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IROQ > SEC Filings for IROQ > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for IF BANCORP, INC.

Form 10-Q for IF BANCORP, INC.


13-Nov-2013

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 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, 2013, 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 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 and Hoopeston, Illinois and Osage Beach, Missouri. We have received regulatory clearance to open a new branch office at 108 Arbours Drive, Savoy, Illinois, which we expect to open in the first calendar quarter of 2014. 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 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, 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 2.82% for the three months ended September 30, 2013 and 2012. An increase in interest-earning assets contributed to an increase in net interest income to $3.8 million, or $15.1 million, on an annualized basis, for the three months ended September 30, 2013 from $3.6 million, or $14.4 million on an annualized basis, for the three months ended September 30, 2012.


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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 loans totaled $4.3 million or 1.35% of total loans at both September 30 and June 30, 2013. Our non-performing assets totaled $4.6 million or 0.85% of total assets at September 30, 2013, and $4.7 million, or 0.87% of total assets at June 30, 2013.

At September 30, 2013, the Association was categorized as "well capitalized" under federal regulations.

Our net income for the three months ended September 30, 2013 was $742,000, compared to a net income of $1.1 million for the three months ended September 30, 2012. The decrease in net income was due to a decrease in noninterest income, an increase in noninterest expense and an increase in the provision for loan losses, partially offset by an increase in interest income and a decrease in interest expense.

Management's discussion and analysis of the financial condition and results of operations at and for three months ended September 30, 2013 and 2012 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.


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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 the fiscal year ended June 30, 2013.

Comparison of Financial Condition at September 30 and June 30, 2013

Total assets decreased $7.5 million, or 1.4%, to $540.0 million at September 30, 2013 from $547.5 million at June 30, 2013. The decrease was primarily due to a $13.4 million decrease in investment securities, partially offset by an increase of $4.1 million in cash and cash equivalents and a $2.1 million increase in net loans.

Net loans receivable, including loans held for sale, increased by $2.1 million, or 0.7%, to $317.8 million at September 30, 2013 from $315.8 million at June 30, 2013. The increase in net loans receivable during this period was due primarily to a $2.0 million, or 2.7%, increase in commercial real estate loans, a $1.3 million, or 6.7%, increase in commercial business loans and a $910,000, or 1.6%, increase in multi-family loans. These increases were partially offset by a decrease of $1.3 million, or 51.6%, in construction loans, a decrease of $334,000, or 4.1%, in home equity lines of credit, a decrease of $420,000, or 0.3%, in one-to four-family residential mortgage loans, and a decrease of $236,000, or 2.4%, in consumer loans.

Investment securities, consisting entirely of securities available for sale, decreased $13.4 million, or 6.7%, to $187.4 million at September 30, 2013 from $200.8 million at June 30, 2013. Purchased investment securities, consisted primarily of agency debt obligations with terms of four to seven years and fixed-rate 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, 2013 or June 30, 2013.

As of September 30, 2013, accrued interest receivable increased $308,000 to $2.0 million, foreclosed assets held for sale decreased $158,000 to $260,000, and other assets decreased $493,000 to $314,000 from the respective balances as of June 30, 2013. The increase in accrued interest receivable was primarily due to an increase in interest receivable on loans while the decrease in other real estate resulted from the sales of other real estate owned, and the decrease in other assets resulted from a decrease in accounts receivable due to the receipt of a receivable that was outstanding as of June 30, 2013.


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At September 30, 2013, our investment in bank-owned life insurance was $7.8 million, an increase of $67,000 from $7.8 million at June 30, 2013. 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 $16.8 million at September 30, 2013.

Deposits increased $9.6 million, or 2.6%, to $380.8 million at September 30, 2013 from $371.2 million at June 30, 2013. Certificates of deposit, excluding brokered certificates of deposit, increased $19.9 million, or 10.5%, to $208.7 million, brokered certificates of deposit increased $542,000, or 1.4%, to $38.4 million, savings, NOW, and money market accounts decreased $10.7 million, or 8.1%, to $121.1 million, and noninterest bearing demand accounts decreased $190,000, or 1.5%, to $12.6 million. Repurchase agreements decreased $235,000, or 14.0%, to $1.4 million at September 30, 2013 from $1.7 million at June 30, 2013. Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, decreased $17.0 million, or 19.4%, to $70.5 million at September 30, 2013 from $87.5 million at June 30, 2013.

Advances from borrowers for taxes and insurance decreased $237,000, or 24.5%, to $729,000 at September 30, 2013 from $966,000 at June 30, 2013. Other liabilities decreased $66,000, or 3.2%, to $2.0 million at September 30, 2013 from $2.1 million on June 30, 2013. The decrease in advances from borrowers for taxes and insurance was attributable to the timing of the payment of real estate taxes and insurance, while the decrease in other liabilities was due to a general decrease in accounts payable and accrued expenses payable due to the timing of payments.

