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IROQ > SEC Filings for IROQ > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for IF BANCORP, INC.

Form 10-Q for IF BANCORP, INC.


12-May-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 Iroquois Federal Savings and Loan Association's (the "Association") 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 bringing the total shares issued in connection with the conversion 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.

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, and Savoy, Illinois and Osage Beach, Missouri. Our newest branch located at 108 Arbours Drive, in Savoy, Illinois, was opened on April 1, 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, repurchase agreements, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, insurance commission income, net realized gains on loan sales, mortgage banking income, and income on bank-owned life insurance. Noninterest expense consists primarily of compensation and benefits, occupancy and equipment, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.


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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) increased to 2.83% for the nine months ended March 31, 2014 from 2.75% for the nine months ended March 31, 2013. An increase in interest-earning assets contributed to an increase in net interest income to $11.8 million for the nine months ended March 31, 2014 from $10.8 million for the nine months ended March 31, 2013.

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 $3.3 million or 0.6% of total assets at March 31, 2014, and $4.7 million, or 0.87% of total assets at June 30, 2013.

At March 31, 2014, the Association was categorized as "well capitalized" under regulatory capital requirements.

Our net income for the nine months ended March 31, 2014 was $2.5 million, compared to a net income of $2.8 million for the nine months ended March 31, 2013. The decrease in net income was primarily 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 nine months ended March 31, 2014 and 2013 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 fiscal year ended June 30, 2013.

Comparison of Financial Condition at March 31, 2014 and June 30, 2013

Total assets increased $30.8 million, or 5.6%, to $578.3 million at March 31, 2014 from $547.5 million at June 30, 2013. The increase was primarily due to a $11.4 million increase in net loans, a $13.3 million increase in investment securities, and a $5.9 million increase in cash and cash equivalents.

Net loans receivable increased by $11.4 million, or 3.6%, to $327.2 million at March 31, 2014 from $315.8 million at June 30, 2013. The increase in net loans receivable during this period was due primarily to a $7.4 million, or 10.0%, increase in commercial real estate loans, a $4.2 million, or 7.1%, increase in multi-family loans, a $2.1 million, or 1.4%, increase in one-to four-family loans and a $950,000, or 4.8%, increase in commercial business loans. These increases were partially offset by a decrease of $834,000, or 33.4%, in construction loans, a decrease of $933,000, or 9.7%, in consumer loans, and a decrease of $688,000, or 8.4%, in home equity lines of credit.

Investment securities, consisting entirely of securities available-for-sale, increased $13.3 million, or 6.6%, to $214.1 million at March 31, 2014 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 March 31, 2014 or June 30, 2013.

As of March 31, 2014, interest receivable increased $336,000 to $2.0 million, premises and equipment increased $607,000 to $4.9 million, foreclosed assets held for sale (other real estate owned) decreased $37,000 to $381,000 and other assets decreased $465,000 to $342,000 from the respective balances as of June 30, 2013. Federal Home Loan Bank stock was $5.4 million at both March 31, 2014 and June 30, 2013. The increase in interest receivable was primarily due to increases in interest receivable on investments and interest receivable on commercial loans and the increase in premises and equipment was due to the purchase of an office building, furniture, and equipment for our new branch office in Savoy, Illinois. The decrease in other real estate owned is due to the sale of other real estate owned, and the decrease in other assets resulted from a decrease in prepaid insurance due to the timing of multi-year premiums and also from a decrease in accounts receivable general due to the receipt of a receivable that was outstanding as of June 30, 2013.


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At March 31, 2014, our investment in bank-owned life insurance was $8.0 million, an increase of $203,000 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 $17.3 million at March 31, 2014.

Deposits increased $33.1 million, or 8.9%, to $404.3 million at March 31, 2014 from $371.2 million at June 30, 2013. Certificates of deposit, excluding brokered certificates of deposit, increased $26.3 million, or 13.9%, to $215.0 million, savings, NOW, and money market accounts increased $463,000, or 0.4%, to $132.2 million, brokered certificates of deposit increased $2.5 million, or 6.7%, to $40.4 million, and noninterest bearing demand accounts increased $3.8 million, or 29.9%, to $16.7 million. Repurchase agreements increased $1.1 million to $2.7 million. Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, decreased $3.0 million, or 3.4%, to $84.5 million at March 31, 2014 from $87.5 million at June 30, 2013.

