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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

☒	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

OR

 

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 001-35226

 

 

IF Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland		45-1834449
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
201 East Cherry Street, Watseka, Illinois		60970
(Address of Principal Executive Offices)		Zip Code

(815) 432-2476

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		(Do not check if a smaller reporting company)  ☐		Smaller reporting company		☒
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

The Registrant had 3,940,408 shares of common stock, par value $0.01 per share, issued and outstanding as of May 4, 2017.

 

 

 

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IF Bancorp, Inc.

Form 10-Q

Index

 

				Page
Part I. Financial Information
Item 1.		Condensed Consolidated Financial Statements			1
		Condensed Consolidated Balance Sheets as of March  31, 2017 (unaudited) and June 30, 2016			1
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended March 31, 2017 and 2016 (unaudited)			2
		Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended March 31, 2017 and 2016 (unaudited)			3
		Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended March 31, 2017 and 2016 (unaudited)			4
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016 (unaudited)			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			54
Item 4.		Controls and Procedures			54
Part II. Other Information
Item 1.		Legal Proceedings			55
Item 1A.		Risk Factors			55
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3.		Defaults upon Senior Securities			55
Item 4.		Mine Safety Disclosures			55
Item 5.		Other Information			55
Item 6.		Exhibits			56
		Signature Page			57

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Part I. – Financial Information

 

Item 1.

Financial Statements

IF Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share amount)

 

		March 31,				June 30,
		2017				2016
		(Unaudited)
Assets
Cash and due from banks		$	15,223			$	5,451
Interest-bearing demand deposits			1,562				998
Cash and cash equivalents			16,785				6,449
Interest-bearing time deposits in banks			250				252
Available-for-sale securities			113,589				121,328
Loans, net of allowance for loan losses of $5,366 and $5,351 at March 31, 2017 and June 30, 2016, respectively			437,946				443,748
Premises and equipment, net of accumulated depreciation of $6,234 and $5,925 at March 31, 2017 and June 30, 2016, respectively			4,886				4,586
Federal Home Loan Bank stock, at cost			2,813				5,425
Foreclosed assets held for sale			155				338
Accrued interest receivable			1,921				1,803
Bank-owned life insurance			8,756				8,555
Mortgage servicing rights			627				440
Deferred income taxes			3,231				1,746
Other			513				895
Total assets		$	591,472			$	595,565
Liabilities and Equity
Liabilities
Deposits
Demand		$	21,987			$	19,036
Savings, NOW and money market			166,456				156,688
Certificates of deposit			208,937				216,343
Brokered certificates of deposit			38,773				41,641
Total deposits			436,153				433,708
Repurchase agreements			2,440				4,392
Federal Home Loan Bank advances			62,500				67,000
Advances from borrowers for taxes and insurance			1,047				932
Accrued post-retirement benefit obligation			3,003				2,967
Accrued interest payable			50				59
Other			3,077				2,535
Total liabilities			508,270				511,593
Commitments and Contingencies
Stockholders’ Equity
Common stock, $.01 par value per share, 100,000,000 shares authorized, 3,940,408 and 4,014,061 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively			39				40
Additional paid-in capital			47,836				47,535
Unearned ESOP shares, at cost, 274,241 and 288,675 shares at March 31, 2017 and June 30, 2016, respectively			(2,742	)			(2,887	)
Retained earnings			38,426				37,095
Accumulated other comprehensive income (loss), net of tax			(357	)			2,189
Total stockholders’ equity			83,202				83,972
Total liabilities and stockholders’ equity		$	591,472			$	595,565

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands except per share amounts)

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Interest and Dividend Income
Interest and fees on loans		$	4,519			$	4,384			$	13,846			$	12,473
Securities:
Taxable			663				704				1,949				2,372
Tax-exempt			35				37				107				112
Federal Home Loan Bank dividends			27				20				79				40
Deposits with other financial institutions			11				3				30				8
Total interest and dividend income			5,255				5,148				16,011				15,005
Interest Expense
Deposits			716				585				2,095				1,706
Federal Home Loan Bank advances and repurchase agreements			182				249				587				671
Total interest expense			898				834				2,682				2,377
Net Interest Income			4,357				4,314				13,329				12,628
Provision for Loan Losses			192				254				225				1,142
Net Interest Income After Provision for Loan Losses			4,165				4,060				13,104				11,486
Noninterest Income
Customer service fees			117				122				395				403
Other service charges and fees			64				69				186				164
Insurance commissions			198				184				548				538
Brokerage commissions			127				165				420				522
Net realized gains on sales of available-for-sale securities			—				115				117				417
Mortgage banking income, net			65				14				349				111
Gain on sale of loans			39				31				214				130
Bank-owned life insurance income, net			65				65				201				199
Other			164				161				548				585
Total noninterest income			839				926				2,978				3,069
Noninterest Expense
Compensation and benefits			2,446				2,245				7,089				6,733
Office occupancy			146				142				444				436
Equipment			278				250				872				756
Federal deposit insurance			42				80				134				231
Stationary, printing and office			46				42				130				144
Advertising			107				90				263				253
Professional services			159				106				400				390
Supervisory examinations			40				38				121				115
Audit and accounting services			40				17				114				103
Organizational dues and subscriptions			2				2				52				45
Insurance bond premiums			35				29				110				99
Telephone and postage			62				80				153				215
Gain on foreclosed assets, net			(7	)			(1	)			(14	)			—
Other			285				380				955				1,140
Total noninterest expense			3,681				3,500				10,823				10,660
Income Before Income Tax			1,323				1,486				5,259				3,895
Provision for Income Tax			479				542				1,942				1,397
Net Income		$	844			$	944			$	3,317			$	2,498
Earnings Per Share:
Basic		$	0.23			$	0.25			$	0.90			$	0.67
Diluted		$	0.23			$	0.25			$	0.89			$	0.67
Dividends declared per common share		$	0.08			$	0.08			$	0.16			$	0.13

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

		Three Months Ended March 31,
		2017				2016
Net Income		$	844			$	944
Other Comprehensive Income
Unrealized appreciation on available-for-sale securities, net of taxes of $145 and $678, for 2017 and 2016, respectively			226				1,006
Less: reclassification adjustment for realized gains included in net income, net of taxes of $0 and $46 for 2017 and 2016, respectively			—				69
			226				937
Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $(1) and $(3) for 2017 and 2016, respectively			(2	)			(4	)
Other comprehensive income, net of tax			224				933
Comprehensive Income		$	1,068			$	1,877
		Nine Months Ended March 31,
		2017				2016
Net Income		$	3,317			$	2,498
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $(1,587) and $665, for 2017 and 2016, respectively			(2,469	)			987
Less: reclassification adjustment for realized gains included in net income, net of taxes of $46 and $168, for 2017 and 2016, respectively			71				249
			(2,540	)			738
Postretirement health plan amortization of transition obligation and prior service cost and change in net loss, net of taxes of $(4) and $(6) for 2017 and 2016, respectively			(6	)			(9	)
Other comprehensive income (loss), net of tax			(2,546	)			729
Comprehensive Income		$	771			$	3,227

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

(Dollars in thousands, except per share amounts)

 

		Common Stock				Additional Paid-In Capital				Unearned ESOP Shares				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
For the nine months ended March 31, 2017
Balance, July 1, 2016		$	40			$	47,535			$	(2,887	)		$	37,095			$	2,189			$	83,972
Net income			—				—				—				3,317				—				3,317
Other comprehensive loss			—				—				—				—				(2,546	)			(2,546	)
Dividends on common stock, $0.16 per share			—				—				—				(612	)			—				(612	)
Stock equity plan			—				169				—				—				—				169
Stock repurchase, 73,653 shares, average price $18.65 each			(1	)			—				—				(1,374	)			—				(1,375	)
ESOP shares earned, 14,434 shares			—				132				145				—				—				277
Balance, March 31, 2017		$	39			$	47,836			$	(2,742	)		$	38,426			$	(357	)		$	83,202
For the nine months ended March 31, 2016
Balance, July 1, 2015		$	41			$	47,009			$	(3,079	)		$	35,466			$	999			$	80,436
Net income			—				—				—				2,498				—				2,498
Other comprehensive income			—				—				—				—				729				729
Dividends on common stock, $0.13 per share			—				—				—				(509	)			—				(509	)
Stock equity plan			—				321				—				(28	)			—				293
Stock repurchase, 83,313 shares, average price $17.11 each			(1	)			—				—				(1,425	)			—				(1,426	)
ESOP shares earned, 14,434 shares			—				107				144				—				—				251
Balance, March 31, 2016		$	40			$	47,437			$	(2,935	)		$	36,002			$	1,728			$	82,272

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

 

		Nine Months Ended March 31,
		2017				2016
Operating Activities
Net income		$	3,317			$	2,498
Items not requiring (providing) cash
Depreciation			309				323
Provision for loan losses			225				1,142
Amortization of premiums and discounts on securities			195				239
Deferred income taxes			151				(294	)
Net realized gains on loan sales			(214	)			(130	)
Net realized gains on sales of available-for-sale securities			(117	)			(417	)
Gain on foreclosed assets held for sale			(14	)			—
Bank-owned life insurance income, net			(201	)			(199	)
Originations of loans held for sale			(14,927	)			(10,404	)
Proceeds from sales of loans held for sale			14,954				10,658
ESOP compensation expense			277				251
Stock equity plan expense			169				293
Changes in
Accrued interest receivable			(118	)			(59	)
Other assets			486				(21	)
Accrued interest payable			(9	)			(19	)
Post-retirement benefit obligation			26				32
Other liabilities			542				477
Net cash provided by operating activities			5,051				4,370
Investing Activities
Net change in interest bearing time deposits			2				(1	)
Purchases of available-for-sale securities			(22,680	)			(8,000	)
Proceeds from the sales of available-for-sale securities			—				51,338
Proceeds from maturities and pay-downs of available-for-sale securities			26,169				10,191
Net change in loans			5,222				(74,835	)
Purchase of premises and equipment			(713	)			(165	)
Proceeds from sale of foreclosed assets			552				48
Redemption of FHLB stock owned			2,815				—
Purchase of FHLB stock owned			(203	)			—
Net cash provided by (used in) investing activities			11,164				(21,424	)
Financing Activities
Net increase in demand deposits, money market, NOW and savings accounts			12,719				4,490
Net (decrease) increase in certificates of deposit, including brokered certificates			(10,274	)			561
Net increase in advances from borrowers for taxes and insurance			115				217
Proceeds from Federal Home Loan Bank advances			72,500				210,500
Repayments of Federal Home Loan Bank advances			(77,000	)			(198,500	)
Net (decrease) increase in repurchase agreements			(1,952	)			923
Dividends paid			(612	)			(509	)
Stock purchase per stock repurchase plan			(1,375	)			(1,426	)
Net cash provided by (used in) financing activities			(5,879	)			16,256
Net Increase (Decrease) in Cash and Cash Equivalents			10,336				(798	)
Cash and Cash Equivalents, Beginning of Period			6,449				13,224
Cash and Cash Equivalents, End of Period		$	16,785			$	12,426
Supplemental Cash Flows Information
Interest paid		$	2,691			$	2,396
Income taxes paid, net of refunds		$	2,037			$	1,645
Foreclosed assets acquired in settlement of loans		$	355			$	182
Dividends payable		$	315			$	321

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Form 10-Q (Unaudited)

(Table dollar amounts in thousands)

Notes to Condensed Consolidated Financial Statements

Note 1:    Basis of Financial Statement Presentation

IF Bancorp, Inc., a Maryland corporation (the “Company”), became the holding company for Iroquois Federal Savings and Loan Association (the “Association”) upon completion of the Association’s conversion from the mutual form of organization to the stock holding company form of organization (the “Conversion”) on July 7, 2011. At the time of the conversion, the Company also established an employee stock ownership plan that purchased 384,900 shares of Company stock, and a charitable foundation, Iroquois Federal Foundation, to which the Company donated 314,755 shares of Company stock and $450,000 cash. IF Bancorp, Inc.’s common stock began trading on the NASDAQ Capital Market under the symbol “IROQ”.

The unaudited condensed consolidated financial statements include the accounts of the Company, the Association, and the Association’s wholly owned subsidiary, L.C.I. Service Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of March 31, 2017 and June 30, 2016, and the results of its operations for the three month and nine month periods ended March 31, 2017 and 2016. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. The results of operations for the three month and nine month periods ended March 31, 2017 are not necessarily indicative of the results that may be expected for the entire year.

