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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 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 Number: 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 No.)
201 East Cherry Street, Watseka, Illinois   60970
(Address of principal executive offices)   (Zip Code)

(815) 432-2476

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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 filing 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 (§ 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 7(a)(2)(B) of the Securities 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 aggregate market value of the voting and non-voting common equity held by nonaffiliates as of December 31, 2016 was $54,868,077.

The number of shares outstanding of the registrant’s common stock as of September 5, 2017 was 3,940,408.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on November 20, 2017 are incorporated by reference in Part III of this Form 10-K.

 

 

 


Table of Contents

INDEX

 

          Page  
PART I      1  

ITEM 1.

   BUSINESS      1  

ITEM 1A.

   RISK FACTORS      36  

ITEM 1B.

   UNRESOLVED STAFF COMMENTS      41  

ITEM 2.

   PROPERTIES      42  

ITEM 3.

   LEGAL PROCEEDINGS      42  

ITEM 4.

   MINE SAFETY DISCLOSURES      43  
PART II      43  

ITEM 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      43  

ITEM 6.

   SELECTED FINANCIAL DATA      45  

ITEM 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION      47  

ITEM 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      58  

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      58  

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      58  

ITEM 9A.

   CONTROLS AND PROCEDURES      58  

ITEM 9B.

   OTHER INFORMATION      59  
PART III      60  

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      60  

ITEM 11.

   EXECUTIVE COMPENSATION      60  

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS      60  

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      61  

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      61  
PART IV      62  

ITEM 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      62  
SIGNATURES      63  

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts; rather, they are statements based on IF Bancorp, Inc.’s current expectations regarding its business strategies, intended results and 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 which could affect actual results include interest rate trends, the general economic climate in the market area in which IF Bancorp, Inc. operates, as well as nationwide, IF Bancorp, Inc.’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation. For further discussion of factors that may affect the results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.


Table of Contents

PART I

 

ITEM 1. BUSINESS

General

IF Bancorp, Inc. (“IF Bancorp” or the “Company”) is a Maryland corporation formed in March 2011 to become the holding company for Iroquois Federal Savings and Loan Association (“Iroquois Federal” or the “Association”). On July 7, 2011, the Company completed its initial public offering of common stock in connection with Iroquois Federal’s mutual-to-stock conversion, selling 4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to Iroquois Federal’s employee stock ownership plan, and raising approximately $45.0 million of gross proceeds. In addition, the Company issued 314,755 shares of its common stock to the Iroquois Federal Foundation.

The Company is primarily engaged in the business of directing, planning, and coordinating the business activities of Iroquois Federal. The Company’s most significant asset is its investment in Iroquois Federal. At June 30, 2017 and 2016, we had consolidated assets of $585.5 million and $595.6 million, consolidated deposits of $439.1 million and $433.7 million and consolidated equity of $84.0 million and $84.0 million, respectively.

Iroquois Federal is a federally chartered savings association headquartered in Watseka, Illinois. The Association’s business consists primarily of taking deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans, multi-family mortgage loans, commercial real estate loans (including farm loans), home equity lines of credit, commercial business loans, and, to a lesser extent, consumer loans (consisting primarily of automobile loans), construction loans and land development loans. We also invest in securities, which historically have consisted primarily of securities issued by the U.S. government, U.S. government agencies and U.S. government-sponsored enterprises, as well as mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises. To a lesser extent, we also invest in municipal obligations.

We offer a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and personal checking accounts, individual retirement accounts and health savings accounts. We also offer alternative delivery channels, including ATMs, online banking and bill pay, mobile banking with mobile deposit and bill pay, ACH origination, remote deposit capture and telephone banking.

In addition to our traditional banking products and services, we offer a full line of property and casualty insurance products through Iroquois Federal’s wholly-owned subsidiary, L.C.I. Service Corporation, d/b/a Iroquois Insurance Agency, an insurance agency with offices in Watseka and Danville, Illinois. We also offer annuities, mutual funds, individual and group retirement plans, life, disability and health insurance, individual securities, managed accounts and other financial services at all of our locations through Iroquois Financial, a division of Iroquois Federal. Raymond James Financial Services, Inc. serves as the broker-dealer for Iroquois Financial.

Available Information

IF Bancorp, Inc. is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission. These respective reports are on file and a matter of public record with the Securities and Exchange Commission and may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

IF Bancorp’s executive offices are located at 201 East Cherry Street, Watseka, Illinois 60970. Our telephone number at this address is (815) 432-2476, and our website address is www.iroquoisfed.com. Information on our website should not be considered a part of this annual report.

 

1


Table of Contents

Market Area

We conduct our operations from our six full-service banking offices located in the municipalities of Watseka, Danville, Clifton, Hoopeston, Savoy and Bourbonnais, Illinois and our loan production and wealth management office in Osage Beach, Missouri. The Bourbonnais office was recently opened in June, 2017. Our primary lending market includes the Illinois counties of Vermilion, Iroquois, Champaign and Kankakee, as well as the counties in Illinois and Indiana within 30 miles of a branch or loan production office. Our loan production and wealth management office in Osage Beach, Missouri, serves the Missouri counties of Camden, Miller and Morgan.

In recent years, Iroquois and Vermilion Counties, our traditional primary market areas, have experienced negative growth, reflecting in part, the economic downturn. However, Champaign County, where our Savoy branch is located, has experienced population growth. Future business and growth opportunities will be influenced by economic and demographic characteristics of our primary market area and of east central Illinois. According to data from the U.S. Census Bureau, Iroquois County had an estimated population of 28,000 in July 2016, a decrease of 4.7% since April 2010, Vermilion County had an estimated population of 78,000 in July 2016, a decrease of 4.3% since April 2010, and Kankakee County had an estimated population of 110,000 in July 2016, a decrease of 3.0% since April 2010, while Champaign County had an estimated population of 208,000 in July 2016, an increase of 3.7% since April 2010. Unemployment rates in our primary market have decreased over the last year. According to the Illinois Department of Employment Security, unemployment, on a non-seasonally adjusted basis, decreased from 5.5% to 4.1% in Iroquois County, from 7.2% to 6.8% in Vermilion County, from 5.1% to 4.8% in Champaign County, and from 6.4% to 5.4% in Kankakee County.

The economy in our primary market is fairly diversified, with employment in services, wholesale/retail trade, and government serving as the basis of the Iroquois County, Vermilion County, Champaign and Kankakee County economies. Manufacturing jobs, which tend to be higher paying jobs, are also a large source of employment in Vermilion, Champaign and Kankakee Counties, while Iroquois County is heavily influenced by agriculture and agriculture related businesses. Hospitals and other health care providers, local schools and trucking/distribution businesses also serve as major sources of employment.

Our Osage Beach, Missouri loan production and wealth management office is located in the Lake of the Ozarks region and serves the Missouri counties of Camden, Miller and Morgan. Once known primarily as a resort area, this market is becoming an area of permanent residences and a growing retirement community, providing an excellent market for mortgage loans and our wealth management and financial services business.

Competition

We face intense competition in our market area both in making loans and attracting deposits. We also compete with commercial banks, credit unions, savings institutions, mortgage brokerage firms, finance companies, mutual funds, insurance companies and investment banking firms. Some of our competitors have greater name recognition and market presence that benefit them in attracting customers, and offer certain services that we do not or cannot provide.

Our deposit sources are primarily concentrated in the communities surrounding our banking offices located in Iroquois and Vermilion Counties, Illinois. As of June 30, 2016, the latest date for which FDIC data is available, we ranked first of 13 bank and thrift institutions with offices in Iroquois County with a 25.29% deposit market share. As of the same date, we ranked first of 16 bank and thrift institutions with offices in Vermilion County with a 18.77% deposit market share and we ranked 22nd of 29 bank and thrift institutions with offices in Champaign County, with a 0.49% deposit market share.

 

2


Table of Contents

Lending Activities

Our principal lending activity is the origination of one- to four-family residential mortgage loans, multi-family loans, commercial real estate loans (including farm loans), home equity loans and lines of credit, commercial business loans, and, to a lesser extent, consumer loans (consisting primarily of automobile loans), construction loans and land development loans.

In addition to loans originated by Iroquois Federal, our loan portfolio includes loan purchases which are secured by single family homes located primarily in the Midwest. As of June 30, 2017 and 2016, the amount of such loans equaled $7.6 million and $9.8 million, respectively. See “—Loan Originations, Purchases, Sales, Participations and Servicing.”

Our loan portfolio also includes commercial loan participations which are secured by both real estate and other business assets, primarily within 100 miles of our primary lending market. As of June 30, 2017 and 2016, the amount of such loans equaled $38.5 million and $47.7 million, respectively. See “—Loan Originations, Purchases, Sales, Participations and Servicing.”