Other liabilities decreased $18,000, or 0.9%, to $2.0 million at March 31, 2014 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 $883,000, or 1.1%, to $80.9 million at March 31, 2014 from $81.7 million at June 30, 2013. Equity decreased due to stock repurchases of $3.8 million and the recognition of dividends in the amount of $432,000, partially offset by a net income of $2.5 million. A stock repurchase program was adopted during the nine months ended March 31, 2014, which authorized the Company to repurchase up to 228,535 shares of its common stock, or approximately 5% of then current outstanding shares. As of March 31, 2014, all 228,535 shares were repurchased. During the nine months ended March 31, 2014, the Company's Board of Directors declared two cash dividends of $0.05 per common share which were paid on October 15, 2013, and April 15, 2014.

Comparison of Operating Results for the Nine Months Ended March 31, 2014 and 2013

General. Net income decreased $293,000 to $2.5 million net income for the nine months ended March 31, 2014 from a $2.8 million net income for the nine months ended March 31, 2013. The decrease was primarily 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 provision for loan losses.

Net Interest Income. Net interest income increased by $1.0 million, or 9.4%, to $11.8 million for the nine months ended March 31, 2014 from $10.8 million for the nine months ended March 31, 2013. The increase was due to an increase of $1.0 million in interest and dividend income, partially offset by an increase of $8,000 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 $35.9 million, or 7.2% increase in the average balance of interest earning assets, partially offset by a $35.5 million, or 8.4% increase in average balance of interest bearing liabilities. Our interest rate spread increased by 8 basis points to 2.83% for the nine months ended March 31, 2014 from 2.75% for the nine months ended March 31, 2013, and our net interest margin increased by 6 basis points to 2.92% for the nine months ended March 31, 2014 from 2.86% for the nine months ended March 31, 2013.

Interest and Dividend Income. Interest and dividend income increased $1.0 million, or 7.7%, to $14.1 million for the nine months ended March 31, 2014 from $13.1 million for the nine months ended March 31, 2013. The increase in interest income was primarily due to an increase in interest income on loans, partially offset by a decrease in interest income on securities. Interest on securities decreased $74,000, or 1.9%, as an $8.8 million decrease in the average balance of securities to $204.7 million at March 31, 2014 was partially offset by a 5 basis point increase in the average yield on securities from 2.44% to 2.49%. An increase of $1.0 million in interest on loans resulted from a $47.1 million, or 16.9%, increase in the average balance of loans to $324.9 million for the nine months ended March 31, 2014, partially


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offset by a 19 basis point, or 4.3%, decrease in the average yield on loans from 4.41% to 4.22%. The decrease in the average yield on loans reflected a reduction in the current interest rates charged on loans originated during the period versus the average rates on loans in the portfolio in the prior period.

Interest Expense.Interest expense increased $8,000, or 0.3%, and was $2.3 million for both the nine months ended March 31, 2014 and for the nine months ended March 31, 2013. The slight increase was primarily due to increased average balances of deposits and borrowings, partially offset by lower market interest rates during the period.

Interest expense on interest-bearing deposits increased by $50,000, or 3.0%, to $1.7 million for the nine months ended March 31, 2014 from $1.7 million for the nine months ended March 31, 2013. This increase was primarily due to an increase in the average balance of interest-bearing deposits to $372.5 million for the nine months ended March 31, 2014, from $334.9 million for the nine months ended March 31, 2013. This increase in average balance of interest-bearing deposits was partially offset by a decrease of 5 basis points in the average cost of interest-bearing deposits to 0.62% for the nine months ended March 31, 2014 from 0.67% for the nine months ended March 31, 2013. We experienced either decreases or no change in the average cost across all categories of interest-bearing deposits for the nine months ended March 31, 2014, reflecting lower market interest rates as compared to the prior period.

Interest expense on borrowings decreased $42,000, or 6.4%, to $617,000 for the nine months ended March 31, 2014 from $659,000 for the nine months ended March 31, 2013. This decrease was due to a 5 basis point decrease in the average cost of such borrowings to 0.95% for the nine months ended March 31, 2014 from 1.00% for the nine months ended March 31, 2013, and a decrease in the average balance of borrowings to $86.2 million for the nine months ended March 31, 2014 from $88.3 million for the nine months ended March 31, 2013.