Note 2:    New Accounting Pronouncements

Recent and Future Accounting Requirements

In May, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance related to principal versus agent considerations and adds illustrative examples to assist in the application of the guidance. The amendments in ASU 2016-08 affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements in ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied either retrospectively or using the modified retrospective approach. Early adoption is not permitted. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income. The Company is currently performing an overall assessment of revenue streams potentially affected by the ASU including deposit related fees and interchange fees to determine the potential impact the new guidance is expected to have on the Company’s consolidated financial statements. The Company plans to adopt ASU 2014-09 on July 1, 2018.

 

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the existing standards for lease accounting effectively bringing most leases onto the balance sheets of the related lessees by requiring them to recognize a right-of-use asset and a corresponding lease liability, while leaving lessor accounting largely unchanged with only targeted changes incorporated into the update. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods with early adoption permitted. The Company is currently reviewing the amendments to ensure it is fully compliant by the adoption date. As permitted by the amendments, the Company is anticipating electing an accounting policy to not recognize lease assets and lease liabilities for leases with a term of twelve months or less. The impact is not expected to have a material effect on the Company’s financial position or results of operations since the Company does not have a material amount of lease agreements. The Company continues to evaluate the amendments and does not expect to early adopt.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718)-Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods with early adoption permitted. The Company expects to adopt ASU 2016-09 on July 1, 2017 and plans to elect to recognize forfeitures as they occur. The cumulative effect adjustment from the modified retrospective transition of the forfeitures and the classification of awards is not expected to have a material effect on the Company’s consolidated financial statements. The Company expects that the adoption of ASU 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. As we prepare for the adoption of ASU 2016-13, we have established a team to review the requirements as published, monitor developments and new guidance, and review and collect data that will be required to calculate and report the allowance when ASU 2016-13 becomes effective. The Company is currently evaluating the impact of these amendments to the Company’s financial position and results of operations, and currently does not know or cannot reasonably quantify the impact of the adoption of the amendments as a result of the complexity and extensive changes from the amendments. The ALLL is a material estimate of the Company and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the ALLL at adoption date. The Company is anticipating a significant change in the processes and procedures to calculate the ALLL, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The current accounting policy and procedures for other-than-temporary impairment on available-for-sale investment securities will be replaced with an allowance approach. The Company is expecting to begin developing and implementing processes and procedures during the next two years to ensure it is fully compliant with the amendments at adoption date.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU with the intent of reducing diversity in practice with respect to eight types of cash flows. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the pending adoption of ASU-2016-15 and its impact on the Company’s consolidated financial statements.

On March 30, 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Callable Debt Securities, addressing the interest income recognition. Under current guidance, when a debt security or loan is purchased at a premium, the premium is typically amortized to the maturity date by adjusting the yield, despite the possibility that the borrower may prepay the debt instrument earlier then the contractual maturity date. The

 

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current interest income model may result in the recognition of too much interest income prior to prepayment and delayed recognition of a loss for the unamortized premium. This amendment requires the premium on certain debt securities to be amortized to the earliest call date. This ASU is effective for public entities for reporting periods beginning after December 15, 2018, with early adoption permitted. As permitted within the amendment, the Company elected to early adopt and apply the provisions of this amendment as of July 1, 2016. This adoption had no effect on the Company’s consolidated financial statements.

Note 3:    Stock-based Compensation

In connection with the conversion to stock form, the Association established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 21). The ESOP borrowed funds from the Company in an amount sufficient to purchase 384,900 shares (approximately 8% of the Common Stock issued in the stock offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Association and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest 100% in their accrued benefits under the employee stock ownership plan after six vesting years, with prorated vesting in years two through five. Vesting is accelerated upon retirement, death or disability of the participant or a change in control of the Association. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Association’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated. Participants receive the shares at the end of employment.

The Company is accounting for its ESOP in accordance with ASC Topic 718, Employers Accounting for Employee Stock Ownership Plans. Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends, if any, on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.

A summary of ESOP shares at March 31, 2017 and June 30, 2016 are as follows (dollars in thousands):

 

		March 31, 2017				June 30, 2016
Allocated shares			83,940				72,524
Shares committed for release			14,434				19,245
Unearned shares			274,241				288,675
Total ESOP shares			372,615				380,444
Fair value of unearned ESOP shares (1)		$	5,457			$	5,294

 

(1)	Based on closing price of $19.90 and $18.34 per share on March 31, 2017, and June 30, 2016, respectively.

During the nine months ended March 31, 2017, 7,829 ESOP shares were paid to ESOP participants due to separation from service.

At the annual meeting on November 19, 2012, the IF Bancorp, Inc. 2012 Equity Incentive Plan (the “Equity Incentive Plan”) was approved by stockholders. The purpose of the Equity Incentive Plan is to promote the long-term financial success of the Company and its Subsidiaries by providing a means to attract, retain and reward individuals who contribute

 

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to such success and to further align their interests with those of the Company’s stockholders. The Equity Incentive Plan authorizes the issuance or delivery to participants of up to 673,575 shares of the Company common stock pursuant to grants of incentive and non-qualified stock options, restricted stock awards and restricted stock unit awards, provided that the maximum number of shares of Company common stock that may be delivered pursuant to the exercise of stock options (all of which may be granted as incentive stock options) is 481,125 and the maximum number of shares of Company stock that may be issued as restricted stock awards or restricted stock units is 192,450.

On December 10, 2013, the Board of Directors approved grants of 85,500 shares of restricted stock and 167,000 in stock options to be awarded to senior officers and directors of the Association. The restricted stock vests in equal installments over 10 years and the stock options vest in equal installments over 7 years. Vesting of both the restricted stock and options started in December 2014. On December 10, 2015, the Board of Directors approved grants of 16,900 shares of restricted stock to be awarded to senior officers and directors of the Association. The restricted stock vests in equal installments over 8 years, starting in December 2016. As of March 31, 2017, there were 90,050 shares of restricted stock and 314,125 stock option shares available for future grants under this plan.

The following table summarizes stock option activity for the nine months ended March 31, 2017 (dollars in thousands):

 

										Weighted-Average
						Weighted-Average				Remaining Contractual
		Options				Exercise Price/Share				Life (in years)				Aggregate Intrinsic Value
Outstanding, June 30, 2016			164,143			$	16.63
Granted			—				—
Exercised			—				—
Forfeited			11,000				16.63
Outstanding, March 31, 2017			153,143			$	16.63				6.7			$	501	(1)
Exercisable, March 31, 2017			64,000			$	16.63				6.7			$	209	(1)

 

(1)	Based on closing price of $19.90 per share on March 31, 2017.

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.

There were 22,286 options that vested during the nine months ended March 31, 2017 compared to 31,714 stock options that vested during the nine months ended March 31, 2016. Stock-based compensation expense and related tax benefit was considered nominal for stock options for the nine months ended March 31, 2017 and 2016. Total unrecognized compensation cost related to non-vested stock options was $208,000 at March 31, 2017 and is expected to be recognized over the remaining weighted-average period of 3.7 years.

The following table summarizes non-vested restricted stock activity for the nine months ended March 31, 2017:

 

						Weighted-Average
		Shares				Grant-Date Fair Value
Balance, June 30, 2016			80,500			$	16.79
Granted			—				—
Forfeited			—				—
Earned and issued			10,062				16.79
Balance, March 31, 2017			70,438			$	16.79

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (ten years) and is based on the market price of the Company’s common stock at the date of grant multiplied by the number of shares granted that are expected to vest. At the date of grant the par value of the shares granted was recorded in equity as a credit to common stock and a debit to paid-in capital. Stock-based compensation expense and related tax benefit for restricted stock was nominal and was recognized in non-interest expense for the nine months ended March 31, 2017. Unrecognized compensation expense for non-vested restricted stock awards was $1.1 million and is expected to be recognized over 6.7 years with a corresponding credit to paid-in capital.

 

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Note 4:    Earnings Per Common Share (“EPS”)

Basic and diluted earnings per common share are presented for the three month and nine month periods ended March 31, 2017 and 2016. The factors used in the earnings per common share computation are as follows:

 

		Three Months Ended March 31, 2017				Three Months Ended March 31, 2016				Nine Months Ended March 31, 2017				Nine Months Ended March 31, 2016
Net income		$	844			$	944			$	3,317			$	2,498
Basic weighted average shares outstanding			3,940,630				4,014,061				3,968,593				4,035,020
Less: Average unallocated ESOP shares			(276,647	)			(295,892	)			(281,458	)			(300,703	)
Basic average shares outstanding			3,663,983				3,718,169				3,687,135				3,734,317
Diluted effect of restricted stock awards and stock options			33,520				4,436				27,566				2,645
Diluted average shares outstanding			3,697,503				3,722,605				3,714,701				3,736,962
Basic earnings per common share		$	0.23			$	0.25			$	0.90			$	0.67
Diluted earnings per common share		$	0.23			$	0.25			$	0.89			$	0.67

The Company announced a stock repurchase plan on February 5, 2016, which allowed the Company to repurchase up to 200,703 shares of its common stock, or approximately 5% of its then current outstanding shares. As of March 31, 2017, 73,653 shares had been repurchased under this plan at an average price of $18.65 per share.

On December 10, 2013, the Company awarded 85,500 shares of restricted stock and 167,000 in stock options to officers and directors of the Association as part of the IF Bancorp, Inc. 2012 Equity Incentive Plan. The restricted stock vests over 10 years and the stock options vest over 7 years, both starting in December 2014. On December 10, 2015, the Company awarded 16,900 shares of restricted stock to officers and directors of the Association as part of this plan. This restricted stock vests over 8 years, starting in December 2016.

 

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Note 5:    Securities

The amortized cost and approximate fair value of securities, together with gross unrealized gains and losses on securities, are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale securities:
March 31, 2017:
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	74,828			$	973			$	(611	)		$	75,190
Mortgage-backed:
GSE residential			35,373				170				(677	)			34,866
State and political subdivisions			3,275				258				—				3,533
		$	113,476			$	1,401			$	(1,288	)		$	113,589
June 30, 2016:
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	87,193			$	2,912			$	—			$	90,105
Mortgage-backed:
GSE residential			26,418				827				—				27,245
State and political subdivisions			3,431				547				—				3,978
		$	117,042			$	4,286			$	—			$	121,328

With the exception of U.S. Government and federal agency and GSE securities, and mortgage-backed GSE residential securities with a book value of approximately $74,828,000 and $35,373,000, respectively, and a market value of approximately $75,190,000 and $34,866,000, respectively, at March 31, 2017, the Company held no securities at March 31, 2017 with a book value that exceeded 10% of total equity.

All mortgage-backed securities at March 31, 2017, and June 30, 2016 were issued by GSEs.

The amortized cost and fair value of available-for-sale securities at March 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available-for-sale Securities
		Amortized Cost				Fair Value
Within one year		$	11,203			$	11,307
One to five years			39,859				40,878
Five to ten years			25,286				24,678
After ten years			1,755				1,860
			78,103				78,723
Mortgage-backed securities			35,373				34,866
Totals		$	113,476			$	113,589

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $65,294,000 and $64,180,000 as of March 31, 2017 and June 30, 2016, respectively.

The carrying value of securities sold under agreement to repurchase amounted to $2.4 million at March 31, 2017 and $4.4 million at June 30, 2016. At March 31, 2017, approximately $805,000 of our repurchase agreements had an overnight maturity, while the remaining $1.6 million in repurchase agreements had a monthly maturity. All of our repurchase agreements were secured by U.S. Government, federal agency and GSE securities. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

 

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Gross gains of $117,000 and $605,000, and gross losses of $0 and $188,000, resulting from sales of available-for-sale securities were realized for the nine month periods ended March 31, 2017 and 2016, respectively. The tax provision applicable to these net realized gains amounted to approximately $46,000 and $168,000, respectively. Gross gains of $0 and $115,000, and gross losses of $0 and $0, resulting from the sale of available-for-sale securities were realized for the three month periods ended March 31, 2017, and 2016, respectively. The tax provision applicable to these net gains amounted to approximately $0 and $46,000, respectively.

Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical cost. Total fair value of these investments at March 31, 2017 and June 30, 2016 was $46,942,000 and $0, respectively, which is approximately 41.3% and 0.0% of the Company’s available-for-sale investment portfolio. These declines primarily resulted from recent increases in market interest rates. Management believes the declines in fair value for these securities are temporary.

The following table shows the gross unrealized losses of the Company’s securities and the fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2017:

 

		March 31, 2017
		Less Than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
U.S. Government and federal agency and Government sponsored enterprises (GSE’s)		$	23,616			$	(611	)		$	—			$	—			$	23,616			$	(611	)
Mortgage-backed: GSE residential			23,326				(677	)			—				—				23,326				(677	)
Total temporarily impaired securities		$	46,942			$	(1,288	)		$	—			$	—			$	46,942			$	(1,288	)

The unrealized losses on the Company’s investment in residential mortgage-backed securities, and U.S. Government and federal agency and Government sponsored enterprises were caused by interest rate increases. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2017.

Note 6:    Loans and Allowance for Loan Losses

Classes of loans include:

 

		March 31, 2017				June 30, 2016
Real estate loans:
One-to four-family, including home equity loans		$	144,718			$	149,538
Multi-family			78,288				84,200
Commercial			121,227				119,643
Home equity lines of credit			7,452				8,138
Construction			25,647				19,698
Commercial			57,801				57,826
Consumer			8,010				10,086
Total loans			443,143				449,129
Less:
Unearned fees and discounts, net			(169	)			30
Allowance for loan losses			5,366				5,351
Loans, net		$	437,946			$	443,748

 

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The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures designed to focus our lending efforts on the types, locations, and duration of loans most appropriate for our business model and markets. The Company’s lending activity includes the origination of one-to four-family residential mortgage loans, multi-family loans, commercial real estate loans, home equity lines of credits, commercial business loans, consumer loans (consisting primarily of automobile loans), construction loans and land loans. The primary lending market includes the Illinois counties of Vermilion, Iroquois and Champaign, as well as the adjacent counties in Illinois and Indiana. The Company also has a loan production and wealth management office in Osage Beach, Missouri, which serves the Missouri counties of Camden, Miller, and Morgan. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the lending relationship. The integrity and character of the borrower are significant factors in our loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

The Company’s policies and loan approval limits are established by the Board of Directors. The loan officers generally have authority to approve one-to four-family residential mortgage loans up to $100,000, other secured loans up to $50,000, and unsecured loans up to $10,000. Managing Officers (those with designated loan approval authority), generally have authority to approve one-to four-family residential mortgage loans up to $300,000, other secured loans up to $300,000, and unsecured loans up to $100,000. In addition, any two individual officers may combine their loan authority limits to approve a loan. Our Loan Committee may approve one-to four-family residential mortgage loans, commercial real estate loans, multi-family real estate loans and land loans up to $1,000,000 in aggregate loans, and unsecured loans up to $300,000. All loans above these limits must be approved by the Operating Committee, consisting of the Chairman and up to four other Board members. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans to related parties, including executive officers and the Company’s directors, are reviewed for compliance with regulatory guidelines and the Board of Directors at least annually.

The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small commercial loans on a sample basis, and all larger commercial loans on an annual basis. The Company also receives independent loan reviews performed by a third party on larger commercial loans to be performed semi-annually. In addition to compliance with our policy, the third party loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management and the Board of Directors.

 

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The Company’s lending can be summarized into six primary areas; one-to four-family residential mortgage loans, commercial real estate and multi-family real estate loans, home equity lines of credit, real estate construction, commercial business loans, and consumer loans.

One-to four-family Residential Mortgage Loans

The Company offers one-to four-family residential mortgage loans that conform to Fannie Mae and Freddie Mac underwriting standards (conforming loans) as well as non-conforming loans. In recent years there has been an increased demand for long-term fixed-rate loans, as market rates have dropped and remained near historic lows. As a result, the Company has sold a substantial portion of the fixed-rate one- to four-family residential mortgage loans with terms of 15 years or greater. Generally, the Company retains fixed-rate one- to four-family residential mortgage loans with terms of less than 15 years, although this has represented a small percentage of the fixed-rate loans originated in recent years due to the favorable long-term rates for borrower.

The Company offers USDA Rural Development loans and sells the servicing.

In addition, the Company also offers home equity loans that are secured by a second mortgage on the borrower’s primary or secondary residence. Home equity loans are generally underwritten using the same criteria used to underwrite one-to four-family residential mortgage loans.

As one-to four-family residential mortgage and home equity loan underwriting are subject to specific regulations, the Company typically underwrites its one-to four-family residential mortgage and home equity loans to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

Commercial Real Estate and Multi-Family Real Estate Loans

Commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, strip mall centers, churches and farm loans secured by real estate. In underwriting commercial real estate and multi-family real estate loans, the Company considers a number of factors, which include the projected net cash flow to the loan’s debt service requirement, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. Personal guarantees are typically obtained from commercial real estate and multi-family real estate borrowers. In addition, the borrower’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates. The repayment of these loans is primarily dependent on the cash flows of the underlying property. However, the commercial real estate loan generally must be supported by an adequate underlying collateral value. The performance and the value of the underlying property may be adversely affected by economic factors or geographical and/or industry specific factors. These loans are subject to other industry guidelines that are closely monitored by the Company.

Home Equity Lines of Credit

In addition to traditional one-to four-family residential mortgage loans and home equity loans, the Company offers home equity lines of credit that are secured by the borrower’s primary or secondary residence. Home equity lines of credit are generally underwritten using the same criteria used to underwrite one-to four-family residential mortgage loans. As home equity lines of credit underwriting is subject to specific regulations, the Company typically underwrites its home equity lines of credit to conform to widely accepted standards. Several factors are considered in underwriting including the value of the underlying real estate and the debt to income ratio and credit history of the borrower.

 

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Commercial Business Loans

The Company originates commercial non-mortgage business (term) loans and lines of credit. These loans are generally originated to small-and medium-sized companies in the Company’s primary market area. Commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture, and are primarily secured by business assets other than real estate, such as business equipment and inventory, accounts receivable or stock. The Company also offers agriculture loans that are not secured by real estate.

The commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, the Company considers the financial statements, lending history and debt service capabilities of the borrower, the projected cash flows of the business and the value of any collateral. The cash flows of the underlying borrower, however, may not perform consistently with historical or projected information. Further, the collateral securing loans may fluctuate in value due to individual economic or other factors. Loans are typically guaranteed by the principals of the borrower. The Company has established minimum standards and underwriting guidelines for all commercial loan types.

Real Estate Construction Loans

The Company originates construction loans for one-to four-family residential properties and commercial real estate properties, including multi-family properties. The Company generally requires that a commitment for permanent financing be in place prior to closing the construction loan. The repayment of these loans is typically through permanent financing following completion of the construction. Real estate construction loans are inherently more risky than loans on completed properties as the unimproved nature and the financial risks of construction significantly enhance the risks of commercial real estate loans. These loans are closely monitored and subject to other industry guidelines.

Consumer Loans

Consumer loans consist of installment loans to individuals, primarily automotive loans. These loans are underwritten utilizing the borrower’s financial history, including the Fair Isaac Corporation (“FICO”) credit scoring and information as to the underlying collateral. Repayment is expected from the cash flow of the borrower. Consumer loans may be underwritten with terms up to seven years, fully amortized. Unsecured loans are limited to twelve months. Loan-to-value ratios vary based on the type of collateral. The Company has established minimum standards and underwriting guidelines for all consumer loan collateral types.

Loan Concentration

The loan portfolio includes a concentration of loans secured by commercial and multi-family real estate properties amounting to $223,641,000 and $222,395,000 as of March 31, 2017 and June 30, 2016, respectively. Generally, these loans are collateralized by multi-family and nonresidential properties. The loans are expected to be repaid from cash flows or from proceeds from the sale of the properties of the borrower.

Purchased Loans and Loan Participations

The Company’s loans receivable included purchased loans of $8,715,000 and $9,772,000 at March 31, 2017 and June 30, 2016, respectively. All of these purchased loans are secured by single family homes located out of our primary market area primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $37,355,000 and $47,731,000 at March 31, 2017 and June 30, 2016, respectively, of which $16,954,000 and $19,303,000, at March 31, 2017 and June 30, 2016 were outside our primary market area.

 

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Allowance for Loan Losses

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of the three month and nine month periods ended March 31, 2017 and 2016 and the year ended June 30, 2016:

 

		Three Months Ended March 31, 2017 Real Estate Loans
		One-to Four- Family				Multi- Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period		$	1,205			$	1,284			$	1,386			$	91
Provision charged to expense			158				(87	)			24				—
Losses charged off			(203	)			—				—				—
Recoveries			—				—				—				—
Balance, end of period		$	1,160			$	1,197			$	1,410			$	91
Ending balance: individually evaluated for impairment		$	—			$	—			$	7			$	—
Ending balance: collectively evaluated for impairment		$	1,160			$	1,197			$	1,403			$	91
Loans:
Ending balance		$	144,718			$	78,288			$	121,227			$	7,452
Ending balance: individually evaluated for impairment		$	2,298			$	1,406			$	27			$	9
Ending balance: collectively evaluated for impairment		$	142,420			$	76,882			$	121,200			$	7,443

 

		Three Months Ended March 31, 2017 (Continued)
		Construction				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance, beginning of period		$	284			$	1,060			$	77			$	—			$	5,387
Provision charged to expense			20				78				(1	)			—				192
Losses charged off			—				—				(11	)			—				(214	)
Recoveries			—				—				1				—				1
Balance, end of period		$	304			$	1,138			$	66			$	—			$	5,366
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	7
Ending balance: collectively evaluated for impairment		$	304			$	1,138			$	66			$	—			$	5,359
Loans:
Ending balance		$	25,647			$	57,801			$	8,010			$	—			$	443,143
Ending balance: individually evaluated for impairment		$	—			$	93			$	—			$	—			$	3,833
Ending balance: collectively evaluated for impairment		$	25,647			$	57,708			$	8,010			$	—			$	439,310

 

		Nine Months Ended March 31, 2017 Real Estate Loans
		One-to Four- Family				Multi- Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period		$	1,198			$	1,202			$	1,399			$	94
Provision charged to expense			138				(5	)			19				(3	)
Losses charged off			(203	)			—				(8	)			—
Recoveries			27				—				—				—
Balance, end of period		$	1,160			$	1,197			$	1,410			$	91
Ending balance: individually evaluated for impairment		$	—			$	—			$	7			$	—
Ending balance: collectively evaluated for impairment		$	1,160			$	1,197			$	1,403			$	91
Loans:
Ending balance		$	144,718			$	78,288			$	121,227			$	7,452
Ending balance: individually evaluated for impairment		$	2,298			$	1,406			$	27			$	9
Ending balance: collectively evaluated for impairment		$	142,420			$	76,882			$	121,200			$	7,443

 

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		Nine Months Ended March 31, 2017 (Continued)
		Construction				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance, beginning of period		$	227			$	1,140			$	91			$	—			$	5,351
Provision charged to expense			77				(2	)			1				—				225
Losses charged off			—				—				(31	)			—				(242	)
Recoveries			—				—				5				—				32
Balance, end of period		$	304			$	1,138			$	66			$	—			$	5,366
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	7
Ending balance: collectively evaluated for impairment		$	304			$	1,138			$	66			$	—			$	5,359
Loans:
Ending balance		$	25,647			$	57,801			$	8,010			$	—			$	443,143
Ending balance: individually evaluated for impairment		$	—			$	93			$	—			$	—			$	3,833
Ending balance: collectively evaluated for impairment		$	25,647			$	57,708			$	8,010			$	—			$	439,310

 

		Year Ended June 30, 2016 Real Estate Loans
		One-to Four- Family				Multi-Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of year		$	1,216			$	827			$	1,246			$	85
Provision charged to expense			165				375				156				41
Losses charged off			(188	)			—				(3	)			(32	)
Recoveries			5				—				—				—
Balance, end of year		$	1,198			$	1,202			$	1,399			$	94
Ending balance: individually evaluated for impairment		$	6			$	—			$	14			$	—
Ending balance: collectively evaluated for impairment		$	1,192			$	1,202			$	1,385			$	94
Loans:
Ending balance		$	149,538			$	84,200			$	119,643			$	8,138
Ending balance: individually evaluated for impairment		$	2,405			$	1,457			$	63			$	327
Ending balance: collectively evaluated for impairment		$	147,133			$	82,743			$	119,580			$	7,811

