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IROQ > SEC Filings for IROQ > Form 10-Q on 10-Feb-2014All Recent SEC Filings

Show all filings for IF BANCORP, INC.

Form 10-Q for IF BANCORP, INC.


10-Feb-2014

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) increased to 2.83% for the six months ended December 31, 2013 from 2.77% for the six months ended December 31, 2012. An increase in the average balance of interest-earning assets contributed to an increase in net interest income to $7.8 million for the six months ended December 31, 2013 from $7.1 million for the six months ended December 31, 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 assets totaled $3.9 million or 0.69% of total assets at December 31, 2013, and $4.7 million, or 0.87% of total assets at June 30, 2013.

At December 31, 2013, the Association was categorized as "well capitalized" under regulatory capital requirements.

Our net income for the six months ended December 31, 2013 was $1.6 million, compared to a net income of $1.8 million for the six months ended December 31, 2012. The decrease in net income was due to a decrease in noninterest income, and an increase in noninterest expense, partially offset by an increase in net interest income and a decrease in the provision for loan losses.

Management's discussion and analysis of the financial condition and results of operations at and for the three and six months ended December 31, 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.

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


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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, 2013.

Comparison of Financial Condition at December 31, 2013 and June 30, 2013

Total assets increased $20.7 million, or 3.8%, to $568.2 million at December 31, 2013 from $547.5 million at June 30, 2013. The increase was primarily due to a $13.0 million increase in investment securities, a $6.4 million increase in net loans and a $437,000 increase in cash and cash equivalents.

Net loans receivable, including loans held for sale, increased by $6.4 million, or 2.0%, to $322.2 million at December 31, 2013 from $315.8 million at June 30, 2013. The increase in net loans receivable during this period was due primarily to a $2.8 million, or 3.8%, increase in commercial real estate loans, a $1.6 million or 8.3% increase in commercial business loans, a $1.5 million, or 1.0% increase in one-to four-family loans, and a $1.2 million, or 2.0% increase in multi-family loans, partially offset by a $420,000, or 5.1% decrease in home equity lines of credit, a $372,000, or 3.9% decrease in consumer loans, and a $247,000, or 9.9% decrease in construction loans.

Investment securities, consisting entirely of securities available for sale, increased $13.0 million, or 6.5%, to $213.8 million at December 31, 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 December 31, 2013 or June 30, 2013.

As of December 31, 2013, premises and equipment increased $450,000 to $4.7 million, deferred income taxes increased $718,000 to $3.9 million, foreclosed assets held for sale decreased $160,000 to $258,000 and other assets decreased $415,000 to $392,000 from the respective balances as of June 30, 2013. The increase in premises and equipment was due to the purchase of an office building and land for a future branch in Savoy, Illinois, and the increase in deferred income taxes was the result of a change in the unrealized gain/loss on available-for-sale securities. The decrease in foreclosed assets held for sale was due to the sale of other real estate owned, and the decrease in other assets resulted from a decrease in accounts receivable general due to the receipt of a receivable that was outstanding as of June 30, 2013.

At December 31, 2013, our investment in bank-owned life insurance was $7.9 million, an increase of $134,000 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 $17.1 million at December 31, 2013.


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Deposits increased $17.2 million, or 4.6%, to $388.4 million at December 31, 2013 from $371.2 million at June 30, 2013. Certificates of deposit, excluding brokered certificates of deposit, increased $21.5 million, or 11.4%, to $210.2 million, savings, NOW, and money market accounts decreased $6.8 million, or 5.2%, to $125.0 million, brokered certificates of deposit increased $2.5 million, or 6.7%, to $40.4 million, and noninterest bearing demand accounts increased $17,000, or 0.1%, to $12.8 million. Repurchase agreements increased $914,000, or 54.6%, to $2.6 million at December 31, 2013, from $1.7 million at June 30, 2013. Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, increased $5.5 million, or 6.3%, to $93.0 million at December 31, 2013 from $87.5 million at June 30, 2013.

Other liabilities decreased $295,000, or 14.4%, to $1.8 million at December 31, 2013 from $2.1 million on June 30, 2013. The decrease was attributable to a general decrease in accounts payable and accrued expenses payable due to timing of payments.

Total equity decreased $2.8 million, or 3.4%, to $78.9 million at December 31, 2013 from $81.7 million at June 30, 2013. Equity decreased due to stock repurchases of $3.3 million and a decrease in accumulated other comprehensive income (loss), net of tax, of $1.1 million, partially offset by net income of $1.6 million. The decrease in other accumulated income was primarily due to an increase in unrealized losses on securities available for sale of $1.1 million. A stock repurchase program was adopted during the six months ended December 31, 2013, which authorized the Company to repurchase up to 228,535 shares of its common stock, or approximately 5% of the then current outstanding shares. As of December 31, 2013, 198,409 shares were repurchased (197,909 of which were repurchased during the three months ended December 31, 2013), leaving the maximum number of shares that may yet be repurchased under the plan at 30,126.