The Association’s legal lending limit to any one borrower is 15% of unimpaired capital and surplus. On July 30, 2012 our bank received approval from the Comptroller of the Currency to participate in the Supplemental Lending Limits Program (SLLP). This program allows eligible institutions to make additional residential real estate loans or extensions of credit to one borrower, small business loans or extensions of credit to one borrower, or small farm loans or extensions of credit to one borrower, in the lesser of the following two amounts: (1) 10% of its capital and surplus; or (2) the percentage of capital and surplus, in excess of 15%, that a state bank is permitted to lend under the state lending limit that is available for loans secured by one- to four-family residential real estate, small business loans, small farm loans or unsecured loans in the state where the main office of the savings association is located. For our association this additional limit (or “supplemental limit(s)”) for one- to four-family residential real estate, small business, or small farm loans is 10% of our Association’s capital and surplus. In addition, the total outstanding amount of the Association’s loans or extensions of credit or parts of loans and extensions of credit made to all of its borrowers under the SLLP may not exceed 100% of the Association’s capital and surplus. By Association policy, participation of any credit facilities in the SLLP is to be infrequent and all credit facilities are to be with prior Board approval.

We originate a substantial portion of our fixed-rate one- to four-family residential mortgage loans for sale to the Federal Home Loan Bank of Chicago with servicing retained. Total loans sold under this program equaled approximately $88.7 million and $79.1 million as of June 30, 2017 and 2016, respectively. See “—One- to Four-Family Residential Real Estate Lending” below for more information regarding the origination of loans for sale to the Federal Home Loan Bank of Chicago.

 

3


Table of Contents

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio, including loans held for sale, by type of loan at the dates indicated. Amounts shown for one- to four-family loans include loans held for sale of approximately $186,000, $0, $93,000, $313,000 and $492,000 at June 30, 2017, 2016, 2015, 2014 and 2013, respectively.

 

     At June 30,  
     2017     2016     2015     2014     2013  
     Amount     Percent     Amount      Percent     Amount      Percent     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Real estate loans:

          

One- to four-family (1)

   $ 140,647       31.47   $ 149,538        33.29   $ 144,887        40.18   $ 149,548        44.75   $ 146,988        45.97

Multi-family

     87,228       19.52       84,200        18.75       58,399        16.20       61,603        18.45       58,442        18.28  

Commercial

     133,841       29.94       119,643        26.64       103,614        28.74       83,134        24.89       74,679        23.35  

Home equity lines of credit

     7,520       1.68       8,138        1.81       7,713        2.14       7,824        2.34       8,228        2.57  

Construction

     7,421       1.66       19,698        4.39       471        0.13       338        0.10       2,086        0.65  

Commercial

     62,392       13.96       57,826        12.87       37,151        10.30       23,120        6.92       19,695        6.16  

Consumer

     7,905       1.77       10,086        2.25       8,325        2.31       8,509        2.55       9,662        3.02  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     446,954       100.00     449,129        100.00     360,560        100.00     333,986        100.00     319,780        100.00
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Less:

                        

Unearned fees and discounts, net

     (203       30          155          104          67     

Allowance for loan losses

     6,835         5,351          4,211          3,958          3,938     
  

 

 

     

 

 

      

 

 

      

 

 

      

 

 

    

Total loans, net

   $ 440,322       $ 443,748        $ 356,194        $ 329,924        $ 315,775     
  

 

 

     

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Includes home equity loans.

 

4


Table of Contents

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2017. We had no demand loans or loans having no stated repayment schedule or maturity at June 30, 2017.

 

     One- to four-family
residential real estate (1)
    Multi-family
real estate
    Commercial
real estate
    Home equity lines of
credit
 
   Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
   (Dollars in thousands)  

Due During the Years Ending June 30,

                    

2018

   $ 3,710        4.80   $ 10,173        4.22   $ 15,235        4.36   $ 248        3.82

2019

     2,417        4.68       5,581        3.96       18,696        4.14       769        5.16  

2021 to 2021

     16,449        5.41       39,078        3.83       56,438        4.02       1,537        4.80  

2022 to 2026

     14,940        4.67       24,867        4.12       33,709        4.02       1,911        4.29  

2027 to 2031

     14,167        4.26       912        4.50       8,821        4.43       2,113        4.24  

2032 and beyond

     88,964        3.98       6,617        3.89       942        4.31       942        3.72  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 140,647        4.28   $ 87,228        3.98   $ 133,841        4.10   $ 7,520        4.38
  

 

 

      

 

 

      

 

 

      

 

 

    

 

     Construction     Commercial     Consumer     Total  
   Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
    Amount      Weighted
Average
Rate
 
   (Dollars in thousands)  

Due During the Years Ending June 30,

                    

2018

   $ 3,482        4.71   $ 27,577        4.73   $ 1,176        4.84   $ 61,601        4.56

2019

     1,275        4.76       1,068        4.79       1,031        5.53       30,837        4.27  

2020 to 2021

     1,851        3.76       19,985        4.25       3,729        4.72       139,067        4.19  

2022 to 2026

     389        6.00       12,338        4.68       1,969        4.07       90,123        4.26  

2027 to 2031

     —          —         786        3.27       —          —         26,799        4.29  

2032 and beyond

     424        4.00       638        3.75       —          —         98,527        3.97  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 7,421        4.51   $ 62,392        4.54   $ 7,905        4.68   $ 446,954        4.22
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1) Includes home equity loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at June 30, 2017 that are contractually due after June 30, 2018.

 

     Due After June 30, 2018  
     Fixed      Adjustable      Total  
     (In thousands)  

Real estate loans:

        

One- to four-family (1)

   $ 40,139      $ 96,798      $ 136,937  

Multi-family

     64,116        12,939        77,055  

Commercial

     88,142        30,464        118,606  

Home equity lines of credit

     3,633        3,638        7,271  

Construction

     2,240        1,699        3,939  

Commercial

     28,925        5,890        34,815  

Consumer

     6,729        —          6,729  
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 233,924      $ 151,428      $ 385,352  
  

 

 

    

 

 

    

 

 

 

 

(1) Includes home equity loans.

 

5


Table of Contents

One- to Four-Family Residential Mortgage Loans. At June 30, 2017, $140.6 million, or 31.5% of our total loan portfolio, consisted of one- to four-family residential mortgage loans. We offer residential mortgage loans that conform to Fannie Mae and Freddie Mac underwriting standards (conforming loans) as well as non-conforming loans. We generally underwrite our one- to four-family residential mortgage loans based on the applicant’s employment and credit history and the appraised value of the subject property. We also offer loans through various agency programs, such as the Mortgage Partnership Finance Program of the Federal Home Loan Bank of Chicago, which are originated for sale.

We currently offer fixed-rate conventional mortgage loans with terms of up to 30 years that are fully amortizing with monthly loan payments. We also offer adjustable-rate mortgage loans that generally provide an initial fixed interest rate of five to seven years and annual interest rate adjustments thereafter. Our adjustable rate mortgage loans amortize over a period of up to 30 years. We offer one- to four-family residential mortgage loans with loan-to-value ratios up to 102%. Private mortgage insurance or participation in a government sponsored program is required for all one- to four-family residential mortgage loans with loan-to-value ratios exceeding 90%. One- to four-family residential mortgage loans with loan-to-value ratios above 80%, but below 90%, require private mortgage insurance unless waived by management. At June 30, 2017, fixed-rate one- to four-family residential mortgage loans totaled $43.4 million, or 30.9%, of our one- to four-family residential mortgage loans, and adjustable-rate one- to four-family residential mortgage loans totaled $97.2 million, or 69.1%, of our one- to four-family residential mortgage loans.

Our one- to four-family residential mortgage loans are generally conforming loans. We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac, which for our primary market area is currently $424,100 for single-family homes. At June 30, 2017, our average one- to four-family residential mortgage loan had a principal balance of $84,000. We also originate loans above the lending limit for conforming loans, which we refer to as “jumbo loans.” At June 30, 2017, $34.9 million, or 24.8%, of our total one- to four-family residential loans had principal balances in excess of $424,100. Most of our jumbo loans are originated with a seven-year fixed-rate term and an annual adjustable rate thereafter, with up to a 30 year amortization schedule. Occasionally we will originate fixed-rate jumbo loans with terms of up to 15 years.