 

		Year Ended June 30, 2016 (Continued)
		Construction				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance, beginning of year		$	6			$	744			$	87			$	—			$	4,211
Provision charged to expense			221				396				12				—				1,366
Losses charged off			—				—				(10	)			—				(233	)
Recoveries			—				—				2				—				7
Balance, end of year		$	227			$	1,140			$	91			$	—			$	5,351
Ending balance: individually evaluated for impairment		$	—			$	—			$	—			$	—			$	20
Ending balance: collectively evaluated for impairment		$	227			$	1,140			$	91			$	—			$	5,331
Loans:
Ending balance		$	19,698			$	57,826			$	10,086			$	—			$	449,129
Ending balance: individually evaluated for impairment		$	—			$	9			$	—			$	—			$	4,261
Ending balance: collectively evaluated for impairment		$	19,698			$	57,817			$	10,086			$	—			$	444,868

 

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		Three Months Ended March 31, 2016
		Real Estate Loans
		One-to Four- Family				Multi- Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period		$	1,290			$	1,146			$	1,307			$	115
Provision charged to expense			5				56				36				7
Losses charged off			(24	)			—				—				(28	)
Recoveries			2				—				—				—
Balance, end of period		$	1,273			$	1,202			$	1,343			$	94
Ending balance: individually evaluated for impairment		$	65			$	—			$	17			$	—
Ending balance: collectively evaluated for impairment		$	1,208			$	1,202			$	1,326			$	94
Loans:
Ending balance		$	148,797			$	84,170			$	114,458			$	8,197
Ending balance: individually evaluated for impairment		$	3,390			$	1,475			$	69			$	332
Ending balance: collectively evaluated for impairment		$	145,407			$	82,695			$	114,389			$	7,865

 

		Three Months Ended March 31, 2016 (Continued)
		Construction				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance, beginning of period		$	119			$	990			$	83			$	—			$	5,050
Provision charged to expense			42				110				(2	)			—				254
Losses charged off			—				—				(1	)			—				(53	)
Recoveries			—				—				—				—				2
Balance, end of period		$	161			$	1,100			$	80			$	—			$	5,253
Ending balance: individually evaluated for impairment		$	—			$	—			$	1			$	—			$	83
Ending balance: collectively evaluated for impairment		$	161			$	1,100			$	79			$	—			$	5,170
Loans:
Ending balance		$	14,288			$	55,878			$	9,164			$	—			$	434,952
Ending balance: individually evaluated for impairment		$	—			$	12			$	3			$	—			$	5,281
Ending balance: collectively evaluated for impairment		$	14,288			$	55,866			$	9,161			$	—			$	429,671

 

		Nine Months Ended March 31, 2016
		Real Estate Loans
		One-to Four- Family				Multi- Family				Commercial				Home Equity Lines of Credit
Allowance for loan losses:
Balance, beginning of period		$	1,216			$	827			$	1,246			$	85
Provision charged to expense			121				375				97				37
Losses charged off			(69	)			—				—				(28	)
Recoveries			5				—				—				—
Balance, end of period		$	1,273			$	1,202			$	1,343			$	94
Ending balance: individually evaluated for impairment		$	65			$	—			$	17			$	—
Ending balance: collectively evaluated for impairment		$	1,208			$	1,202			$	1,326			$	94
Loans:
Ending balance		$	148,797			$	84,170			$	114,458			$	8,197
Ending balance: individually evaluated for impairment		$	3,390			$	1,475			$	69			$	332
Ending balance: collectively evaluated for impairment		$	145,407			$	82,695			$	114,389			$	7,865

 

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		Nine Months Ended March 31, 2016 (Continued)
		Construction				Commercial				Consumer				Unallocated				Total
Allowance for loan losses:
Balance, beginning of period		$	6			$	744			$	87			$	—			$	4,211
Provision charged to expense			155				356				1				—				1,142
Losses charged off			—				—				(9	)			—				(106	)
Recoveries			—				—				1				—				6
Balance, end of period		$	161			$	1,100			$	80			$	—			$	5,253
Ending balance: individually evaluated for impairment		$	—			$	—			$	1			$	—			$	83
Ending balance: collectively evaluated for impairment		$	161			$	1,100			$	79			$	—			$	5,170
Loans:
Ending balance		$	14,288			$	55,878			$	9,164			$	—			$	434,952
Ending balance: individually evaluated for impairment		$	—			$	12			$	3			$	—			$	5,281
Ending balance: collectively evaluated for impairment		$	14,288			$	55,866			$	9,161			$	—			$	429,671

 

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Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The allowance for loan losses represents an estimate of the amount of losses believed inherent in our loan portfolio at the balance sheet date. The allowance calculation involves a high degree of estimation that management attempts to mitigate through the use of objective historical data where available. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of the loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Overall, we believe the reserve to be consistent with prior periods and adequate to cover the estimated losses in our loan portfolio.

The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for estimated credit losses on individual loans that are determined to be impaired through the Company’s review for identified problem loans; and (2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio.

The specific allowance is measured by determining the present value of expected cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expense. Factors used in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition for loans secured by real estate, the Company also considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

The Company establishes a general allowance for loans that are not deemed impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. The general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on the Company’s historical loss experience and management’s evaluation of the collectability of the loan portfolio. The allowance is then adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These qualitative factors may include: (1) Management’s assumptions regarding the minimal level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured and other loan modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.

Although the Company’s policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, the Company has historically evaluated every loan classified as substandard, regardless of size, for impairment as part of the review for establishing specific allowances. The Company’s policy also allows for general valuation allowance on certain smaller-balance, homogenous pools of loans which are loans criticized as special mention or watch. A separate general allowance calculation is made on these loans based on historical measured weakness, and which is no less than twice the amount of the general allowance calculated on the non-classified loans.

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

 

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The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. All loans are graded at inception of the loan. Subsequently, analyses are performed on an annual basis and grade changes are made as necessary. Interim grade reviews may take place if circumstances of the borrower warrant a more timely review. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Watch,” “Substandard,” “Doubtful,” and “Loss.” The Company uses the following definitions for risk ratings:

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Watch – Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of any pledged collateral. Loans so classified have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged off.

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

Residential One-to Four-Family and Equity Lines of Credit Real Estate: The residential one-to four-family real estate loans are generally secured by owner-occupied one-to four-family residences. Repayment of these loans is primarily dependent on the personal income of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial and Multi-family Real Estate: Commercial and multi-family real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Construction Real Estate: Construction real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

 

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Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity:

 

		Real Estate Loans
		One-to Four- Family				Multi-Family				Commercial				Home Equity Lines of Credit				Construction				Commercial				Consumer				Total
March 31, 2017:
Pass		$	141,360			$	77,975			$	120,923			$	7,428			$	25,647			$	55,988			$	7,941			$	437,262
Watch			1,271				—				—				9				—				1,710				69				3,059
Substandard			2,087				313				304				15				—				103				—				2,822
Doubtful			—				—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—				—
Total		$	144,718			$	78,288			$	121,227			$	7,452			$	25,647			$	57,801			$	8,010			$	443,143
		Real Estate Loans
		One-to Four- Family				Multi-Family				Commercial				Home Equity Lines of Credit				Construction				Commercial				Consumer				Total
June 30, 2016:
Pass		$	146,924			$	82,580			$	115,787			$	7,811			$	19,698			$	55,184			$	10,073			$	438,057
Watch			350				1,271				3,500				—				—				2,633				—				7,754
Substandard			2,264				349				356				327				—				9				13				3,318
Doubtful			—				—				—				—				—				—				—				—
Loss			—				—				—				—				—				—				—				—
Total		$	149,538			$	84,200			$	119,643			$	8,138			$	19,698			$	57,826			$	10,086			$	449,129

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Past due status is based on contractual terms of the loan. In all instances, loans are placed on non-accrual or are charged off at an earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. The interest on these loans is accounted for on a cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

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The following tables present the Company’s loan portfolio aging analysis:

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or Greater				Total Past Due				Current				Total Loans Receivable				Total Loans 90 Days Past Due & Accruing
March 31, 2017:
Real estate loans:
One-to four-family		$	841			$	303			$	783			$	1,927			$	142,791			$	144,718			$	139
Multi-family			—				—				—				—				78,288				78,288				—
Commercial			89				286				—				375				120,852				121,227				—
Home equity lines of credit			241				3				15				259				7,193				7,452				15
Construction			—				—				—				—				25,647				25,647				—
Commercial			—				—				—				—				57,801				57,801				—
Consumer			59				15				—				74				7,936				8,010				—
Total		$	1,230			$	607			$	798			$	2,635			$	440,508			$	443,143			$	154

 

		30-59 Days Past Due				60-89 Days Past Due				90 Days or Greater				Total Past Due				Current				Total Loans Receivable				Total Loans 90 Days Past Due & Accruing
June 30, 2016:
Real estate loans:
One-to four-family		$	2,061			$	148			$	1,489			$	3,698			$	145,840			$	149,538			$	4
Multi-family			181				—				—				181				84,019				84,200				—
Commercial			—				97				27				124				119,519				119,643				—
Home equity lines of credit			39				—				316				355				7,783				8,138				—
Construction			—				—				—				—				19,698				19,698				—
Commercial			33				100				—				133				57,693				57,826				—
Consumer			16				5				8				29				10,057				10,086				8
Total		$	2,330			$	350			$	1,840			$	4,520			$	444,609			$	449,129			$	12

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Association will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significantly restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlements with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are $3.1 million in troubled debt restructurings that were classified as impaired.

 

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The following tables present impaired loans:

 

														Three Months Ended March 31, 2017												Nine Months Ended March 31, 2017
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Interest on Cash Basis				Average Investment in Impaired Loans				Interest Income Recognized				Interest on Cash Basis
March 31, 2017:
Loans without a specific valuation allowance
Real estate loans:
One-to four-family		$	2,298			$	2,298			$	—			$	2,316			$	12			$	11			$	2,336			$	27			$	35
Multi-family			1,406				1,406				—				1,415				22				22				1,429				53				68
Commercial			20				20				—				21				—				—				23				—				—
Home equity line of credit			9				9				—				9				—				—				10				1				1
Construction			—				—				—				—				—				—				—				(1	)			—
Commercial			93				93				—				97				—				—				89				—				—
Consumer			—				—				—				—				—				—				—				—				—
Loans with a specific valuation allowance
Real estate loans:
One-to four-family			—				—				—				—				—				—				—				—				—
Multi-family			—				—				—				—				—				—				—				—				—
Commercial			7				7				7				7				—				—				8				—				—
Home equity line of credit			—				—				—				—				—				—				—				—				—
Construction			—				—				—				—				—				—				—				—				—
Commercial			—				—				—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—				—				—
Total:
Real estate loans:
One-to four-family			2,298				2,298				—				2,316				12				11				2,336				27				35
Multi-family			1,406				1,406				—				1,415				22				22				1,429				53				68
Commercial			27				27				7				28				—				—				31				—				—
Home equity line of credit			9				9				—				9				—				—				10				1				1
Construction			—				—				—				—				—				—				—				(1	)			—
Commercial			93				93				—				97				—				—				89				—				—
Consumer			—				—				—				—				—				—				—				—				—
		$	3,833			$	3,833			$	7			$	3,865			$	34			$	33			$	3,895			$	80			$	104

 

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														Year Ended June 30, 2016
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Interest on Cash Basis
June 30, 2016:
Loans without a specific valuation allowance
Real estate loans:
One-to four-family		$	2,291			$	2,291			$	—			$	2,338			$	32			$	42
Multi-family			1,457				1,457				—				1,497				67				90
Commercial			28				28				—				29				—				—
Home equity line of credit			327				327				—				346				—				2
Construction			—				—				—				—				—				—
Commercial			9				9				—				15				—				—
Consumer			—				—				—				3				—				—
Loans with a specific allowance
Real estate loans:
One-to four-family			114				114				6				117				1				2
Multi-family			—				—				—				—				—				—
Commercial			35				35				14				40				—				—
Home equity line of credit			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Commercial			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total:
Real estate loans:
One-to four-family			2,405				2,405				6				2,455				33				44
Multi-family			1,457				1,457				—				1,497				67				90
Commercial			63				63				14				69				—				—
Home equity line of credit			327				327				—				346				—				2
Construction			—				—				—				—				—				—
Commercial			9				9				—				15				—				—
Consumer			—				—				—				3				—				—
		$	4,261			$	4,261			$	20			$	4,385			$	100			$	136