Comparison of Operating Results for the Six Months Ended December 31, 2013 and 2012

General. Net income decreased $203,000 to $1.6 million net income for the six months ended December 31, 2013 from a $1.8 million net income for the six months ended December 31, 2012. The decrease was due to a decrease in noninterest income and an increase in noninterest expense, partially offset by an increase in net interest income and a decrease in the provision for loan losses.

Net Interest Income. Net interest income increased by $623,000, or 8.7%, to $7.8 million for the six months ended December 31, 2013 from $7.1 million for the six months ended December 31, 2012. The increase was due to an increase of $597,000 in interest and dividend income and a decrease of $26,000 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 and FHLB advances. We had a $37.3 million, or 7.6%, increase in the average balance of interest earning assets, partially offset by a $35.7 million, or 8.6%, increase in average balance of interest bearing liabilities. We also had an increase in our interest rate spread by 5 basis points to 2.83% for the six months ended December 31, 2013 compared to 2.78% for the six months ended December 31, 2012, and an increase in our net interest margin by 3 basis points to 2.93% for the six months ended December 31, 2013 compared to 2.90% for the six months ended December 31, 2012.

Interest and Dividend Income. Interest and dividend income increased $597,000, or 6.9%, to $9.3 million for the six months ended December 31, 2013 from $8.7 million for the six months ended December 31, 2012. The increase in interest income was primarily due to a $789,000 increase in interest income on loans, partially offset by a $193,000 decrease in interest on securities. The increase in interest income on loans resulted from a $52.7 million, or 19.5%, increase in the average balance of loans to $322.5 million for the six months ended December 31, 2013, from $269.8 million for the six months ended December 2012, partially offset by a 24 basis point, or 5.4%, decrease in the average yield on loans from 4.48% to 4.24%. Interest on securities decreased $193,000, or 7.3%, as a result of a $12.5 million decrease in the average balance of securities to $199.7 at December 31, 2013 and a 4 basis point decrease in the average yield on securities from 2.50% to 2.47%. The decrease in the average yield on loans and securities reflected a reduction in the current interest rates charged on loans originated and earned on securities purchased during the period versus the average rates on loans and securities in the portfolio in the prior period.


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Interest Expense. Interest expense decreased $27,000, or 1.7%, and was $1.6 million for the six months ended December 31, 2013 and for the six months ended December 31, 2012. The decrease was primarily due to lower market interest rates during the period.

Interest expense on interest-bearing deposits increased by $15,000, or 1.3%, to $1.2 million for the six months ended December 31, 2013 from $1.1 million for the six months ended December 31, 2012. This increase was primarily due to an increase of $36.8 million in the average balance of interest-bearing deposits to $367.2 million for the six months ended December 31, 2013 from $330.4 million for the six months ended December 31, 2012, partially offset by a 6 basis point, or 8.8%, decrease in the average cost of interest bearing deposits to 0.63% for the six months ended December 30, 2013, from 0.69% for the six months ended December 30, 2012. We experienced decreases in the average cost across all categories of interest-bearing deposits for the six months ended December 31, 2013, reflecting lower market interest rates as compared to the prior period.

Interest expense on borrowings decreased $42,000, or 9.3%, to $408,000 for the six months ended December 31, 2013 from $450,000 for the six months ended December 31, 2012. This decrease was due a 9 basis point decrease in the average cost of such borrowings to 0.98% for the six months ended December 31, 2013 from 1.07% for the six months ended December 31, 2012 and a decrease in the average balance of borrowings to $83.3 million for the six months ended December 31, 2013 from $84.4 million for the six months ended December 31, 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 $226,000 for the six months ended December 31, 2013, compared to a provision for loan losses of $507,000 for the six months ended December 31, 2012. The allowance for loan losses was $3.9 million, or 1.20% of total loans, at December 31, 2013, compared to $4.0 million, or 1.37% of total loans, at December 31, 2012 and $3.9 million, or 1.23% of total loans, at June 30, 2013. Non-performing loans decreased to $3.7 million during the six month period ended December 31, 2013. During the six months ended December 31, 2013, a net charge-off of $258,000 was recorded while during the six months ended December 31, 2012, a net charge-off of $73,000 was recorded.