We actively monitor our interest rate risk position to determine the desirable level of investment in fixed-rate mortgage loans. In recent years there has been increased demand for long-term fixed-rate loans, as market rates have dropped and remained near historic lows. As a result, we have sold a substantial majority of our fixed-rate one- to four-family residential mortgage loans with terms of 15 years or greater. We sell fixed-rate residential mortgages to the Federal Home Loan Bank of Chicago, with servicing retained, under its Mortgage Partnership Finance Program. Since December 2008, we have sold loans to the Federal Home Loan Bank of Chicago under its Mortgage Partnership Finance Xtra Program. Total mortgages sold under this program were approximately $6.5 million and $8.9 million for the years ended June 30, 2017 and 2016, respectively. In October 2015, we began to also sell loans to FHLBC under its Mortgage Partnership Finance Original Program. Total loans sold under this program were approximately $13.9 million and $7.1 million for the years ended June 30, 2017 and 2016, respectively. Generally, however, we retain in our portfolio 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 that we have originated in recent years due to the favorable long-term rates for borrowers.

We currently offer several types of adjustable-rate mortgage loans secured by residential properties with interest rates that are fixed for an initial period of five to seven years. We offer adjustable-rate mortgage loans that are fully amortizing. After the initial fixed period, the interest rate on adjustable-rate mortgage loans generally resets every year based upon the weekly average of a one-year U.S. Treasury Securities rate plus an applicable margin, subject to periodic and lifetime limitations on interest rate changes. The adjustable rate mortgage loans we are currently offering have a 2% maximum annual rate change up or down, and a 6% lifetime cap. In our portfolio are also adjustable rate mortgage loans with a 1% maximum annual rate change up or down, and a 5% lifetime cap up from the initial rate. Interest rate changes are further limited by floors. After the initial fixed period, the interest rate will generally have a floor that is equal to the initial rate, but no less than 4.0% on our five and seven year adjustable-rate mortgage loans.

 

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Adjustable-rate mortgage loans generally present different credit risks than fixed-rate mortgage loans. This is primarily because the underlying debt service payments of the borrowers increase as interest rates increase, thereby increasing the potential for default and higher rates of delinquency in a rising interest rate environment. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Since changes in the interest rates on adjustable-rate mortgages may be limited by an initial fixed-rate period or by the contractual limits on periodic interest rate adjustments, adjustable-rate loans may not adjust as quickly to increases in interest rates as our interest-bearing liabilities.

In addition to traditional one- to four-family residential mortgage loans, we offer 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 that we use to underwrite one- to four-family residential mortgage loans. Home equity loans may be underwritten with a loan-to-value ratio of up to 90% when combined with the principal balance of the existing first mortgage loan. Our home equity loans are primarily originated with fixed rates of interest with terms of up to 10 years, fully amortized. At June 30, 2017, approximately $1.2 million, or 0.9%, of our one- to four-family mortgage loans were home equity loans secured by a second mortgage.

Home equity loans secured by second mortgages have greater risk than one- to four-family residential mortgage loans or home equity loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property used as collateral for our loans.

We do not offer or purchase loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.

We require title insurance on all of our one- to four-family residential mortgage loans, and we also require that borrowers maintain fire and extended coverage casualty insurance in an amount at least equal to the lesser of the loan balance or the replacement cost of the improvements. We also require flood insurance, as applicable. We do not conduct environmental testing on residential mortgage loans unless specific concerns for hazards are identified by the appraiser used in connection with the origination of the loan.

Commercial Real Estate and Multi-family Real Estate Loans. At June 30, 2017, $133.8 million, or 29.9% of our loan portfolio consisted of commercial real estate loans, and $87.2 million, or 19.5% of our loan portfolio consisted of multi-family (which we consider to be five or more units) residential real estate loans. At June 30, 2017, substantially all of our commercial real estate and multi-family real estate loans were secured by properties located in Illinois, Indiana and Missouri.

Our commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, retail rentals, churches, and farm loans secured by real estate. At June 30, 2017, loans secured by commercial real estate had an average loan balance of $538,000. We originate commercial real estate loans with balloon and adjustable rates of up to seven years with amortization up to 25 years. At June 30, 2017, $33.7 million or 25.1%, of our commercial real estate loans had adjustable rates. The rates on our adjustable-rate commercial real estate loans are generally based on the prime rate of interest plus an applicable margin, and generally have a specified floor.

We originate multi-family loans with balloon and adjustable rates for terms of up to seven years with amortization up to 25 years. At June 30, 2017, $13.5 million or 15.5%, of our multi-family loans had adjustable rates. The rates on our adjustable-rate multi-family loans are generally tied to the prime rate of interest plus or minus an applicable margin and generally have a specified floor.

 

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In underwriting commercial real estate and multi-family real estate loans, we consider a number of factors, which include the projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%), 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. Commercial real estate and multi-family real estate loans are originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. 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.

Commercial real estate and multi-family real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Commercial real estate and multi-family real estate loans, however, entail greater credit risks compared to the one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate and multi-family real estate than for one- to four-family residential properties.

At June 30, 2017, our largest commercial real estate loan had an outstanding balance of $6.8 million, was secured by a commercial building, and was performing in accordance with its terms. At that date, our largest multi-family real estate loan had a balance of $8.8 million, was secured by three apartment buildings, and was performing in accordance with its terms.

Home Equity Lines of Credit. In addition to traditional one- to four-family residential mortgage loans and home equity loans, we offer home equity lines of credit that are secured by the borrower’s primary residence. Home equity lines of credit are generally underwritten using the same criteria that we use to underwrite one- to four-family residential mortgage loans. Our home equity lines of credit are originated with either fixed or adjustable rates and may be underwritten with a loan-to-value ratio of up to 90% when combined with the principal balance of an existing first mortgage loan. Fixed-rate lines of credit are generally based on the prime rate of interest plus an applicable margin and have monthly payments of 1.5% of the outstanding balance. Adjustable-rate home equity lines of credit are based on the prime rate of interest plus or minus an applicable margin and require interest paid monthly. Both fixed and adjustable rate home equity lines of credit have draw periods of five years. At June 30, 2017 we had $7.5 million, or 1.7% of our total loan portfolio in home equity lines of credit. At that date we had $5.7 million of undisbursed funds related to home equity lines of credit.

Home equity lines of credit secured by second mortgages have greater risk than one- to four-family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity lines of credit, decreases in real estate values could adversely affect the value of property securing the loan.

Commercial Business Loans. We also originate commercial non-mortgage business (term) loans and adjustable lines of credit. At June 30, 2017, we had $62.4 million of commercial business loans outstanding, representing 14.0% of our total loan portfolio. At that date, we also had $19.9 million of unfunded commitments on such loans. These loans are generally originated to small- and medium-sized companies in our primary market area. Our 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. We also offer agriculture loans that are not secured by real estate.

In underwriting commercial business loans, we generally lend up to 80% of the appraised value or purchase price of the collateral securing the loan, whichever is lower. The commercial business loans that we offer have fixed interest rates or adjustable rates indexed to the prime rate of interest plus an applicable margin, and with terms

 

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ranging from one to seven years. Our commercial business loan portfolio consists primarily of secured loans. When making commercial business loans, we consider the financial statements, lending history and debt service capabilities of the borrower (generally requiring a minimum ratio of 120%), the projected cash flows of the business and the value of the collateral, if any. Virtually all of our loans are guaranteed by the principals of the borrower.

Commercial business loans generally have a greater credit risk than one- to four-family residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards.

At June 30, 2017, our largest commercial business loan outstanding was for $4.9 million and was secured by business equipment and assets. At June 30, 2017, this loan was performing in accordance with its terms.

Construction Loans. We also originate construction loans for one- to four-family residential properties and commercial real estate properties, including multi-family properties. At June 30, 2017, $7.4 million, or 1.7%, of our total loan portfolio, consisted of construction loans, which were secured by one- to four-family residential real estate, multi-family real estate properties and commercial real estate properties.

Construction loans for one- to four-family residential properties are originated with a maximum loan to value ratio of 85% and are generally “interest-only” loans during the construction period which typically does not exceed 12 months. After this time period, the loan converts to permanent, amortizing financing following the completion of construction. Construction loans for commercial real estate are made in accordance with a schedule reflecting the cost of construction, and are generally limited to an 80% loan-to-completed appraised value ratio. We generally require that a commitment for permanent financing be in place prior to closing the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.

Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

At June 30, 2017, all of the construction loans that we originated were for one- to four-family residential properties, multi-family real estate properties and commercial real estate properties. The largest of such construction loans at June 30, 2017 was for an assisted living facility property and had a principal balance of $2.1 million. This loan was performing in accordance with its terms at June 30, 2017.