 

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														Three Months Ended March 31, 2016												Nine Months Ended March 31, 2016
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Interest on Cash Basis				Average Investment in Impaired Loans				Interest Income Recognized				Interest on Cash Basis
March 31, 2016:
Loans without a specific valuation allowance
Real estate loans:
One-to four-family		$	3,199			$	3,199			$	—			$	3,213			$	11			$	10			$	3,236			$	24			$	29
Multi-family			1,475				1,475				—				1,484				22				23				1,506				52				68
Commercial			31				31				—				30				—				—				30				—				—
Home equity line of credit			332				332				—				346				—				—				348				—				2
Construction			—				—				—				—				—				—				—				—				—
Commercial			12				12				—				14				—				—				17				—				—
Consumer			2				2				—				3				—				—				4				—				—
Loans with a specific valuation allowance
Real estate loans:
One-to four-family			191				191				65				193				—				—				194				2				3
Multi-family			—				—				—				—				—				—				—				—				—
Commercial			38				38				17				39				—				—				42				—				—
Home equity line of credit			—				—				—				—				—				—				—				—				—
Construction			—				—				—				—				—				—				—				—				—
Commercial			—				—				—				—				—				—				—				—				—
Consumer			1				1				1				2				—				—				4				—				—
Total:
Real estate loans:
One-to four-family			3,390				3,390				65				3,406				11				10				3,430				26				32
Multi-family			1,475				1,475				—				1,484				22				23				1,506				52				68
Commercial			69				69				17				69				—				—				72				—				—
Home equity line of credit			332				332				—				346				—				—				348				—				2
Construction			—				—				—				—				—				—				—				—				—
Commercial			12				12				—				14				—				—				17				—				—
Consumer			3				3				1				5				—				—				8				—				—
		$	5,281			$	5,281			$	83			$	5,324			$	33			$	33			$	5,381			$	78			$	102

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability of principal is not uncertain.

The following table presents the Company’s nonaccrual loans at March 31, 2017 and June 30, 2016:

 

		March 31, 2017				June 30, 2016
Mortgages on real estate:
One-to four-family		$	1,514			$	1,604
Multi-family			155				185
Commercial			27				63
Home equity lines of credit			—				316
Construction loans			—				—
Commercial business loans			93				9
Consumer loans			—				—
Total		$	1,789			$	2,177

 

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At March 31, 2017 and June 30, 2016, the Company had a number of loans that were modified in troubled debt restructurings (TDR’s) and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

The following table presents the recorded balance, at original cost, of troubled debt restructurings. As of March 31, 2017 all loans listed were on nonaccrual except for thirteen, one-to four-family residential loans totaling $784,000, one multi-family loan for $1.3 million, and two home equity lines of credit totaling $9,000. All loans listed as of June 30, 2016 were on nonaccrual except for twelve, one-to four-family residential loans totaling $802,000, one multi-family loan for $1.3 million, and one home equity line of credit for $11,000.

 

		March 31, 2017				June 30, 2016
Real estate loans
One-to four-family		$	1,787			$	984
Multi-family			1,251				1,272
Commercial			7				9
Home equity lines of credit			9				11
Total real estate loans			3,054				2,276
Construction			—				—
Commercial and industrial			93				9
Consumer loans			—				—
Total		$	3,147			$	2,285

TDR Modifications

During the nine month period ended March 31, 2017, three one-to four-family loans totaling $844,000 and one commercial business loan for $92,000 were modified.

During the year ended June 30, 2016, the Company modified one home equity line of credit for $4,000.

During the nine month period ended March 31, 2016, the Company modified one home equity line of credit for $5,000 and one consumer loan with a recorded investment of $2,000.

TDR’s with Defaults

The Company had one TDR, a one-to four-family residential loan for $159,000, that was in default as of March 31, 2017, and was restructured in prior periods. This loan was in foreclosure at March 31, 2017. The Company had one TDR, a one-to four-family residential loan for $174,000 that was in default as of June 30, 2016, and was restructured in the prior years. No loans were in foreclosure at June 30, 2016. The Company defines a default as any loan that becomes 90 days or more past due.

Specific loss allowances are included in the calculation of estimated future loss ratios, which are applied to the various loan portfolios for purposes of estimating future losses.

Management considers the level of defaults within the various portfolios, as well as the current adverse economic environment and negative outlook in the real estate and collateral markets when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. We believe the qualitative adjustments more accurately reflect collateral values in light of the sales and economic conditions that we have recently observed.

 

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We may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of March 31, 2017, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $155,000. In addition, as of March 31, 2017, we had residential mortgage loans and home equity loans with a carrying value of $301,000 collateralized by residential real estate property for which formal foreclosure proceedings were in process.

Note 7:    Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned $2,812,500 of Federal Home Loan Bank stock as of March 31, 2017 and $5,425,000 as of June 30, 2016. This decrease in Federal Home Loan Bank stock was the result of the new Federal Home Loan Bank of Chicago automated excess stock repurchase process which was initiated in January, 2017. The FHLB provides liquidity and funding through advances.

Note 8:    Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, were as follows at the dates specified:

 

		March 31, 2017				June 30, 2016
Net unrealized gains on securities available-for-sale		$	113			$	4,286
Net unrealized postretirement health benefit plan obligations			(700	)			(690	)
			(587	)			3,596
Tax effect			230				(1,407	)
Total		$	(357	)		$	2,189

Note 9:    Changes in Accumulated Other Comprehensive Income (AOCI) by Component

Amounts reclassified from AOCI and the affected line items in the statements of income during the three and nine month periods ended March 31, 2017 and 2016, were as follows:

 

		Amounts Reclassified from AOCI
		Three Months Ended March 31,								Nine Months Ended March 31,								Affected Line Item in the Condensed Consolidated Statements of Income
		2017				2016				2017				2016
Realized gains (losses) on available-for-sale securities		$	—			$	115			$	117			$	417			Net realized gains on sale of available-for-sale securities
Amortization of defined benefit pension items:																		Components are included in computation of net periodic pension cost
Actuarial losses		$	8			$	4			$	26			$	21
Prior service costs		$	(12	)		$	(12	)		$	(36	)		$	(36	)
Total reclassified amount before tax			(4	)			107				107				402
Tax expense			1				43				42				162			Provision for Income Tax
Total reclassification out of AOCI		$	(3	)		$	64			$	65			$	240			Net Income

 

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Note 10:    Income Taxes

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Computed at the statutory rate (34%)		$	450			$	505			$	1,788			$	1,324
Decrease resulting from
Tax exempt interest			(12	)			(13	)			(36	)			(38	)
Cash surrender value of life insurance			(23	)			(22	)			(68	)			(68	)
State income taxes			49				59				214				142
Other			15				13				44				37
Actual expense		$	479			$	542			$	1,942			$	1,397

The Company established a charitable foundation at the time of its mutual-to-stock conversion and donated to it $450,000 in cash and shares of common stock equal to 7% of the shares sold in the offering, or 314,755 shares. The donated shares were valued at $3,147,550 ($10.00 per share) at the time of conversion. The $3,147,550 and the $450,000 cash donation, or a total of $3,597,550 was expensed during the quarter ended September 30, 2011. The Company established a deferred tax asset associated with this charitable contribution. No valuation allowance was deemed necessary as it appears the Company will be able to deduct the contribution, which is subject to limitations each year, during the five year carry forward period, which ends June 30, 2017. Management continues to monitor its taxable income projections through June 30, 2017, to determine whether a valuation allowance is needed.

Note 11:     Regulatory Capital

The federal banking agencies have adopted regulations that substantially amend the capital regulations currently applicable to us. These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Association became subject to new capital requirements adopted by the OCC. These new requirements create a new required ratio for common equity Tier 1 (“CETI”) capital, increase the leverage and Tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Association to pay dividends, repurchase shares, or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies with assets under $1 billion.

 

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Under the new capital regulations, the minimum capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.

There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. The Association does not use any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital. The Association has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk weights (0% to 600%) for equity exposures.

In addition to the minimum CETI, Tier 1 and total capital ratios, the Association will have to maintain a capital conservation buffer consisting of additional CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

Note 12:    Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

 

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Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2017 and June 30, 2016:

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017:
Available-for-sale securities:
US Government and federal agency		$	75,190			$	—			$	75,190			$	—
Mortgage-backed securities – GSE residential			34,866				—				34,866				—
State and political subdivisions			3,533				—				3,533				—
Mortgage servicing rights			627				—				—				627

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
June 30, 2016:
Available-for-sale securities:
US Government and federal agency		$	90,105			$	—			$	90,105			$	—
Mortgage-backed securities – GSE residential			27,245				—				27,245				—
State and political subdivisions			3,978				—				3,978				—
Mortgage servicing rights			440				—				—				440

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2017. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There were no Level 1 securities as of March 31, 2017 or June 30, 2016. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or

 

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discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE - residential) and state and political subdivisions. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. There were no Level 3 securities as of March 31, 2017 or June 30, 2016.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Level 3 Reconciliation

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying balance sheet using significant unobservable (Level 3) inputs:

 

		Mortgage Servicing Rights
Balance, July 1, 2016		$	440
Total realized and unrealized gains and losses included in net income			77
Servicing rights that result from asset transfers			170
Payments received and loans refinanced			(60	)
Balance, March 31, 2017		$	627
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date		$	77

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as noninterest income.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2017 and June 30, 2016:

 

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017:
Impaired loans (collateral-dependent)		$	—			$	—			$	—			$	—
June 30, 2016:
Impaired loans (collateral-dependent)		$	108			$	—			$	—			$	108

 

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The following table presents recoveries (losses) recognized on assets measured on a non-recurring basis for the three months and nine months ended March 31, 2017 and 2016:

 

		Three Months Ended March 31,								Nine Months Ended March 31,
		2017				2016				2017				2016
Impaired loans (collateral-dependent)		$	7			$	31			$	14			$	(7	)

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Collateral-dependent Impaired Loans, Net of the Allowance for Loan Losses

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the senior lending officer. Appraisals are reviewed for accuracy and consistency by the senior lending officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the senior lending officer by comparison to historical results.

 

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Unobservable (Level 3) Inputs

The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements at March 31, 2017 and June 30, 2016.

 

		Fair Value at March 31, 2017				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
Mortgage servicing rights		$	627			Discounted cash flow		Discount rate   Constant prepayment rate   Probability of default		9.5% – 10.5% (9.5%)   9.7% - 10.2% (9.8%)   0.06% - 0.32% (0.31%)
		Fair Value at June 30, 2016				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
Mortgage servicing rights		$	440			Discounted cash flow		Discount rate   Constant prepayment rate   Probability of default		9.5% – 10.5% (9.5%)   12.8% - 13.4% (13.3%)   0.06% - 0.32% (.31%)
Impaired loans (collateral-dependent)			108			Market comparable properties		Marketability discount		11.8% (11.8%)

 

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Fair Value of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2017 and June 30, 2016.