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

                                                      Six Months
                                                        Ended
                                                     December 31,              Year Ended
                                                         2013                 June 30, 2013

Allowance to non-performing loans                           106.75 %                   91.12 %
Allowance to total loans outstanding at the
end of the period                                             1.20 %                    1.23 %
Net charge-offs to average total loans
outstanding during the period, annualized                      .16 %                     .07 %
Total non-performing loans to total loans                     1.12 %                    1.35 %
Total non-performing assets to total assets                    .69 %                     .87 %

Noninterest Income. Noninterest income decreased $897,000, or 36.4%, to $1.6 million for the six months ended December 31, 2013 compared to $2.5 million for the six months ended December 31, 2012. The decrease was primarily due to decreases in net realized gains on the sale of securities available for sale, net gains on sale of loans, and other service charges and fees, partially offset by an increase in brokerage commissions. For the six months ended December 31, 2013, net realized gains on the sale of securities available for sale decreased from $568,000 to ($104,000), net gains of sale of loans decreased from $207,000 to $72,000, and other service charges and fees decreased from $147,000 to $72,000, while brokerage commissions increased from $268,000 to $336,000. The decrease in net realized gains on the sale of available-for-sale securities was due to the rate environment in the six months ended December 31, 2012, that allowed for profits to be gained when repositioning the investment portfolio that were not available in the six months ended December 31, 2013. The decrease in gains on sale of loans was due to a decrease in the number of loans sold to the Federal Home Loan Bank of Chicago in the six months ending December 31, 2013, and the decrease in other service charges and fees was due to a decrease in the number of fees. The increase in brokerage commissions reflects increased activity due to movement in interest rates.

Noninterest Expense. Noninterest expense increased $365,000, or 5.9%, to $6.6 million for the six months ended December 31, 2013 from $6.2 million for the six months ended December 31, 2012. The largest components of this increase were salaries and benefits, which increased $423,000, or 11.2%, and loss on foreclosed assets, net, which increased $213,000, to a loss of $192,000 in the six months ended December 31, 2013 from a gain of $21,000 for the six months ended December 30, 2012. Increased staffing, normal salary increases, and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense. Loss on foreclosed assets, net, increased due to gains taken in the six months ended December 31, 2012. These increases were partially offset by decreases in equipment expense, professional services, and audit and accounting. The decrease in equipment expense was due to increased expenses in the six months ended December 31, 2012, when we relocated our information technology department to a more secure and efficient location. Decreases in audit and accounting and professional services were due to additional services received in the three months ended December 31, 2012.

Income Tax Expense (Benefit). We recorded a provision for income tax of $852,000 for the six months ended December 31, 2013, compared to a provision for income tax of $1.0 million for the six months ended December 31, 2012, reflecting effective tax rates of 34.2% and 35.4%, respectively.

Comparison of Operating Results for the Three Months Ended December 31, 2013 and 2012

General. Net income increased $188,000 to $897,000 net income for the three months ended December 31, 2013 from a $709,000 net income for the three months ended December 31, 2012. The increase was primarily due to increases in the interest income and a decrease in the provision for loan losses, partially office by a decrease in non-interest income, an increase in noninterest expense, an increase in interest expense, and an increase in income tax expense.


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Net Interest Income. Net interest income increased $452,000 to $4.0 million for the three months ended December 31, 2013 from $3.5 million for the three months ended December 31, 2012. The increase was a result of a $453,000 increase in interest income, partially offset by a $1,000 increase in interest expense. We had a $49.8 million, or 10.1% increase in the average balance of interest earning assets, partially offset by a $49.0 million, or 11.8% increase in average balance of interest bearing liabilities. We also had an increase in our interest rate spread by 10 basis points to 2.82% for the three months ended December 31, 2013 compared to 2.72% for the three months ended December 31, 2012, and an increase in our net interest margin by 7 basis points to 2.92% for the three months ended December 31, 2013 compared to 2.85% for the three months ended December 31, 2012.

Interest and Dividend Income. Interest and dividend income increased $453,000, or 10.5%, to $4.8 million for the three months ended December 31, 2013 from $4.3 million for the three months ended December 31, 2012. The increase in interest and dividend income was primarily due to a $425,000 increase in interest income on loans, which resulted from a $48.7 million, or 17.5%, increase in the average balance of loans to $326.1 million for the three months ending December 31, 2013, from $277.5 million for the three months ending December 31, 2012, partially offset by a 13 basis point, or 3.0% decrease in the average yield on loans from 4.36% to 4.23%. Interest on securities increased $27,000, or 2.1%, as the average balance increased by $1.3 million, or 0.6% to . . .

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