Loan Originations, Purchases, Participations, Sales and Servicing. Lending activities are conducted primarily by our loan personnel operating in each office. All loans that we originate are underwritten pursuant to our standard policies and procedures. In addition, our one- to four-family residential mortgage loans generally incorporate Fannie Mae, Freddie Mac or Federal Home Loan Bank of Chicago underwriting guidelines, as applicable. We originate both adjustable-rate and fixed-rate loans. Our ability to originate fixed- or adjustable-rate loans is dependent upon the relative customer demand for such loans, which is affected by current market interest rates as well as anticipated future market interest rates. Our loan origination and sales activity may be adversely affected by a rising interest rate environment which typically results in decreased loan demand. Most of our commercial real estate and commercial business loans are generated by our internal business development efforts

 

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and referrals from professional contacts. Most of our originations of one- to four-family residential mortgage loans, consumer loans and home equity loans and lines of credit are generated by existing customers, referrals from realtors, residential home builders, walk-in business and from our website.

Consistent with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold on a servicing-retained basis a substantial majority of the conforming, fixed-rate one- to four-family residential mortgage loans with maturities of 15 years or greater that we have originated.

From time to time, we purchase loan participations in commercial loans in which we are not the lead lender secured by real estate and other business assets, primarily within 100 miles of our primary lending area. In these circumstances, we follow our customary loan underwriting and approval policies. We have sufficient capital to take advantage of these opportunities to purchase loan participations, as well as strong relationships with other community banks in our primary market area and throughout Illinois that may desire to sell participations, and we may increase our purchases of participations in the future as a growth strategy. At June 30, 2017 and 2016, the amount of commercial loan participations totaled $38.5 million and $47.7 million, respectively, of which $10.3 million and $19.3 million, at June 30, 2017 and 2016 were outside our primary market area.

We sell a portion of our fixed-rate residential mortgage loans to the Federal Home Loan Bank of Chicago under its Mortgage Partnership Finance Xtra Program and its Mortgage Partnership Finance Original Program. We retain servicing on all loans sold under these programs. During the years ended June 30, 2017 and 2016, we sold $20.4 million and $15.8 million of loans to the Federal Home Loan Bank of Chicago under the program. Prior to December 2008, we also retained some credit risk associated with loans sold to the Federal Home Loan Bank of Chicago. For additional information regarding retained risk associated with these loans, see “Allowance for Loan Losses—Other Credit Risk.”

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We will also evaluate a guarantor when a guarantee is provided as part of the loan.

Iroquois Federal’s policies and loan approval limits are established by our Board of Directors. Our 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 and 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 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.

We generally require appraisals from certified or licensed third party appraisers of all real property securing loans. When appraisals are ordered, they are done so through an agency independent of the Association or by staff independent of the loan approval process, in order to maintain a process free of any influence or pressure from any party that has an interest in the transaction.

Non-performing and Problem Assets

For all of our loans, once a loan is 15 days delinquent, a past due notice is mailed. Past due notices continue to be mailed monthly in the event the account is not brought current. Prior to the time a loan is 30 days past due, we attempt to contact the borrower by telephone. Thereafter we continue with follow-up calls. Generally, once a loan becomes 90-120 days delinquent, if no work-out efforts have been pursued, we commence the foreclosure or repossession process. A summary report of all loans 90 days or more past due and all criticized and classified loans is provided monthly to our Board of Directors.

 

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Loans are evaluated for non-accrual status when payment of principal and/or interest is 90 days or more past due. Loans are also placed on non-accrual status when it is determined collection of principal or interest is in doubt or if the collateral is in jeopardy. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received and only after the loan is returned to accrual status. The loans are typically returned to accrual status if unpaid principal and interest are repaid so that the loan is current.

 

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Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At June 30, 2017, 2016, 2015, 2014 and 2013, we had troubled debt restructurings of approximately $3.1 million, $2.3 million, $2.6 million, $2.9, million and $3.3 million, respectively. At the dates presented, we had one loan that was delinquent 120 days or greater and that were still accruing interest. This loan is a performing TDR with more than 2 years of payments as agreed, but it is still listed as delinquent more than 120 days.

 

     At June 30,  
     2017     2016     2015     2014     2013  
     (Dollars in thousands)  

Non-accrual loans:

          

Real estate loans:

          

One- to four-family (1)

   $ 9,105     $ 1,604     $ 2,724     $ 2,146     $ 3,439  

Multi-family

     146       185       240       296       353  

Commercial

     25       63       46       55       194  

Home equity lines of credit

     24       316       —         28       —    

Construction

     —         —         —         —         —    

Commercial

     84       9       21       29       242  

Consumer

     —               14       30       64  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     9,384       2,177       3,045       2,584       4,292  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans delinquent 90 days or greater and still accruing:

          

Real estate loans:

          

One- to four-family (1)

     155       4       15       182       30  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity line of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Consumer

     —         8       7       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans delinquent 90 days or greater and still accruing

     155       12       22       182       30  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     9,539       2,189       3,067       2,766       4,322  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performing troubled debt restructurings

     2,211       2,084       1,855       1,959       2,015  

Total non-performing loans and performing troubled debt restructurings

   $ 11,750     $ 4,273     $ 4,922     $ 4,725     $ 6,337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned and foreclosed assets:

          

Real estate loans:

          

One- to four-family (1)

     210       338       50       416       414  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         20       —    

Home equity lines of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     219       —         —         —         4  

Consumer

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and foreclosed assets

     429       338       50       436       418  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 9,968     $ 2,527     $ 3,117     $ 3,202     $ 4,740  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Non-performing loans to total loans

     2.13     0.49     0.85     0.82     1.35

Non-performing assets to total assets

     1.70     0.42     0.55     0.58     0.87

 

(1) Includes home equity loans.

For the years ended June 30, 2017 and 2016, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $142,000 and $140,000, respectively. We recognized no interest income on such loans for the years ended June 30, 2017 and 2016.

At June 30, 2017, our non-accrual loans totaled $9.4 million. These non-accrual loans consisted primarily of 10 one- to four-family residential loans with aggregate principal balances totaling $9.1 million and specific allowances of $1.5 million, 2 commercial real estate loans with aggregate principal balances totaling $25,000 and specific allowances of $6,000, 2 multi-family loans with aggregate principal balances totaling $146,000 with no specific allowances, 2 commercial business loans with aggregate principal balances totaling $84,000 and no specific allowance, and 1 home equity line of credit loan with a principal balance of $24,000 and no specific allowance.

 

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Troubled Debt Restructurings. Troubled debt restructurings are defined under ASC 310-40 to include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates or on terms materially less favorable than current market rates. 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 June 30, 2017 and 2016, we had $3.1 million and $2.3 million, respectively, of troubled debt restructurings. At June 30, 2017 our troubled debt restructurings consisted of $1.8 million of residential one- to four-family mortgage loans, $84,000 of commercial business loans, $1.2 million of multi-family real estate loans, $6,000 of commercial real estate loans, $33,000 of home equity lines of credit loans, and $5,000 of consumer loans, all of which were impaired.

For the years ended June 30, 2017 and 2016, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $163,000 and $157,000, respectively. We recognized interest income of $136,000 and $123,000 on such modified loans for the years ended June 30, 2017 and 2016, respectively.

 

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Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

 

     Loans Delinquent For      Total  
     60 to 89 Days      90 Days or Greater     
     Number      Amount      Number      Amount      Number      Amount  
     (Dollars in thousands)  
At June 30, 2017                  

Real estate loans:

                 

One- to four-family (1)

     4        158        5        540        9        698  

Multi-family

     —          —          —          —          —          —    

Commercial

     1        84        —          —          1        84  

Home equity lines of credit

     —          —          1        24        1        24  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    

Consumer

     3        6        —          —          3        6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     8      $ 248        6      $ 564        14      $ 812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
At June 30, 2016                  

Real estate loans:

                 

One- to four-family (1)

     6        148        9        1,489        15        1,637  

Multi-family

     —          —          —          —          —          —    

Commercial

     2        97        1        27        3        124  

Home equity lines of credit

     —          —          1        316        1        316  

Construction

     —          —          —          —          —          —    

Commercial

     1        100        —          —          1        100  

Consumer

     1        5        1        8        2        13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     10      $ 350        12      $ 1,840        22      $ 2,190  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
At June 30, 2015                  

Real estate loans:

                 

One- to four-family (1)

     14        724        17        2,279        31        3,003  

Multi-family

     1        31        —          —          1        31  

Commercial

     3        137        —          —          3        137  

Home equity lines of credit

     —          —          —          —          —          —    

Construction

     —          —          —          —          —          —    

Commercial

     1        21        —          —          1        21  

Consumer

     —                 3        21        3        21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     19      $ 913        20      $ 2,300        39      $ 3,213  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
At June 30, 2014                  

Real estate loans:

                 

One- to four-family (1)

     14        876        14        1,500        28        2,376  

Multi-family

     —          —          —          —          —          —    

Commercial

     1        349        —          —          1        349  

Home equity lines of credit

     2        36        —          —          2        36  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          —          —          —          —    

Consumer

     4        33        —          —          4        33  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     21      $ 1,294        14      $ 1,500        35      $ 2,794  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
At June 30, 2013                  

Real estate loans:

                 

One- to four-family (1)

     14        827        17        2,472        31        3,299  

Multi-family

     —          —          —          —          —          —    

Commercial

     —          —          1        46        1        46  

Home equity lines of credit

     1        8        —          —          1        8  

Construction

     —          —          —          —          —          —    

Commercial

     2        15        —          —          2        15  

Consumer

     9        50        4        44        13        94  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     26      $ 900        22      $ 2,562        48      $ 3,462  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes home equity loans.