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 $366,000 for the nine months ended March 31, 2014, compared to a provision for loan losses of $552,000 for the nine months ended March 31, 2013. The allowance for loan losses was $3.9 million, or 1.18% of total loans, at March 31, 2014, compared to $4.0 million, or 1.35% of total loans, at March 31, 2013, and $3.9 million, or 1.23% of total loans, at June 30, 2013. Non-performing loans decreased to $2.9 million during the nine month period ended March 31, 2014. During the nine months ended March 31, 2014, a net charge-off of $383,000 was recorded, while during the nine months ended March 31, 2013, a net charge-off of $97,000 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:

                                                    Nine Months Ended             Year Ended
                                                     March 31, 2014              June 30, 2013

Allowance to non-performing loans                               134.82 %                  91.12 %
Allowance to total loans outstanding at the
end of the period                                                 1.18 %                   1.23 %
Net charge-offs to average total loans
outstanding during the period, annualized                          .16 %                    .07 %
Total non-performing loans to total loans                          .87 %                   1.35 %
Total non-performing assets to total assets                        .57 %                    .87 %

Noninterest Income. Noninterest income decreased $1.2 million, or 34.1%, to $2.2 million for the nine months ended March 31, 2014 compared to $3.4 million for the nine months ended March 31, 2013. The decrease was primarily due to decreases in net realized gains on the sale of available-for-sale securities, gains on sale of loans, and other service charges and fees, partially offset by an increase in brokerage commissions. For the nine months ended March 31, 2014, net realized gains on the sale of securities available-for-sale decreased to a loss of $199,000 from a gain of $629,000, gains on sale of loans decreased to $77,000 from $251,000, and other service charges and fees decreased to $89,000 from $207,000, while brokerage commissions increased to $508,000 from $426,000. The decrease in net realized gains on the sale of available-for-sale securities was due to the rate environment in the nine months ended March 31, 2013, that allowed for profits to be gained when repositioning the investment portfolio that were not available in the nine months ended March 31, 2014. The decrease in gains on sale of loans was primarily due to a decrease in the number of loans sold to the Federal Home Loan Bank of Chicago in the nine months ended March 31, 2014, 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 market interest rates.

Noninterest Expense. Noninterest expense increased $563,000, or 6.0%, to $9.9 million for the nine months ended March 31, 2014 from $9.3 million for the nine months ended March 31, 2013. The largest components of this increase were compensation and benefits, which increased $532,000, or 9.2%, and loss on foreclosed assets, net, which increased $231,000, to a loss of $209,000 for the nine months ended March 31, 2014 from a gain of $22,000 for the nine months ended March 31, 2013. Increased medical insurance costs, normal salary increases, and stock equity plan expenses primarily accounted for the increase in compensation and benefits expense, while loss on foreclosed assets, net, increased due to gains taken in the nine months ended March 31, 2013. 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 nine months ended March 31, 2013, 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 nine months ended March 31, 2013.

Income Tax Expense. We recorded a provision for income tax of $1.3 million for the nine months ended March 31, 2014, compared to a provision for income tax of $1.5 million for the nine months ended March 31, 2013, reflecting effective tax rates of 34.3% and 35.5%, respectively.


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Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. Net income decreased $90,000 to $834,000 net income for the three months ended March 31, 2014 from a $924,000 net income for the three months ended March 31, 2013. The decrease was primarily due to a decrease in noninterest income and increases in interest expense and noninterest expense, partially offset by an increase in interest and dividend income and a decrease in the provision for loan losses.

Net Interest Income. Net interest income increased $385,000 to $4.0 million for the three months ended March 31, 2014 from $3.6 million for the three months ended March 31, 2013. The increase was the result of an increase of $419,000 in interest and dividend income offset by an increase of $34,000 in interest expense. We had a $33.1 million, or 6.4%, increase in the average balance of interest earning assets, partially offset by a $35.0 million, or 8.0%, increase in average balance of interest bearing liabilities. Our interest rate spread increased by 13 basis points to 2.83% for the three months ended March 31, 2014 from 2.70% for the three months ended March 31, 2013, and our net interest margin increased by 11 basis points to 2.92% for the three months ended March 31, 2014 from 2.81% for the three months ended March 31, 2013.

Interest and Dividend Income. Interest and dividend income increased $419,000, or 9.5%, to $4.8 million for the three months ended March 31, 2014 from $4.4 million for the three months ended March 31, 2013. The increase in interest and dividend income was due to a $296,000 increase in interest income on loans and a $119,000 increase in interest on securities. Interest income on securities increased due to a 24 basis point, or 10.4%, increase in the average yield on securities from 2.31% to 2.55%, partially offset by a $1.5 million, or 0.7%, decrease in the average balance of securities to $214.7 million for the three . . .

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