 

		Carrying Amount				Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017:
Financial assets
Cash and cash equivalents		$	16,785			$	16,785			$	—			$	—
Interest-bearing time deposits in banks			250				250				—				—
Loans, net of allowance for loan losses			437,946				—				—				433,197
Federal Home Loan Bank stock			2,813				—				2,813				—
Accrued interest receivable			1,921				—				1,921				—
Financial liabilities
Deposits			436,153				—				188,443				246,904
Repurchase agreements			2,440				—				2,440				—
Federal Home Loan Bank advances			62,500				—				62,419				—
Advances from borrowers for taxes and insurance			1,047				—				1,047				—
Accrued interest payable			50				—				50				—
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans			—				—				—				—
Lines of credit			—				—				—				—

 

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		Carrying Amount				Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
June 30, 2016:
Financial assets
Cash and cash equivalents		$	6,449			$	6,449			$	—			$	—
Interest-bearing time deposits in banks			252				252				—				—
Loans, net of allowance for loan losses			443,748				—				—				442,366
Federal Home Loan Bank stock			5,425				—				5,425				—
Accrued interest receivable			1,803				—				1,803				—
Financial liabilities
Deposits			433,708				—				175,724				258,445
Repurchase agreements			4,392				—				4,392				—
Federal Home Loan Bank advances			67,000				—				67,273				—
Advances from borrowers for taxes and insurance			932				—				932				—
Accrued interest payable			59				—				59				—
Unrecognized financial instruments (net of contract amount)			—				—				—				—
Commitments to originate loans			—				—				—				—
Lines of credit			—				—				—				—

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Interest-Bearing Time Deposits in Banks, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, Repurchase Agreements and Advances from Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Deposits

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these types of deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

 

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Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of lines of credit are based on fees currently charged for similar agreements, or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Note 13:    Commitments

Commitments to Originate Loans

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company had commitments of $25,020,000 and $17,555,000 as of March 31, 2017 and June 30, 2016, respectively. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Company had lines of credit totaling $45,630,000 and $56,916,000 as of March 31, 2017 and June 30, 2016, respectively. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

 

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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, 2016, 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. We have received regulatory clearance to open a new branch at 421 Brown Boulevard, Bourbonnais, Illinois, which we expect to open by the end of June, 2017. 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 3.03% for the nine months ended March 31, 2017 from 3.01% for the nine months ended March 31, 2016. An increase in interest-earning assets contributed to an increase in net interest income to $13.3 million for the nine months ended March 31, 2017, from $12.6 million for the nine months ended March 31, 2016.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets. Our non-performing loans totaled $1.9 million, or 0.4% of loans at March 31, 2017, and $2.2 million, or 0.5% of total loans at June 30, 2016. Our non-performing assets totaled $2.1 million or 0.4% of total assets at March 31, 2017, and $2.5 million, or 0.4% of total assets at June 30, 2016.

At March 31, 2017, the Association was categorized as “well capitalized” under regulatory capital requirements.

Net income increased $819,000 to $3.3 million for the nine months ended March 31, 2017, from $2.5 million for the nine months ended March 31, 2016. The increase in net income was due to an increase in net interest income and a decrease in provision for loan losses, partially offset by a decrease in noninterest income and an increase in noninterest expense.

Management’s discussion and analysis of the financial condition and results of operations at and for the three and nine months ended March 31, 2017 and 2016 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.

The Company established a charitable foundation at the time of its mutual-to-stock conversion and donated to it cash and shares of common stock for a total value of approximately $3.6 million. The Company established a deferred tax asset associated with this charitable contribution. No valuation allowance has been established, as it appears that the Company will be able to deduct the contribution, which is subject to limitations each year, during the five year carry-forward period which ends June 30, 2017.

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, 2016.

Comparison of Financial Condition at March 31, 2017 and June 30, 2016

Total assets decreased $4.1 million, or 0.7%, to $591.5 million at March 31, 2017 from $595.6 million at June 30, 2016. The decrease was primarily due to a $5.8 million decrease in net loans and a $7.7 million decrease in investment securities, partially offset by a $10.3 million increase in cash and cash equivalents.

Net loans receivable, including loans held for sale, decreased by $5.8 million, or 1.3%, to $437.9 million at March 31, 2017 from $443.7 million at June 30, 2016. The decrease in net loans receivable during this period was due primarily to a $5.9 million, or 7.0%, decrease in multi-family loans, a $4.8 million, or 3.2%, decrease in one-to four-family loans, a $2.1 million, or 20.6%, decrease in consumer loans, and a $686,000, or 8.4%, decrease in home equity lines of credit, partially offset by a $5.9 million, or 30.2%, increase in construction loans, and a $1.6 million, or 1.3%, increase in commercial real estate loans.

Investment securities, consisting entirely of securities available-for-sale, decreased $7.7 million, or 6.4%, to $113.6 million at March 31, 2017 from $121.3 million at June 30, 2016. We had no securities classified as held to maturity at March 31, 2017 or June 30, 2016.

As of March 31, 2017, Federal Home Loan Bank stock decreased $2.6 million to $2.8 million, while premises and equipment increased $300,000 to $4.9 million, deferred income taxes increased $1.5 million to $3.2 million, and mortgage servicing rights increased $187,000 to $627,000 from the respective balances as of June 30, 2016. The decrease in Federal Home Loan Bank stock was the result of a new Federal Home Loan Bank of Chicago initiative whereby they

 

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automatically repurchase all excess stock over the calculated required amount. The increase in premises and equipment was primarily due to the purchase of a building in Bourbonnais, Illinois, with the intent to open a branch office. The increase in deferred income taxes was mostly due to a decrease in the unrealized gain on the sale of available-for-sale securities and the increase in mortgage servicing rights was due to increases in both the valuation and in the loan balances serviced.

At March 31, 2017, our investment in bank-owned life insurance was $8.8 million, an increase of $201,000 from $8.6 million at June 30, 2016. 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 $18.7 million at March 31, 2017.

Deposits increased $2.4 million, or 0.6%, to $436.2 million at March 31, 2017 from $433.7 million at June 30, 2016. Certificates of deposit, excluding brokered certificates of deposit, decreased $7.4 million, or 3.4%, to $208.9 million. Savings, NOW, and money market accounts increased $9.8 million, or 6.2%, to $166.5 million. Brokered certificates of deposit decreased $2.9 million, or 6.9%, to $38.8 million, and noninterest bearing demand accounts increased $3.0 million, or 15.5%, to $22.0 million. Repurchase agreements decreased $2.0 million, or 44.4%, to $2.4 million. Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, decreased $4.5 million, or 6.7%, to $62.5 million at March 31, 2017 from $67.0 million at June 30, 2016.

Advances from borrowers for taxes and insurance increased $115,000, or 12.3%, to $1.0 million at March 31, 2017, from $932,000 at June 30, 2016. Other liabilities increased $542,000, or 21.4%, to $3.1 million at March 31, 2017 from $2.5 million on June 30, 2016. The increase in advances from borrowers for taxes and insurance was attributable to the timing of the payment of real estate taxes and insurance, while the increase in other liabilities was attributable to a general increase in accounts payable and accrued expenses payable due to timing of payments.

Total equity decreased $770,000, or 0.9%, to $83.2 million at March 31, 2017 from $84.0 million at June 30, 2016. This decrease was due to a $2.5 million decrease in accumulated other comprehensive income (loss), net of tax, the repurchase of 73,653 shares of common stock at an aggregate cost of approximately $1.4 million, and semi-annual dividends paid on common stock in the amount of $612,000, partially offset by net income of $3.3 million. The decrease in other accumulated comprehensive income (loss) was primarily due to unrealized depreciation on available-for-sale securities, net of taxes. The Company announced a stock repurchase plan on February 5, 2016, whereby the Company could repurchase up to 200,703 shares of its common stock, or approximately 5% of its then current outstanding shares. There were 73,653 shares of the Company’s common stock repurchased by the Company during the nine months ended March 31, 2017, and there were 127,050 shares yet to be repurchased under the plan as of March 31, 2017.

Comparison of Operating Results for the Nine Months Ended March 31, 2017 and 2016

General. Net income increased $819,000 to $3.3 million for the nine months ended March 31, 2017, from $2.5 million for the nine months ended March 31, 2016. The increase in net income was primarily due to an increase in net interest income and a decrease in provision for loan losses, partially offset by a decrease in noninterest income, and an increase in noninterest expense.

Net Interest Income. Net interest income increased by $701,000, or 5.6%, to $13.3 million for the nine months ended March 31, 2017 from $12.6 million for the nine months ended March 31, 2016. The increase was due to an increase of $1.0 million in interest and dividend income, partially offset by an increase of $305,000 in interest expense. A $23.4 million, or 4.3%, increase in the average balance of interest earning assets was partially offset by a $19.5 million, or 4.3%, increase in the average balance of interest bearing liabilities. Our interest rate spread increased by 2 basis points to 3.03% for the nine months ended March 31, 2017, compared to 3.01% for the nine months ended March 31, 2016, while our net interest margin increased by 4 basis points to 3.15% for the nine months ended March 31, 2017 compared to 3.11% for the nine months ended March 31, 2016.

 

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Interest and Dividend Income. Interest and dividend income increased $1.0 million, or 6.7%, to $16.0 million for the nine months ended March 31, 2017 from $15.0 million for the nine months ended March 31, 2016. The increase in interest and dividend income was primarily due to a $1.4 million increase in interest income on loans, partially offset by a $428,000 decrease in interest income on securities. The increase in interest income on loans resulted from a $37.4 million, or 9.2%, increase in the average balance of loans to $445.0 million for the nine months ended March 31, 2017, and by a 7 basis point, or 1.7%, increase in the average yield on loans to 4.15% from 4.08%. Interest on securities decreased $428,000, or 17.2%, as a result of a $15.3 million decrease in the average balance of securities to $110.5 million at March 31, 2017, and a 15 basis point, or 5.8%, decrease in the average yield on securities to 2.48% from 2.63%.

Interest Expense. Interest expense increased $305,000, or 12.8%, to $2.7 million for the nine months ended March 31, 2017, from $2.4 million for the nine months ended March 31, 2016. The increase was primarily due to an increase in the average balance of interest-bearing liabilities and higher market rates of interest during the nine months ended March 31, 2017.

Interest expense on interest-bearing deposits increased by $389,000, or 22.8%, to $2.1 million for the nine months ended March 31, 2017 from $1.7 million for the nine months ended March 31, 2016. This increase was due to an increase of $15.8 million in the average balance of interest-bearing deposits to $407.7 million for the nine months ended March 31, 2017, from $391.9 million for the nine months ended March 31, 2016, as well as an 11 basis point increase in the average cost of interest-bearing deposits to 0.69% for the nine months ended March 31, 2017 from 0.58% for the nine months ended March 31, 2016.

Interest expense on borrowings decreased $84,000, or 12.5%, to $587,000 for the nine months ended March 31, 2017 from $671,000 for the nine months ended March 31, 2016. This decrease was due to a 24 basis point decrease in the average cost of such borrowings to 1.10% for the nine months ended March 31, 2017 from 1.34% for the nine months ended March 31, 2016, partially offset by an increase in average balance of borrowings to $70.7 million for the nine months ended March 31, 2017, from $67.0 million for the nine months ended March 31, 2016.

Provision for Loan Losses. We establish provisions for loan losses that 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 $225,000 for the nine months ended March 31, 2017, compared to a provision for loan losses of $1.1 million for the nine months ended March 31, 2016. The allowance for loan losses was $5.4 million, or 1.21% of total loans, at March 31, 2017, compared to $5.3 million, or 1.21% of total loans, at March 31, 2016, and $5.4 million, or 1.19% of total loans, at June 30, 2016. Non-performing loans decreased to $1.9 million during the nine month period ended March 31, 2017. During the nine months ended March 31, 2017, a net charge-off of $210,000 was recorded, while during the nine months ended March 31, 2016, a net charge-off of $100,000 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 March 31, 2017				Year Ended June 30, 2016
Allowance to non-performing loans			276.10	%			244.39	%
Allowance to total loans outstanding at the end of the period			1.21	%			1.19	%
Net charge-offs to average total loans outstanding during the period, annualized			0.06	%			0.05	%
Total non-performing loans to total loans			0.44	%			0.49	%
Total non-performing assets to total assets			0.35	%			0.42	%

Noninterest Income. Noninterest income decreased $91,000, or 3.0%, to $3.0 million for the nine months ended March 31, 2017 compared to $3.1 million for the nine months ended March 31, 2016. The decrease was primarily due to decreases in net realized gains on the sale of available-for-sale securities, and brokerage commissions, partially offset by increases in net gains on the sale of loans and mortgage banking income, net. For the nine months ended March 31, 2017, net realized gains on the sale of available-for-sale securities decreased $300,000 to $117,000, and brokerage commissions decreased $102,000 to $420,000, while net gains on the sale of loans increased $84,000 to $214,000, and mortgage banking income, net, increased $238,000 to $349,000. The decrease in net realized gains on the sale of available-for-sale securities was a result of a larger amount of securities sold at a gain in the nine months ended March 31, 2016, than in the nine months ended March 31, 2017, while the decrease in brokerage commissions reflects decreased activity due to movement in interest rates. The increase in net gains on the sale of loans income were due to a larger number of loans sold to the Federal Home Loan Bank of Chicago in the nine months ended March 31, 2017, while the increase in mortgage banking income was mostly due to a higher valuation of mortgage servicing rights in the nine months ended March 31, 2017.