 

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Total delinquent loans decreased by $1.4 million to $812,000 at June 30, 2017 from $2.2 million at June 30, 2016. The decrease in delinquent loans was due primarily to a decrease of $949,000 in one- to four-family loans delinquent 90 days or more, a decrease of $292,000 in home equity lines of credit delinquent 90 days or more, and a decrease of $100,000 in commercial loans delinquent 90 days or more.

Real Estate Owned and Foreclosed Assets. Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. When property is acquired it is recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Estimated fair value generally represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in fair value result in charges to expense after acquisition. In addition, we could repossess certain collateral, including automobiles and other titled vehicles, called other repossessed assets. At June 30, 2017, we had $429,000 in foreclosed assets compared to $338,000 as of June 30, 2016. Foreclosed assets at June 30, 2017, consisted of $210,000 in residential real estate property and $219,000 in commercial nonoccupied property, while foreclosed assets at June 30, 2016, consisted of $338,000 in residential real estate property.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as watch.

When we classify assets as either substandard or doubtful, we undertake an impairment analysis which may result in allocating a portion of our general loss allowances to a specific allowance for such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. When we classify a problem asset as loss, we charge off the asset. For other classified assets, we provide a specific allowance for that portion of the asset that is considered uncollectible. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our principal federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets, assets designated as watch and total criticized assets (classified assets and loans designated as watch) as of the date indicated. Amounts shown at June 30, 2017 and 2016, include approximately $9.5 million and $2.2 million of nonperforming loans, respectfully. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $1.5 million and $20,000 at June 30, 2017 and 2016, respectively. Substandard assets shown include foreclosed assets.

 

     At June 30,  
     2017      2016  
     (In thousands)  

Classified assets:

     

Substandard

   $ 10,887      $ 3,656  

Doubtful

     —          —    

Loss

     —          —    
  

 

 

    

 

 

 

Total classified assets

     10,887        3,656  

Watch

     4,323        7,754  
  

 

 

    

 

 

 

Total criticized assets

   $ 15,210      $ 11,410  
  

 

 

    

 

 

 

At June 30, 2017, substandard assets consisted of $9.7 million of one- to four-family residential mortgage loans, $328,000 in multi-family loans, $298,000 of commercial real estate loans, $49,000 in home equity lines of credit, $95,000 of commercial business loans, $1,000 of consumer loans, and $429,000 of foreclosed assets held for sale. At June 30, 2017, watch assets consisted of $1.1 million of one- to four-family residential mortgage loans, $485,000 of commercial real estate loans, $2.6 million of commercial business loans, and $62,000 of consumer loans. At June 30, 2017, no assets were classified as doubtful or loss.

 

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Other Loans of Concern. At June 30, 2017, there were no other loans or other assets that are not disclosed in the text or tables above where known information about the possible credit problems of borrowers caused us to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

Other Credit Risk. We also have some credit risk associated with fixed-rate residential loans that we sold to the Federal Home Loan Bank of Chicago between 2000 and December 2008, and again starting in October 2015, under its Mortgage Partnership Finance (MPF) Original Program. However, while we retain the servicing of these loans and receive both service fees and credit enhancement fees, they are not our assets. We sold $13.9 million in loans under this program in the year ended June 30, 2017, and we continue to service approximately $24.1 million of these loans, for which our maximum potential credit risk is approximately $1.2 million. From June 2000 to June 30, 2017, we experienced only $53,000 in actual losses under the MPF Original Program. We have also sold loans to the Federal Home Loan Bank of Chicago since December 2008 under its Mortgage Partnership Finance Xtra Program. Unlike loans sold under the MPF Original Program, we do not retain any credit risk with respect to loans sold under the MPF Xtra Program.

Allowance for Loan Losses

The allowance for loan losses represents one of the most significant estimates within our financial statements and regulatory reporting. Because of this, we have developed, maintained, and documented a comprehensive, systematic, and consistently applied process for determining the allowance for loan losses, in accordance with GAAP, our stated policies and procedures, management’s best judgment and relevant supervisory guidance.

Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis, and more frequently if warranted. We analyze the collectability of loans held for investment and maintain an allowance that is appropriate and determined in accordance with GAAP. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our 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 our review for identified problem loans; and (2) a general allowance based on estimated credit losses inherent in the remainder of the loan portfolio.

In performing the allowance for loan loss review, we have divided our credit portfolio into several separate homogeneous and non-homogeneous categories within the following groups:

 

    Mortgage Loans: one- to four-family residential first lien loans originated by Iroquois Federal; one- to four-family residential first lien loans purchased from a separate origination company; one- to four-family residential junior lien loans; home equity lines of credit; multi-family residential loans on properties with five or more units; non-residential real estate loans; and loans on land under current development or for future development.

 

    Consumer Loans (unsecured or secured by other than real estate): loans secured by deposit accounts; loans for home improvement; automobile loans; mobile home loans; loans on other security; and unsecured loans.

 

    Commercial Loans (unsecured or secured by other than real estate): secured loans and unsecured loans.

 

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Determination of Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows, the loan’s observable market value, or, for collateral-dependant loans, the fair value of the collateral adjusted for market conditions and selling expenses. 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 our 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, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

Determination of General Allowance for Remainder of the Loan Portfolio. We establish 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. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance is then adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include: (1) Management’s assumptions regarding the minimal level of risk for a given loan category and includes amounts for anticipated losses which may not be reflected in our current loss history experience; (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, 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-dependant 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 our policy allows for a general valuation allowance on certain smaller-balance, homogenous pools of loans classified as substandard, we have historically evaluated every loan classified as substandard, regardless of size, for impairment as part of our review for establishing specific allowances. Our policy also allows for a 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 general allowances calculated on our non-classified loans.

In addition, as an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agency may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

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

 

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Table of Contents

The allowance for loan losses increased $1.4 million to $6.8 million at June 30, 2017, from $5.4 million at June 30, 2016. The increase was mostly the result of a specific allowance relating to one large credit in the amount of $7.8 million secured by 45 one- to four-family properties where the borrower became involved in litigation, and subsequently filed for bankruptcy protection. The properties securing this loan are all existing homes that were acquired by the borrower to be renovated and resold. Our best estimate of potential loss once the properties can be worked through the bankruptcy proceeding resulted in an addition to the allowance of $1.5 million. Excluding the effect of this one specific allowance, the allowance for loan losses would have declined by $100,000 as a result of a decrease in outstanding loans. While the overall increase was necessary in order to bring the allowance for loan losses to a level that reflects management’s estimate of potential loss in the Company’s portfolio at June 30, 2017, management notes that this is an isolated credit which created the addition to the allowance and is not reflective of the remaining loan portfolio.

As noted above, 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 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 June 30, 2017 and June 30, 2016:

 

Portfolio segment

   June 30, 2017
Net charge-offs –
12 quarter weighted  historical
    June 30, 2016
Net charge-offs –
12 quarter weighted  historical
 

Real Estate:

    

One- to four-family

     0.12     0.13

Multi-family

     0.00     0.00

Commercial

     0.00     0.01

HELOC

     0.17     0.32

Construction

     0.00     0.00

Commercial business

     0.00     0.04

Consumer

     0.05     (0.02 )% 

Entire portfolio total

     0.05     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. As noted above, the Company has identified specific qualitative factors that address these issues and assigns a percentage to each factor based on management’s judgement. 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
June 30, 2017
    Qualitative factor applied at
June 30, 2016
 

Real Estate:

    

One- to four-family

     0.64     0.68

Multi-family

     1.56     1.45

Commercial

     1.20     1.24

HELOC

     0.84     0.88

Construction

     1.01     1.15

Commercial business

     1.99     1.93

Consumer

     0.76     0.87

Entire portfolio total

     1.17     1.13

 

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Table of Contents

At June 30, 2017, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $5.2 million, as compared to $5.1 million at June 30, 2016. The general increase in qualitative factors was attributable primarily to a change in the loan portfolio mix which resulted in higher balances in loans with slightly higher qualitative factors at June 30, 2017.