Total equity increased $415,000, or 0.5%, to $82.2 million at September 30, 2013 from $81.7 million at June 30, 2013. Equity increased due to net income of $742,000, partially offset by dividends payable of $229,000 and a decrease of $167,000 in accumulated other comprehensive income, net of tax. The decrease in other accumulated income was primarily due to an increase in unrealized losses on securities available for sale of $167,000. The increase in unrealized losses on securities available-for-sale was due to lower market values of available-for-sale securities. A stock repurchase program was adopted during the quarter ended September 30, 2013, which authorized the company to repurchase up to 228,535 shares of its common stock, or approximately 5% of the current outstanding shares. As of September 30, 2013, 500 shares were repurchased, leaving the maximum number of shares that may yet be purchased under the plan at 228,035.

Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General. Net income decreased $391,000 to $742,000 net income for the three months ended September 30, 2013 from $1.1 million net income for the three months ended September 30, 2012. The decrease was primarily due to an increase in noninterest expense, a decrease in noninterest income and an increase in the provision for loan losses, partially offset by an increase in interest income and a decrease in interest expense

Net Interest Income. Net interest income increased by $171,000, or 4.7%, to $3.8 million for the three months ended September 30, 2013 from $3.6 million for the three months ended September 30, 2012. The increase was due to an increase of $144,000 in interest income and a decrease of $27,000 in interest expense. The increase in net interest income was primarily the result of an increase in the average balance of interest earning assets and lower rates paid on certificates of deposit. We had a $24.8 million, or 5.1% increase in the average balance of interest earning assets, partially offset by a $22.4 million, or 5.4% increase in average balance of interest bearing liabilities. We also had a slight decrease in our net interest margin by 1 basis point to 2.93% for the three months ended September 30, 2013 compared to 2.94% for the three months ended September 30, 2012, while our interest rate spread was 2.82% for both three month periods.

Interest Income. Interest income increased $144,000, or 3.3%, to $4.5 million for the three months ended September 30, 2013 from $4.4 million for the three months ended September 30, 2012. The increase in interest income was primarily due to a $364,000 increase in interest income on loans, partially offset by a $220,000 decrease in interest on securities. The increase in interest income on loans resulted from a $56.7 million, or 21.6%, increase in the average balance of loans to $318.9 million for the three months ended September 30, 2013, from $262.2 million for the three months ended


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September 30, 2012, partially offset by a 37 basis point, or 8.0%, decrease in the average yield on loans from 4.62% to 4.25%. Interest on securities decreased $220,000, or 16.1%, as a result of a $26.2 million, or 12.3%, decrease in the average balance of securities to $187.8 million for the three months ended September 30, 2013, from $214.0 million for the three months ended September 30, 2012, and an 11 basis point, or 4.2%, decrease in the average yield on securities from 2.56% to 2.45%. The decrease in the average yield on loans and securities reflected a reduction in the current interest rates charged on loans originated and on securities purchased during the period versus the average rates on existing loans and securities in the portfolio.

Interest Expense. Interest expense decreased $27,000, or 3.4%, to $772,000 for the three months ended September 30, 2013 from $799,000 for the three months ended September 30, 2012. The decrease was primarily due to lower market interest rates during the 2013 period.

Interest expense on interest-bearing deposits increased by $1,000, or 0.2%, to $572,000 for the three months ended September 30, 2013 from $571,000 for the three months ended September 30, 2012. This slight increase was primarily due to a $35.4 million, or 10.8% increase in the average balance of interest bearing deposits to $363.8 for the three months ended September 30, 2013, from $328.4 million for the three months ended September 30, 2012, partially offset by a 7 basis point, or 10.0%, decrease in the average cost of interest bearing deposits to 0.63% for the three months ended September 30, 2013, from 0.70% for the three months ended September 30, 2012. We experienced decreases in the average cost across most categories of interest-bearing deposits for the three months ended September 30, 2013, reflecting lower market interest rates as compared to the prior period.

Interest expense on borrowings, including FHLB advances and repurchase agreements, decreased $28,000, or 12.3%, to $200,000 for the three months ended September 30, 2013 from $228,000 for the three months ended September 30, 2012. This decrease was due to a decrease in the average balance of borrowings to $73.6 million for the three months ended September 30, 2013 from $86.7 million for the three months ended September 30, 2012. This was partially offset by a 4 basis point increase in the average cost of such borrowings to 1.09% for the three months ended September 30, 2013 from 1.05% for the three months ended September 30, 2012.