Noninterest Expense. Noninterest expense increased $163,000, or 1.5%, to $10.8 million for the nine months ended March 31, 2017 from $10.7 million for the nine months ended March 31, 2016. The largest components of this increase were compensation and benefits, which increased $356,000, or 5.3%, and equipment expense, which increased $116,000, or 15.3%. Compensation and benefits increased due to increased staffing, normal salary increases, and increased medical insurance costs, while equipment expense increased as a result of technology upgrades in the nine months ended March 31, 2017. These increases were partially offset by decreases in federal deposit insurance expense, which decreased by $97,000, or 42.0%, and telephone and postage expense, which decreased by $62,000, or 28.8%. The decrease in the federal deposit insurance expense was the result of the change in the premium calculation method by the FDIC, while the decrease in telephone and postage expense was mostly the result of a telephone system upgrade.

Income Tax Expense. We recorded a provision for income tax of $1.9 million for the nine months ended March 31, 2017, compared to a provision for income tax of $1.4 million for the nine months ended March 31, 2016, reflecting effective tax rates of 36.9% and 35.9%, respectively.

 

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Comparison of Operating Results for the Three Months Ended March 31, 2017 and 2016

General. Net income decreased $100,000 to $844,000 for the three months ended March 31, 2017 from net income of $944,000 for the three months ended March 31, 2016. The decrease was primarily due to a decrease in noninterest income and an increase in interest 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 $43,000 to $4.4 million for the three months ended March 31, 2017 from $4.3 million for the three months ended March 31, 2016. The increase was the result of an increase of $107,000 in interest and dividend income, partially offset by an increase of $64,000 in interest expense. We had an $8.7 million, or 1.6%, increase in the average balance of interest earning assets, partially offset by a $3.8 million, or 0.8%, increase in average balance of interest bearing liabilities. Our interest rate spread decreased by 3 basis points to 2.97% for the three months ended March 31, 2017 from 3.00% for the three months ended March 31, 2016, and our net interest margin decreased by 2 basis points to 3.09% for the three months ended March 31, 2017 from 3.11% for the three months ended March 31, 2016.

Interest and Dividend Income. Interest and dividend income increased $107,000, or 2.1%, to $5.3 million for the three months ended March 31, 2017 from $5.1 million for the three months ended March 31, 2016. The increase in interest and dividend income was mostly due to a $135,000 increase in interest income on loans. This increase resulted from a $10.0 million, or 2.3%, increase in the average balance of loans to $443.8 million for the three months ended March 31, 2017, from $433.8 million for the three months ended March 31, 2016, and by a 3 basis point, or 0.8%, increase in the average yield on loans to 4.07% from 4.04%. Interest income on securities decreased $43,000, or 5.8%, as the average yield on securities decreased 16 basis points to 2.45% for the three months ended March 31, 2017, from 2.61% for the three months ended March 31, 2016. The decrease in average yield was partially offset by a $382,000 increase in the average balance of securities to $113.8 million, for the three months ended March 31, 2017, from $113.4 million for the three months ended March 31, 2016.

Interest Expense. Interest expense increased $64,000, or 7.7%, to $898,000 for the three months ended March 31, 2017 from $834,000 for the three months ended March 31, 2016. The increase was primarily due to an increase in the average balance of deposits and an increase in the average cost of deposits, partially offset by a decrease in the average balance of borrowings and a decrease in the average cost of borrowings.

Interest expense on interest-bearing deposits increased by $131,000, or 22.4%, to $716,000 for the three months ended March 31, 2017 from $585,000 for the three months ended March 31, 2016. This increase was due to an 11 basis point, or 19.1%, increase in the average cost of interest-bearing deposits to 0.70% for the three months ended March 31, 2017 from 0.59% for the three months ended March 31, 2016, as well as an $11.5 million, or 2.9%, increase in the average balance of interest-bearing deposits to $407.8 million for the three months ended March 31, 2017 from $396.3 million for the three months ended March 31, 2016.

Interest expense on borrowings decreased by $67,000, or 26.9%, to $182,000 for the three months ended March 31, 2017 from $249,000 for the three months ended March 31, 2016. This decrease was due to both a decrease in the average balance of borrowings of $7.7 million, or 10.1%, to $68.2 million for the three months ended March 31, 2017, from $75.9 million for the three months ended March 31, 2016, and a 25 basis point, or 19.1%, decrease in the average cost of borrowings to 1.06% for the three months ended March 31, 2017 from 1.31% for the three months ended March 31, 2016.

Provision for Loan Losses. We recorded a provision for loan losses of $192,000 for the three months ended March 31, 2017, compared to a provision for loan losses of $254,000 for the three months ended March 31, 2016. During the three months ended March 31, 2017 and 2016, $213,000 and $51,000 in net charge-offs were recorded, respectively.

Noninterest Income. Noninterest income decreased $87,000, or 9.4%, to $839,000 for the three months ended March 31, 2017 from $926,000 for the three months ended March 31, 2016. The decrease was primarily due to a decrease in net

 

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realized gains on the sale of available-for-sale securities, and a decrease in brokerage commissions, partially offset by increases in mortgage banking income and gains of sale of loans. For the three months ended March 31, 2017, net realized gains on the sale of available-for-sale securities decreased $115,000 to $0, and brokerage commissions decreased $38,000 to $127,000. The decrease in brokerage commissions reflects decreased activity due to movement in interest rates. The increases in mortgage banking income and gain on sale of loans were primarily due to an increase in number of loans sold to the Federal Home Loan Bank of Chicago in the three months ended March 31, 2017.

Noninterest Expense. Noninterest expense increased $181,000, or 5.2%, to $3.7 million for the three months ended March 31, 2017 from $3.5 million for the three months ended March 31, 2016. The largest components of this increase were compensation and benefits, which increased $201,000, or 9.0%, equipment expense, which increased $28,000, or 11.2%, and professional services, which increased $53,000, or 50.0%, partially offset by decreases in federal deposit insurance expense of $38,000, or 47.5%, and telephone and postage expense of $18,000, or 22.5%. Increased medical insurance costs, normal salary increases, and stock equity plan expenses primarily accounted for the increase in compensation and benefits expense, while the increase in equipment expense was due to routine technology upgrades, and the increase in professional services was due to increased services received during the three months ended March 31, 2017. The decrease in federal deposit insurance expense was the result of the change in the premium calculation method by the FDIC and the decrease in telephone and postage was mostly the result of a telephone system upgrade.

Income Tax Expense. We recorded a provision for income tax of $479,000 for the three months ended March 31, 2017, compared to a provision for income tax of $542,000 for the three months ended March 31, 2016, reflecting effective tax rates of 36.2% and 36.5%, respectively.

Asset Quality

At March 31, 2017, our non-accrual loans totaled $1.8 million, including $1.5 million in one-to four-family loans, $155,000 in multi-family loans, $27,000 in commercial real estate loans, and $93,000 in commercial business loans. At March 31, 2017, we had one one-to four-family loan for $139,000 and one home equity line of credit for $15,000, which were delinquent 90 days or greater and still accruing interest.

At March 31, 2017, $2.8 million in loans were classified as substandard. Loans classified as substandard consisted of $2.1 million in one-to four-family loans, $313,000 in multi-family loans, $304,000 in commercial real estate loans, $15,000 in home equity lines of credit, and $103,000 in commercial business loans. At March 31, 2017, no loans were classified as doubtful or loss.

At March 31, 2017, watch assets consisted of $1.3 million in one-to four-family loans, $9,000 in home equity lines of credit, $1.7 million in commercial business loans and $69,000 in consumer loans.

Troubled Debt Restructurings. 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 March 31, 2017 and June 30, 2016, we had $3.1 million and $2.3 million, respectively, of troubled debt restructurings. At March 31, 2017 our troubled debt restructurings consisted of $1.8 million in one-to four-family loans, $1.3 million in multi-family loans, $7,000 in commercial real estate loans, $9,000 in home equity lines of credit, and $93,000 in commercial business loans.

At March 31, 2017, we had $155,000 in foreclosed assets compared to $338,000 as of June 30, 2016. Foreclosed assets consisted entirely of residential real estate properties at both March 31, 2017 and June 30, 2016.

 

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Allowance for Loan Loss Activity

The Company regularly reviews its allowance for loan losses and makes adjustments to its balance based on management’s analysis of the loan portfolio, the amount of non-performing and classified loans, as well as general economic conditions. Although the Company maintains its allowance for loan losses at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional loss provisions. The following table summarizes changes in the allowance for loan losses over the nine-month periods ended March 31, 2017 and 2016:

 

		Nine months ended March 31,
		2017				2016
Balance, beginning of period		$	5,351			$	4,211
Loans charged off			(203	)			(69	)
Real estate loans:
One-to four-family
Multi-family			—				—
Commercial			(8	)			—
HELOC			—				(28	)
Construction			—				—
Commercial business			—				—
Consumer			(31	)			(9	)
Gross charged off loans			(242	)			(106	)
Recoveries of loans previously charged off			27				5
Real estate loans:
One-to four-family
Multi-family			—				—
Commercial			—				—
HELOC			—				—
Construction			—				—
Commercial business			—				—
Consumer			5				1
Gross recoveries of charged off loans			32				6
Net charge offs			(210	)			(100	)
Provision charged to expense			225				1,142
Balance, end of period		$	5,366			$	5,253

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company’s loans. Management considers such factors as the repayment status of a loan, the estimated net fair value of the underlying collateral, the borrower’s intent and ability to repay the loan, local economic conditions, and the Company’s historical loss ratios. We maintain the allowance for loan losses through the provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. The allowance for loan losses increased $15,000 to $5.4 million at March 31, 2017, from $5.4 million at June 30, 2016. The increase was necessary in order to bring the allowance for loan losses to a level that reflects management’s estimate of the probable loss in the Company’s loan portfolio at March 31, 2017.

In its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data including past due percentages, charge offs, and recoveries. The Company’s allowance methodology weights the most recent twelve-quarter period’s net charge-offs and uses this information as one of the primary factors for evaluation of allowance adequacy. The most recent four-quarter net charge-offs are given a higher weight of 50%, while quarters 5-8 are given a 30% weight and quarters 9-12 are given only a 20% weight. The average net charge-offs in each period are calculated as net charge-offs by portfolio type for the period as a percentage of the quarter end balance of respective portfolio type over the same period. As the Company and the industry have seen increases in loan defaults in the past several years, the

 

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Company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation. The following table sets forth the Company’s weighted average historical net charge-offs as of March 31, 2017 and June 30, 2016:

 

Portfolio segment		March 31, 2017 Net charge-offs 12 quarter weighted historical				June 30, 2016 Net charge-offs 12 quarter  weighted historical
Real Estate:
One-to four-family			0.14	%			0.13	%
Multi-family			0.00	%			0.00	%
Commercial			0.00	%			0.01	%
HELOC			0.23	%			0.32	%
Construction			0.00	%			0.00	%
Commercial business			0.00	%			0.04	%
Consumer			0.05	%			(0.02	)%
Total portfolio			0.06	%			0.06	%

Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in financial conditions of individual borrowers; changes in local, regional, and national economic conditions; the Company’s historical loss experience; and changes in market conditions for property pledged to the Company as collateral. The Company has identified specific qualitative factors that address these issues and subjectively assigns a percentage to each factor. At March 31, 2017, these qualitative factors included: (1) management’s assumptions regarding the minimal level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured and other loan modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.

 

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The qualitative factors are applied to the allowance for loan losses based upon the following percentages by loan type:

 

Portfolio segment		Qualitative factor applied at March 31, 2017				Qualitative factor applied at June 30, 2016
Real Estate:
One-to four-family			0.67	%			0.68	%
Multi-family			1.56	%			1.45	%
Commercial			1.22	%			1.24	%
HELOC			0.99	%			0.88	%
Construction			1.19	%			1.15	%
Commercial business			1.97	%			1.93	%
Consumer			0.75	%			0.87	%
Total portfolio			1.16	%			1.13	%

At March 31, 2017, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $5.1 million, as compared to $5.1 million at June 30, 2016. The general increase in qualitative factors was attributable primarily to a slight increase in economic concerns regarding the multi-family general market conditions.