While management believes that our asset quality remains strong, it recognizes that, due to the recent 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 charges-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.

The following table sets forth activity in our allowance for loan losses at and for the periods indicated.

 

     At or For the Fiscal Years Ended June 30,  
     2017     2016     2015     2014     2013  
     (Dollars in thousands)  

Balance at beginning of period

   $ 5,351     $ 4,211     $ 3,958     $ 3,938     $ 3,531  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

          

Real estate loans:

          

One- to four-family (1)

     (232     (188     (231     (418     (78

Multi-family

     —         —         —         —         —    

Commercial

     (8     (3     —         (28     (45

Home equity lines of credit

     —         (32     (35     (16     (8

Construction

     —         —         —         —         —    

Commercial

     —         —         —         (38     (50

Consumer

     (35     (10     (12     (38     (69
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (275     (233     (278     (538     (250

Recoveries:

          

Real estate loans:

          

One- to four-family (1)

     32       5       29       50       49  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity lines of credit

     —         —         13       —         —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Consumer

     6       2       29       6       13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     38       7       71       56       62  

Net charge-offs

     (237     (226     (207     (482     (188
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     1,721       1,366       460       502       595  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 6,835     $ 5,351     $ 4,211     $ 3,958     $ 3,938  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net charge-offs to average loans outstanding

     0.05     0.05     0.01     0.15     0.07

Allowance for loan losses to non-performing loans at end of period

     71.66     244.39     137.30     143.10     91.12

Allowance for loan losses to total loans at end of period

     1.53     1.19     1.17     1.18     1.23

 

(1) Includes home equity loans.

 

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Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

    At June 30,  
    2017     2016     2015  
    Allowance for
Loan Losses
    Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
    Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
    Percent of
Loans in Each
Category to
Total Loans
 
    (Dollars in thousands)  

Real estate loans:

           

One- to four-family (1)

  $ 2,519       31.5   $ 1,198       33.3   $ 1,216       40.2

Multi-family

    1,336       19.5       1,202       18.8       827       16.2  

Commercial

    1,520       29.9       1,399       26.6       1,246       28.8  

Home equity lines of credit

    76       1.7       94       1.8       85       2.1  

Construction

    75       1.6       227       4.4       6       0.1  

Commercial

    1,242       14.0       1,140       12.9       744       10.3  

Consumer

    67       1.8       91       2.2       87       2.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allocated allowance

    6,835         5,351         4,211    

Unallocated

    —           —           —      
 

 

 

     

 

 

     

 

 

   

Total

  $ 6,835       100.0   $ 5,351       100.0   $ 4,211       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes home equity loans.

 

     At June 30,  
     2014     2013  
     Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
    Allowance for
Loan Losses
     Percent of
Loans in Each
Category to
Total Loans
 
     (Dollars in thousands)  

Real estate loans:

          

One- to four-family (1)

   $ 1,391        44.6   $ 1,616        46.0

Multi-family

     842        18.4       797        18.2  

Commercial

     968        24.8       838        23.3  

Home equity lines of credit

     111        2.3       90        2.6  

Construction

     10        0.5       24        0.8  

Commercial

     543        6.9       431        6.1  

Consumer

     93        2.5       104        3.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     3,958          3,900     

Unallocated

     —            38     
  

 

 

      

 

 

    

Total

   $ 3,958        100.0   $ 3,938        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes home equity loans.

Net charge-offs increased from $226,000 for the year ended June 30, 2016 to $237,000 for the year ended June 30, 2017, with most of the charge-offs during both periods involving one- to four-family residential real estate loans. In addition, non-performing loans increased by $7.3 million during the year ended June 30, 2017.

The allowance for loan losses increased $1.4 million, or 25.9%, to $6.8 million at June 30, 2017 from $5.4 million at June 30, 2016. The increase was mostly the result of a specific allowance relating to one large credit in the amount of $7.8 million secured by 45 one- to four-family properties where the borrower became involved in litigation, and subsequently filed for bankruptcy protection. The properties securing this loan are all existing homes that were acquired by the borrower to be renovated and resold. Our best estimate of potential loss once the properties can be worked through the bankruptcy proceeding resulted in an addition to the allowance of $1.5 million. Excluding the effect of this one specific allowance, the allowance for loan losses would have declined by $100,000 as a result of a decrease in outstanding loans. While the overall increase was necessary in order to bring the allowance for loan losses to a level that reflects management’s estimate of potential loss in the Company’s portfolio at June 30, 2017, management notes that this is an isolated credit which created the addition to the allowance and is not reflective of the remaining loan portfolio. At June 30, 2017, the allowance for loan losses represented 1.53% of total loans compared to 1.19% of total loans at June 30, 2016.

 

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Investments

We conduct investment transactions in accordance with our Board-approved investment policy. The investment policy is reviewed at least annually by the Budget and Investment Committee of the Board, and any changes to the policy are subject to ratification by the full Board of Directors. This policy dictates that investment decisions give consideration to the safety of the investment, liquidity requirements, potential returns, the ability to provide collateral for pledging requirements, minimizing exposure to credit risk, potential returns and consistency with our interest rate risk management strategy. Authority to make investments under approved guidelines is delegated to our Investment Committee, comprised of our President and Chief Executive Officer, our Senior Executive Vice President and Chief Financial Officer, our Executive Vice President and Community President, and our Senior Vice President and Controller. All investments are reported to the Board of Directors for ratification at the next regular Board meeting.

Our current investment policy permits us to invest only in investment quality securities permitted by Office of the Comptroller of the Currency regulations, including U.S. Treasury or Government guaranteed securities, U.S. Government agency securities, securities issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, bank-qualified municipal securities, bank-qualified money market instruments, and bank-qualified corporate bonds. We do not engage in speculative trading. As of June 30, 2017, we held no asset-backed securities other than mortgage-backed securities. As a federal savings and loan association, Iroquois Federal is generally not permitted to invest in equity securities, although this general restriction will not apply to IF Bancorp, which may acquire up to 5% of voting securities of any company without regulatory approval.

ASC 320-10, “Investment – Debt and Equity Securities” requires that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent. Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. All of our securities are available for sale. We do not maintain a trading portfolio.

U.S. Government and Agency Debt Securities. While U.S. Government and federal agency securities generally provide lower yields than other investments, including mortgage-backed securities and interest-earning certificates of deposit, we maintain these investments, to the extent appropriate, for liquidity purposes and as collateral for borrowings.

Mortgage-Backed Securities. We invest in mortgage-backed securities insured or guaranteed by the U.S. Government or government sponsored enterprises. Mortgage-backed securities are created by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the underlying mortgages. Some securities pools are guaranteed as to payment of principal and interest to investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Finally, mortgage-backed securities are assigned lower risk weightings for purposes of calculating our risk-based capital level. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. Also classified as agency mortgage-backed securities, are securities backed by debentures/loans for working capital to small businesses with limited or no access to private venture capital, and regulated by the Small Business Administration (SBA). Like other agency mortgage-backed securities, they are backed by the full faith and credit of the United States Government. They have zero risk weighting for purposes of calculating our risk-based capital level. With ten year maturities, these fixed rate bullet debentures pay interest semi-annually and principal at maturity. Prepayments are required to be in whole on any semi-annual payment date, and there are no prepayments penalties for deals issued since 2007. Therefore, the two sources of prepayment risk are voluntary prepays and defaults. In the event of default, the SBA may accelerate the payment equal to 100% of the outstanding principal balance, or the SBA will make the principal and interest payments.

 

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Municipal Obligations. Iroquois Federal’s investment policy allows it to purchase municipal securities of credit-worthy issuers, and does not permit it to invest more than 10% of Iroquois Federal’s capital in the bonds of any single issuer. At June 30, 2017, we held $3.6 million of municipal securities, all of which were issued by local governments and school districts within our market area.

Federal Home Loan Bank Stock. At June 30, 2017, we held $2.5 million of Federal Home Loan Bank of Chicago common stock in connection with our borrowing activities totaling $53.5 million. The common stock of the Federal Home Loan Bank is carried at cost and classified as a restricted equity security.

Bank-Owned Life Insurance. 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. At June 30, 2017, we had $8.8 million invested in bank-owned life insurance, which was 12.5% of our Tier 1 capital plus our allowance for loan losses.

Investment Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated, excluding Federal Home Loan Bank of Chicago stock, federally insured interest-earning time deposits and bank-owned life insurance. As of June 30, 2017, 2016 and 2015 all of such securities were classified as available for sale.