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 $179,000 for the three months ended September 30, 2013, compared to a provision for loan losses of $102,000 for the three months ended September 30, 2012. The allowance for loan losses was $4.0 million, or 1.23% of total loans, at September 30, 2013, compared to $3.7 million, or 1.39% of total loans, at September 30, 2012 and $3.9 million, or 1.23% of total loans, at June 30, 2013. Non-performing loans increased by $23,000 during the three month period ended September 30, 2013. During the three months ended September 30, 2013, a net charge-off of $150,000 was recorded while during the three months ended September 30, 2012, a net recovery of $39,000 was recorded.

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

                                                   Three Months
                                                       Ended                      Year Ended
                                                September 30, 2013               June 30, 2013

Allowance to non-performing loans                             91.30 %                     91.12 %
Allowance to total loans outstanding
at the end of the period                                       1.23 %                      1.23 %
Net charge-offs (recoveries) to
average total loans outstanding during
the period, annualized                                         0.19 %                      0.07 %
Total non-performing loans to total
loans                                                          1.35 %                      1.35 %
Total non-performing assets to total
assets                                                         0.85 %                      0.87 %


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Noninterest Income. Noninterest income decreased $550,000, or 40.1%, to $821,000 for the three months ended September 30, 2013 compared to $1.4 million for the three months ended September 30, 2012. The decrease was primarily due to decreases in net realized gains on the sale of available-for-sale securities and other service charges and fees, partially offset by an increase in brokerage commissions. For the three months ended September 30, 2013, net realized gains (losses) on the sale of available-for-sale securities decreased from $473,000 to ($60,000) and other service charges and fees decreased from $72,000 to $46,000, while brokerage commissions increased from $114,000 to $168,000. The decrease in net realized gains (losses) on the sale of available-for-sale securities was due to the interest rate environment in the three months ended September 30, 2012, that allowed for profits to be gained when repositioning the investment portfolio, while a net loss was taken when repositioning in the three months ended September 30, 2013. The decrease in other service charges and fees was due to a decrease in the number of loan fees, while the increase in brokerage commissions was a result of increased activity due to movement in interest rates.

Noninterest Expense. Noninterest expense increased $231,000, or 7.5%, to $3.3 million for the three months ended September 30, 2013 from $3.1 million for the three months ended September 30, 2012. The largest components of this increase were compensation and benefits, which increased $243,000, or 13.0%, and net loss on foreclosed assets, which increased $140,000, or 583.3%. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense. Net loss on foreclosed assets increased due to gains taken in the three months ended September 30, 2012. These increases were partially offset by decreases in professional services of $9,000 and other operating expenses of $159,000. Decreases in professional services were due to the timing of an external loan review while decreases in operating expenses were due to a combination of decreases in loan expenses, other real estate owned expenses, and bank charges.

Income Tax Expense. We recorded a provision for income tax of $351,000 for the three months ended September 30, 2013, compared to a provision for income tax of $647,000 for the three months ended September 30, 2012, reflecting effective tax rates of 32.1% and 36.3%, respectively.

Asset Quality

At September 30, 2013, our non-accrual loans totaled $4.0 million, including $3.3 million in one-to four-family loans, $340,000 in multi-family loans, $87,000 in commercial real estate loans, $15,000 in home equity lines of credit, $239,000 in commercial business loans and $50,000 in consumer loans. The commercial real estate loans are secured by commercial rental properties. At September 30, 2013, we had eight one-to four-family loans totaling $301,000 delinquent 90 days or greater and still accruing interest.

At September 30, 2013, loans classified as substandard and doubtful equaled $6.1 million and $34,000, respectively. Loans classified as substandard consisted of $4.1 million in one-to four-family loans, $1.7 million in multi-family loans, $61,000 in commercial real estate loans, $15,000 in home equity lines of credit, $239,000 in commercial business loans and $42,000 in consumer loans. Loans classified as doubtful consisted of $26,000 in commercial real estate loans and $8,000 in consumer loans. No loans were classified as loss at September 30, 2013.

At September 30, 2013, watch assets consisted of $478,000 in one-to four-family residential mortgage loans, $181,000 in multi-family loans, $369,000 in commercial real estate loans, and $961,000 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 September 30, 2013 and June 30, 2013, we had $3.1 million and $3.3 million, respectively, of troubled debt restructurings. At September 30, 2013 our troubled debt restructurings consisted of $1.7 million in one-to four-family residential mortgage loans, $1.4 million in multi-family loans, $26,000 in commercial real estate loans, and $36,000 in commercial business loans.

At September 30 2013, we had $260,000 in foreclosed assets compared to $418,000 as of June 30, 2013. Foreclosed assets at September 30, 2013, consisted of four residential real estate properties and one automobile while foreclosed assets at . . .

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