While management believes that our asset quality remains strong, it recognizes that, due to the continued growth in the loan portfolio, the increase in troubled debt restructurings and the potential changes in market conditions, our level of nonperforming assets and resulting charge-offs may fluctuate. Higher levels of net charge-offs requiring additional provisions for loan losses could result. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan sales and repayments, advances from the Federal Home Loan Bank of Chicago, and maturities of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. For the three months ended March 31, 2017 and the year ended June 30, 2016, our liquidity ratio averaged 19.51% and 21.4% of our total assets, respectively. We believe that we had enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2017.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and medium-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by our operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $16.8 million. Interest-bearing time deposits which can offer additional sources of liquidity, totaled $250,000 at March 31, 2017.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Condensed Consolidated Statement of Cash Flows included in our financial statements. Net cash provided by operating activities was $5.1 million and $4.4 million for the nine months ended March 31, 2017 and 2016, respectively. Net cash provided by (used in) investing activities consisted primarily of disbursements for loan originations and the purchase of

 

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securities and Federal Home Loan Bank stock, offset by net cash provided by principal collections on loans, proceeds from maturing securities, the sale of securities, the redemption of Federal Home Loan Bank stock, and pay downs on mortgage-backed securities. Net cash provided by (used in) investing activities was $11.2 million and $(21.4) million for the nine months ended March 31, 2017 and 2016, respectively. Net cash provided by (used in) financing activities consisted primarily of the activity in deposit accounts, FHLB advances, dividends paid, and stock repurchases. The net cash provided by (used in) financing activities was $(5.9) million and $16.3 million for the nine months ended March 31, 2017 and 2016, respectively.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at March 31, 2017 and June 30, 2016.

 

		March 31, 2017				June 30, 2016
		(Dollars in thousands)
Commitments to fund loans		$	25,020			$	17,555
Lines of credit			45,630				56,916

At March 31, 2017, certificates of deposit due within one year of March 31, 2017 totaled $123.6 million, or 28.4% of total deposits. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2018. Moreover, it is our intention as we continue to grow our commercial real estate portfolio, to emphasize lower cost deposit relationships with these commercial loan customers and thereby replace the higher cost certificates with lower cost deposits. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provides an additional source of funds. Federal Home Loan Bank advances were $62.5 million at March 31, 2017. At March 31, 2017, we had the ability to borrow up to an additional $127.0 million from the Federal Home Loan Bank of Chicago and also had the ability to borrow $36.3 million from the Federal Reserve based on current collateral pledged.

During the nine months ended March 31, 2017, 73,653 shares were repurchased as part of the stock repurchase plan that was announced by the Company on February 5, 2016, which allowed the Company to repurchase up to 200,703 shares of its common stock, or approximately 5% of the then current outstanding shares. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance. The repurchase plan may be suspended, terminated, or modified at any time for any reason, including market conditions, the cost of purchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase plan does not obligate the Company to purchase any particular number of shares.

The federal banking agencies have adopted regulations that substantially amend the capital regulations currently applicable to us. These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Association became subject to new capital requirements adopted by the OCC. These new requirements create a new required ratio for common equity Tier 1 (“CETI”) capital, increase the leverage and Tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Association to pay dividends, repurchase shares, or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies with assets under $1 billion.

 

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Under the new capital regulations, the minimum capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.

In addition to the minimum CETI, Tier 1 and total capital ratios, the Association will have to maintain a capital conservation buffer consisting of additional CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

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

 

		March 31, 2017 Actual				June 30, 2016 Actual				Minimum to Be Well Capitalized
Tier 1 capital to total assets
Association			11.9	%			11.1	%			5.0	%
Company			14.3	%			14.4	%			N/A
Common equity tier 1 to risk-weighted assets
Association			15.7	%			14.9	%			6.5	%
Company			18.9	%			18.5	%			N/A
Tier 1 capital to risk-weighted assets
Association			15.7	%			14.9	%			8.0	%
Company			18.9	%			18.5	%			N/A
Total capital to risk-weighted assets
Association			17.0	%			16.1	%			10.0	%
Company			20.1	%			19.7	%			N/A

 

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Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information at and for the periods indicated. Yields and costs are presented on an annualized basis. Tax-equivalent yield adjustments have not been made for tax-exempt securities. All average balances are based on month-end balances, which management deems to be representative of the operations of the Company. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

 

		For the Three Months Ended March 31,
		2017												2016
		Average Balance				Interest Income/ Expense				Yield/ Cost				Average Balance				Interest Income/ Expense				Yield/ Cost
		(Dollars in thousands)
Assets
Loans		$	443,781			$	4,519				4.07	%		$	433,825			$	4,384				4.04	%
Securities:
U.S. government, federal agency and government-sponsored enterprises			74,839				452				2.42	%			82,517				546				2.65	%
Mortgage-backed:
GSE-residential			35,675				228				2.56	%			27,458				176				2.56	%
State and political subdivisions			3,275				18				2.20	%			3,432				19				2.21	%
Total securities			113,789				698				2.45	%			113,407				741				2.61	%
Other			6,295				38				2.41	%			7,941				23				1.16	%
Total interest-earning assets			563,865				5,255				3.73	%			555,173				5,148				3.71	%
Non-interest earning assets			18,798												23,183
Total assets		$	582,663											$	578,356
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing checking or NOW		$	45,794				11				0.10	%		$	41,415				9				0.09	%
Savings accounts			40,427				12				0.12	%			38,980				12				0.12	%
Money market accounts			75,487				53				0.28	%			71,872				34				0.19	%
Certificates of deposit			246,135				640				1.04	%			244,065				530				0.87	%
Total interest-bearing deposits			407,843				716				0.70	%			396,332				585				0.59	%
Federal Home Loan Bank Advances and repurchase agreements			68,224				182				1.06	%			75,912				249				1.31	%
Total interest-bearing liabilities			476,067				898				0.75	%			472,244				834				0.71	%
Noninterest-bearing liabilities			23,520												23,874
Total liabilities			499,587												496,118
Stockholders’ equity			83,076												82,238
Total liabilities and stockholders’ equity		$	582,663											$	578,356

 

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		For the Three Months Ended March 31,
		2017												2016
		Average Balance				Interest Income/ Expense				Yield/ Cost				Average Balance				Interest Income/ Expense				Yield/ Cost
		(Dollars in thousands)
Net interest income						$	4,357											$	4,314
Interest rate spread (1)											2.97	%											3.00	%
Net interest margin (2)											3.09	%											3.11	%
Net interest-earning assets (3)		$	87,798											$	82,929
Average interest-earning assets to interest-bearing liabilities			118	%											118	%

 

(1)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(2)	Net interest margin represents net interest income divided by average total interest-earning assets.

(3)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

 

		For the Nine Months Ended March 31,
		2017												2016
		Average Balance				Interest Income/ Expense				Yield/ Cost				Average Balance				Interest Income/ Expense				Yield/ Cost
		(Dollars in thousands)
Assets
Loans		$	445,040			$	13,846				4.15	%		$	407,602			$	12,473				4.08	%
Securities:
U.S. government, federal agency and government-sponsored enterprises			75,689				1,414				2.49	%			88,232				1,748				2.64	%
Mortgage-backed:
GSE-residential			31,454				587				2.49	%			34,046				677				2.65	%
State and political subdivisions			3,361				55				2.18	%			3,517				59				2.24	%
Total securities			110,504				2,056				2.48	%			125,795				2,484				2.63	%
Other			8,978				109				1.62	%			7,772				48				0.82	%
Total interest-earning assets			564,522				16,011				3.78	%			541,169				15,005				3.70	%
Non-interest earning assets			21,241												22,617
Total assets		$	585,763											$	563,786

 

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		For the Nine Months Ended March 31,
		2017												2016
		Average Balance				Interest Income/ Expense				Yield/ Cost				Average Balance				Interest Income/ Expense				Yield/ Cost
		(Dollars in thousands)
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing checking or NOW		$	43,539				30				0.09	%		$	40,609				28				0.09	%
Savings accounts			39,757				36				0.12	%			37,901				38				0.13	%
Money market accounts			73,859				122				0.22	%			71,342				102				0.19	%
Certificates of deposit			250,552				1,907				1.02	%			242,064				1,538				0.85	%
Total interest-bearing deposits			407,707				2,095				0.69	%			391,916				1,706				0.58	%
Federal Home Loan Bank Advances and repurchase agreements			70,735				587				1.10	%			67,013				671				1.34	%
Total interest-bearing liabilities			478,442				2,682				0.75	%			458,929				2,377				0.69	%
Noninterest-bearing liabilities			23,992												23,312
Total liabilities			502,434												482,241
Stockholders’ equity			83,329												81,545
Total liabilities and stockholders’ equity		$	585,763											$	563,786
Net interest income						$	13,329											$	12,628
Interest rate spread (1)											3.03	%											3.01	%
Net interest margin (2)											3.15	%											3.11	%
Net interest-earning assets (3)		$	86,080											$	82,240
Average interest-earning assets to interest-bearing liabilities			118	%											118	%

 

(1)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(2)	Net interest margin represents net interest income divided by average total interest-earning assets.

(3)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

 

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Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to the changes due to rate and the changes due to volume in proportion to the relationship of the absolute dollar amounts of change in each.

 

		Three Months Ended March 31, 2017 vs. 2016												Nine Months Ended March 31, 2017 vs. 2016
		Increase (Decrease) Due to								Total Increase (Decrease)				Increase (Decrease) Due to								Total Increase (Decrease)
		Volume				Rate								Volume				Rate
		(In thousands)
Interest-earning assets:
Loans		$	(185	)		$	320			$	135			$	987			$	386			$	1,373
Securities			17				(60	)			(43	)			(94	)			(334	)			(428	)
Other			(29	)			44				15				12				49				61
Total interest-earning assets		$	(197	)		$	304			$	107			$	905			$	101			$	1,006
Interest-bearing liabilities:
Interest-bearing checking or NOW		$	2			$	—			$	2			$	2			$	—			$	2
Savings accounts			—				—				—				2				(4	)			(2	)
Certificates of deposit			33				77				110				96				273				369
Money market accounts			13				6				19				7				13				20
Total interest-bearing deposits			48				83				131				107				282				389
Federal Home Loan Bank advances and repurchase agreements			(354	)			287				(67	)			56				(140	)			(84	)
Total interest-bearing liabilities		$	(306	)		$	370			$	64			$	163			$	142			$	305
Change in net interest income		$	109			$	(66	)		$	43			$	742			$	(41	)		$	701

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

An internal interest rate risk analysis is performed at least quarterly to assess the Company’s Earnings at Risk, Capital at Risk, and Value at Risk. As of March 31, 2017, there were no material changes in interest rate risk from the analysis disclosed in the Company’s Form 10-K for the fiscal year ended June 30, 2016, as filed with the Securities and Exchange Commission.

 

Item 4.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2017. Based upon such evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended March 31, 2017, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II – Other Information

 

Item 1.

Legal Proceedings

The Association and Company are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Association’s or the Company’s financial condition or results of operations.

 

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item1A.- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, which could materially affect our business, financial condition or future results of operations. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about purchases by the Company of the quarter ended December 31, 2016 regarding the Company’s common stock.

PURCHASES OF EQUITY SECURITIES BY COMPANY (1)

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
1/1/17 – 1/31/17			10,000			$	18.60				10,000				127,050
2/1/17 – 2/28/17			—				—				—				127,050
3/1/17 – 3/31/17			—				—				—				127,050
Total			10,000			$	18.60				10,000

 

(1)

The Company announced a stock repurchase plan on February 5, 2016, whereby the Company could repurchase up to 200,703 shares of its common stock, or approximately 5% of the Company’s then outstanding shares. There were 10,000 shares of the Company’s common stock repurchased by the Company during the three months ended March 31, 2017, and there were 127,050 shares still available for repurchase under the plan as of March 31, 2017.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

Mine Safety Disclosures

None.

 

Item 5.

Other Information

None.

 

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Item 6.

Exhibits

 

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of March 31, 2017 and June 30, 2016, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2017 and 2016, (iii) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31, 2017 and 2016, (iv) the Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended March 31, 2017 and 2016, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2017 and 2016, and (vi) the notes to the Condensed Consolidated Financial Statements.*

 

*	This information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

						IF BANCORP, INC.
Date: May 11, 2017						/s/ Walter H. Hasselbring III
						Walter H. Hasselbring III
						President and Chief Executive Officer
Date: May 11, 2017						/s/ Pamela J. Verkler
						Pamela J. Verkler
						Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

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