 

     At June 30,  
     2017      2016      2015  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
     (In thousands)  

Securities available for sale:

                 

U.S. government, federal agency and government-sponsored enterprises

   $ 25,230      $ 25,035      $ 87,193      $ 90,105      $ 105,742      $ 107,938  

U.S. government sponsored mortgage-backed securities

     81,088        80,962        26,418        27,245        59,213        58,840  

Small Business Administration

     2,048        2,032        —          —          —          —    

State and political subdivisions

     3,274        3,582        3,431        3,978        3,585        3,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 111,640      $ 111,611      $ 117,042      $ 121,328      $ 168,540      $ 170,630  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2017 are summarized in the following table. At such date, all of our securities were available for sale. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The yields on municipal securities have not been adjusted to a tax-equivalent basis.

 

     One Year or Less     More than One Year
through Five Years
    More than Five Years
through Ten Years
    More than Ten Years     Total Securities  
     Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Weighted
Average
Yield
    Amortized
Cost
     Fair Value      Weighted
Average
Yield
 
     (Dollars in thousands)  

U.S. government, federal agency and government-sponsored enterprises

   $ —          —     $ 5,000        2.59   $ 20,230        2.20   $ —          —     $ 25,230      $ 25,035        2.28

U.S. government sponsored mortgage-backed securities

     —          —         —          —         27,219        2.55       53,869        2.52       81,088        80,962        2.53  

Small Business Administration

     —          —         —          —         2,048        2.38       —          —         2,048        2,032        2.38  

State and political subdivisions

     171        3.24       1,286        5.81       62        4.83       1,755        3.25       3,274        3,582        4.29  
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

Total

   $ 171        3.24   $ 6,286        3.25   $ 49,559        2.40   $ 55,624        2.54   $ 111,640      $ 111,611        2.52
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

 

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Sources of Funds

General. Deposits traditionally have been our primary source of funds for our lending and investment activities. We also borrow from the Federal Home Loan Bank of Chicago, to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are the proceeds from the sale of loans originated for sale, scheduled loan payments, maturing investments, loan prepayments, retained earnings and income on other earning assets.

Deposits. We generate deposits primarily from the areas in which our branch offices are located. We rely on our competitive pricing, convenient locations and customer service to attract and retain both retail and commercial deposits.

We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, individual retirement accounts and health savings accounts. From time to time we utilize brokered certificates of deposit or non-brokered certificates of deposit obtained through an internet listing service. At June 30, 2017, we had $38.8 million in brokered certificates of deposit and $8.9 million in non-brokered certificates of deposit obtained through an internet listing service.

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, including the cost of alternate sources of funds, and market interest rates, liquidity requirements, interest rates paid by competitors and our deposit growth goals.

The following tables set forth the distribution of our average total deposit accounts, by account type, for the periods indicated.

 

     For the Fiscal Year Ended
June 30, 2017
    For the Fiscal Year Ended
June 30, 2016
 
     Average
Balance
     Percent     Weighted
Average
Rate
    Average
Balance
     Percent     Weighted
Average
Rate
 
     (Dollars in thousands)  

Deposit type:

          

Noninterest bearing demand

   $ 19,011        4.43     0.00   $ 18,760        4.51     0.00

Interest-bearing checking or NOW

     44,080        10.28       0.09       40,852        9.82       0.09  

Savings accounts

     40,191        9.38       0.12       38,399        9.24       0.13  

Money market accounts

     75,736        17.67       0.26       72,118        17.34       0.19  

Certificates of deposit

     249,689        58.24       1.04       245,699        59.09       0.88  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 428,707        100.00     0.67   $ 415,828        100.00     0.57
  

 

 

    

 

 

     

 

 

    

 

 

   

 

     For the Fiscal Year Ended
June 30, 2015
 
     Average
Balance
     Percent     Weighted
Average
Rate
 
            (Dollars in
thousands)
       

Deposit type:

       

Noninterest bearing demand

   $ 15,351        3.75     0.00

Interest-bearing checking or NOW

     36,177        8.84       0.09  

Savings accounts

     35,480        8.68       0.17  

Money market accounts

     59,570        14.57       0.19  

Certificates of deposit

     262,372        64.16       0.85  
  

 

 

    

 

 

   

Total deposits

   $ 408,950        100.00     0.60
  

 

 

    

 

 

   

 

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As of June 30, 2017, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $95.7 million. The following table sets forth the maturity of those certificates as of June 30, 2017.

 

     At
June 30, 2017
 
     (In thousands)  

Three months or less

   $ 16,862  

Over three months through six months

     9,514  

Over six months through one year

     20,785  

Over one year to three years

     34,738  

Over three years

     13,777  
  

 

 

 

Total

   $ 95,676  
  

 

 

 

The following table sets forth the amount of our certificates of deposit classified by interest rate as of the dates indicated.

 

     At June 30,  
     2017      2016      2015  
     (In thousands)  

Interest Rate:

        

Less than 2.00%

   $ 242,262      $ 257,237      $ 242,965  

2.00% to 2.99%

     5,531        747        4,647  

3.00% to 3.99%

     —          —          —    

4.00% to 4.99%

     —          —          —    

5.00% to 5.99%

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 247,793      $ 257,984      $ 247,612  
  

 

 

    

 

 

    

 

 

 

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Chicago and repurchase agreements. At June 30, 2017, we had access to additional Federal Home Loan Bank of Chicago advances of up to $151.8 million based on our collateral. The following table sets forth information concerning balances and interest rates on our borrowings and repurchase agreements at the dates and for the periods indicated.

 

     At or For the Fiscal Years Ended June 30,  
     2017     2016     2015  
     (Dollars in thousands)  
Federal Home Loan Bank of Chicago       

Balance at end of period

   $ 53,500     $ 67,000     $ 58,000  

Average balance during period

     64,622       64,000       48,875  

Maximum outstanding at any month end

     74,000       75,500       58,000  

Weighted average interest rate at end of period

     1.02     1.57     1.36

Average interest rate during period

     1.10     1.43     1.60
Repurchase Agreements       

Balance at end of period

   $ 2,183     $ 4,392     $ 4,024  

Average balance during period

     3,277       5,111       3,398  

Maximum outstanding at any month end

     4,817       5,776       4,403  

Weighted average interest rate at end of period

     0.38     0.45     0.40

Average interest rate during period

     0.42     0.42     0.35

 

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Personnel

At June 30, 2017, the Association had 98 full-time employees and 3 part-time employees, none of whom is represented by a collective bargaining unit. Iroquois Federal believes that its relationship with its employees is good.

Subsidiaries

IF Bancorp conducts its principal business activities through its wholly-owned subsidiary, Iroquois Federal Savings and Loan Association. Iroquois Federal Savings and Loan Association has one wholly-owned subsidiary, L.C.I. Service Corporation, an insurance agency with offices in Watseka and Danville, Illinois.

REGULATION AND SUPERVISION

General

Iroquois Federal is examined and supervised by the Office of the Comptroller of the Currency (“OCC”) and is subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors, and not for the protection of stockholders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Iroquois Federal also is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the twelve regional banks in the Federal Home Loan Bank System. Iroquois Federal is also regulated to a lesser extent by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) governing reserves to be maintained against deposits and other matters. Iroquois Federal must comply with the consumer protection regulations issued by the Consumer Financial Protections Bureau. The OCC examines Iroquois Federal and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Iroquois Federal’s relationship with its depositors and borrowers is also regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the form and content of Iroquois Federal’s mortgage documents and certain consumer protection matters.

As a savings and loan holding company, IF Bancorp is required to comply with the rules and regulations of the Federal Reserve Board and to file certain reports with and is subject to examination by the Federal Reserve Board. IF Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Set forth below are certain material regulatory requirements that are applicable to Iroquios Federal and IF Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Iroquois Federal and IF Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on IF Bancorp, Iroquois Federal and their operations.

Dodd-Frank Act

The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies, as well as changes that affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

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The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Iroquois Federal, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage originations.

Many provisions of the Dodd-Frank Act involve delayed effective dates and/or require implementing regulations or have not been issued in final form. The full impact on our operations cannot yet fully be assessed. However, the Dodd-Frank Act has increased regulatory burden and compliance, operating and interest expense for Iroquois Federal and IF Bancorp, and is likely to continue to do so.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, Iroquois Federal may invest in mortgage loans secured by residential and nonresidential real estate, commercial business loans and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. While Iroquois Federal may originate, invest in, sell, or purchase unlimited loans on the security of residential real estate, certain types of lending, such as commercial and consumer lending, is subject to an aggregate limit calculated as a specified percentage of Iroquois Federal’s total capital assets. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Iroquois Fedeal may also establish subsidiaries that may engage in certain activities not otherwise permissible for Iroquois Federal, including real estate investment and securities and insurance brokerage.

Capital Requirements. Federal regulations require savings associations to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of regulations implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

As noted, the risk-based capital standards for savings associations require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred

 

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stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated other comprehensive income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

At June 30, 2017, Iroquois Federal’s capital exceeded all applicable requirements.

