, 2011. Of this amount $255,000 in charge-offs related to four credits which had a specific reserve of $210,000 as of June 30, 2011.


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                                                                                          Three Months
                                                                                              Ended            Year Ended
The following table sets forth information regarding the allowance for loan losses and    September 30,         June 30,
nonperforming assets at the dates indicated:                                                  2011                2011

Allowance to non-performing loans                                                                  44.95 %           59.73 %
Allowance to total loans outstanding at the end of the period                                       1.24 %            1.29 %
Net charge-offs to average total loans outstanding during the period, annualized                    0.44 %             .40 %
Total non-performing loans to total loans                                                           2.75 %            2.16 %
Total non-performing assets to total assets                                                         1.55 %            1.17 %


Noninterest Income. Noninterest income decreased $474,000, or 39.4%, to $730,000
for the three months ended September 30, 2011 compared to $1.2 million for the
three months ended September 30, 2010. The decrease was primarily due to
decreases in mortgage banking income, net realized gains on the sale of
available-for-sale securities, insurance commissions and other service charges
and fees. For the three months ended September 30, 2011, mortgage banking income
decreased $204,000 to ($28,000), net realized gains on sale of
available-for-sale securities decreased $178,000 to $50,000, insurance
commissions decreased 33,000 to $183,000 and other service charges and fees
decreased 34,000 to $43,000. The decrease in mortgage banking income was due
primarily to a reduction in the fair value of mortgage servicing rights as a
result of decreased market interest rates. The decrease in the net realized
gains on the sale of available-for-sale securities was due to the rate
environment in the quarter ended September 30, 2010, that allowed for profits to
be gained when repositioning the investment portfolio that were not available in
the quarter ended September 30, 2011.

Noninterest Expense. Noninterest expense increased $3.8 million, or 150.0%, to
$6.3 million for the three months ended September 30, 2011 from $2.5 million for
the three months ended September 30,, 2010. The largest components of this
increase were charitable contributions, which increased $3.6 million,
compensation and benefits, which increased $155,000, or 9.69%, professional
services expense, which increased $48,000, or 104.4%, audit and accounting,
which increased $22,000, or 95.7%, and gain on foreclosed assets, net, which
decreased $63,000, or 82.9%. The increase in charitable contributions was
primarily due to a contribution to our newly established charitable foundation,
Iroquois Federal Foundation, Inc., of 314,755 shares of IF Bancorp, Inc. stock
(valued at $3,147,550 at time of conversion) as well as a cash donation of
$450,000. Increased staffing, normal salary increases and increases in payroll
taxes primarily accounted for the increase in compensation and benefits expense.
Increases in professional services and audit and accounting expense were a
result of increased costs associated with transitioning to a public company.
These increases were partially offset by a decrease of $46,000 in deposit
insurance premium resulting from the new FDIC formula used to calculate this
premium.

Income Tax Expense.We recorded a benefit for income tax of ($935,000) for the
three months ended September 30, 2011, compared to a provision for income tax of
$483,000 for the three months ended September 30, 2010, reflecting effective tax
rates of (40.5%) and 35.2%, respectively. The tax benefit for the three months
ended September 30, 2011 was due to a contribution to our newly established
charitable foundation, Iroquois Federal Foundation, Inc., of 314,755 shares of
IF Bancorp, Inc. stock (valued at $3,147,550 at time of conversion) as well as a
cash donation of $450,000.

Asset Quality

At September 30, 2011, our non-accrual loans totaled $6.7 million, including
$4.8 million in one- to four-family loans, $1.6 million in multi-family loans,
. . .
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