Loans to One Borrower. Generally, a federal savings bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.

On July 30, 2012 Iroquois Federal received approval from the OCC to participate in the Supplemental Lending Limits Program (SLLP). This program allows eligible institutions to make additional residential real estate loans or extensions of credit to one borrower, small business loans or extensions of credit to one borrower, or small farm loans or extensions of credit to one borrower, in the lesser of the following two amounts: (1) 10% of its capital and surplus; or (2) the percentage of capital and surplus, in excess of 15%, that a state bank is permitted to lend under the state lending limit that is available for loans secured by one- to four-family residential real estate, small business loans, small farm loans or unsecured loans in the state where the main office of the savings association is located. For Iroquois Federal, this additional limit (or “supplemental limit”) for one- to four-family residential real estate, small business, or small farm loans is 10% of its capital and surplus. In addition, the total outstanding amount of Iroquois Federal’s loans or extensions of credit or parts of loans and extensions of credit made to all of Iroquois Federal’s borrowers under the SLLP may not exceed 100% of Iroquois Federal’s capital and surplus. Iroquois Federal uses the supplemental limit for its loans to one borrower infrequently, and all such credit facilities must receive prior approval by the Board of Directors.

As of June 30, 2017, Iroquois Federal was in compliance with its loans-to-one borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank, Iroquois Federal must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Iroquois Federal must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 months. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings institution’s business. A savings bank that fails the qualified thrift lender test must operate under specified restrictions specified in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL Test potentially subject to agency enforcement action for a violation of law. At June 30, 2017, Iroquois Federal held 74.6% of its “portfolio assets” in “qualified thrift investments,” and satisfied the QTL Test.

Capital Distributions. Federal regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings bank must file an application for approval of a capital distribution if:

 

    the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;

 

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    the savings bank would not be at least adequately capitalized (as defined in the prompt corrective action regulations discussed below) following the distribution;

 

    the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or

 

    the savings bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company, such as Iroquois Federal, must still file a notice with the Federal Reserve Board (with a copy to the OCC) at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.

The Federal Reserve Board, upon consultation with OCC, may disapprove a notice or application if:

 

    the savings bank would be undercapitalized following the distribution;

 

    the proposed capital distribution raises safety and soundness concerns; or

 

    the capital distribution would violate a prohibition contained in any statute, regulation, agreement with a federal banking regulatory agency or condition, imposed in connection with an application or notice.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to satisfy any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, Iroquois Federal’s ability to pay dividends will be limited if Iroquois Federal does not have the capital conservation buffer required by the new capital rules, which may limit the ability of IF Bancorp to pay dividends to its stockholders. See “— Capital Requirements.”

Community Reinvestment Act and Fair Lending Laws. All federal savings banks have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the OCC is required to assess the association’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. Iroquois Federal received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its affiliates is limited by federal regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W. An affiliate is a company that controls, is controlled by, or is under common control with an insured depository institution such as Iroquois Federal. IF Bancorp is an affiliate of Iroquois Federal because of its control of Iroquois Federal. In general, transactions between an insured depository institution and its affiliate are subject to certain quantitative and collateral requirements. In addition, federal regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings banks to maintain detailed records of all transactions with affiliates.

 

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Iroquois Federal’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders

 

    be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features (subject to an exception for bank-wide lending programs available to all employees); and

 

    not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Iroquois Federal’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Iroquois Federal’s Board of Directors. Extensions of credit to executive officers are subject to additional restrictions, including limits on various types of loans.

Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action Regulations. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

The Federal Deposit Insurance Corporation has adopted regulations to implement the prompt corrective action legislation. For this purpose, a savings bank is placed in one of the five categories based on the savings bank’s capital:

 

    Well Capitalized - a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater.

 

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    Adequately Capitalized - a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater.

 

    Undercapitalized - a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%.

 

    Significantly Undercapitalized - a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%.

 

    Critically Undercapitalized - a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

At June 30, 2017, Iroquois Federal met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Iroquois Federal. Deposit accounts in Iroquois Federal are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. Rates are based on each institution’s risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.

The FDIC issued a final rule that redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the rule, assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. The final rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2017, the annualized FICO assessment was equal to 0.54 of a basis point of total assets less tangible capital.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Iroquois Federal. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

 

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Federal Home Loan Bank System. Iroquois Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Chicago, Iroquois Federal is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of June 30, 2017, Iroquois Federal was in compliance with this requirement.

Federal Reserve System

Federal Reserve Board regulations require savings banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At June 30, 2017, Iroquois Federal was in compliance with these reserve requirements.

Other Regulations

Interest and other charges collected or contracted for by Iroquois Federal are subject to state usury laws and federal laws concerning interest rates. Iroquois Federal’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

    Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

    Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

 

    Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

    Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

    Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

    fair lending laws;

 

    Unfair or Deceptive Acts or Practices laws and regulations;

 

    Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

    Truth in Savings Act; and

 

    Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Iroquois Federal is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.

 

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The operations of Iroquois Federal also are subject to the:

 

    Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

    Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

    Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

    The USA PATRIOT Act, which requires savings banks to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

 

    The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Holding Company Regulation

General. IF Bancorp is a unitary savings and loan holding company within the meaning of Home Owners’ Loan Act. As such, IF Bancorp is registered with the Federal Reserve Board and is subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over IF Bancorp and any future non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Permissible Activities. Under present law, the business activities of IF Bancorp are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met (including electing such status), or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations. As of June 30, 2017, IF Bancorp, Inc. has not elected financial holding company status.

Federal law prohibits a savings and loan holding company, including IF Bancorp, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

 

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The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

 

    the approval of interstate supervisory acquisitions by savings and loan holding companies; and

 

    the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital. Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. However, pursuant to legislation passed in December 2014, the FRB has extended the applicability of the “Small Bank Holding Company” exception to its consolidated capital requirements to savings and loan holding companies and increased the threshold for the exception to $1.0 billion, effective May 15, 2015. As a result, savings and loan holding companies with less than $1.0 billion in consolidated assets are generally not subject to the capital requirements unless otherwise advised by the FRB.

Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all bank and savings and loan holding companies serve as a source of managerial and financial strength to their subsidiary savings and loan associations by providing capital, liquidity and other support in times of financial stress.

Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings and loan association becomes undercapitalized. The policy statement also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of IF Bancorp to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.

Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.

Federal Securities Laws

IF Bancorp common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. IF Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

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The registration under the Securities Act of 1933 of shares of common stock issued in the stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: (i) they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; (ii) they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and (iii) they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

 

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ITEM 1A. RISK FACTORS

Because we intend to continue to originate commercial real estate, multi-family and commercial business loans and increase these loans as a percentage of our total loan portfolio, our credit risk may increase, and continued downturns in the local real estate market or economy could adversely affect our earnings.

We intend to continue originating commercial real estate, multi-family and commercial business loans. At June 30, 2017, $133.8 million, or 29.9%, of our total loan portfolio consisted of commercial real estate loans, $87.2 million, or 19.5%, of our total loan portfolio consisted of multi-family loans, and $62.4 million, or 14.0%, of our total loan portfolio consisted of commercial business loans. These categories of loans have increased significantly since June 30, 2009, when $23.8 million, or 10.5%, of our total loan portfolio consisted of commercial real estate loans, $14.8 million, or 6.6%, of our total loan portfolio consisted of multi-family loans, and $9.3 million, or 4.1%, of our total loan portfolio consisted of commercial business loans. We expect each of these loan categories to continue to increase as a percentage of our total loan portfolio. Commercial real estate, multi-family and commercial business loans generally have more risk than the one- to four-family residential real estate loans that we originate. Because the repayment of commercial real estate, multi-family and commercial business loans depends on the successful management and operation of the borrower’s properties or businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate, multi-family and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. In addition, a downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate, multi-family and commercial business loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

If our non-performing loans and other non-performing assets increase, our earnings will decrease.

At June 30, 2017, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent, and real estate owned) totaled $10.0 million. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans, and we must establish reserves or take charge-offs for probable losses on non-performing loans. Reserves are established through a current period charge to income in the provision for loan losses. There are also legal fees associated with the resolution of problem assets. Additionally, our real estate owned results in carrying costs such as taxes, insurance and maintenance fees. Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of operations and other income-producing activities of Iroquois Federal. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly by recording a provision for loan losses.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable losses in our loan portfolio, requiring us to make additions to our allowance for loan losses. Our allowance for loan losses was 1.53% of total loans at June 30, 2017. Additions to our allowance could materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

 

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A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted Accounting Standard Update 2016-13, which will be effective for IF Bancorp and Iroquois Federal for the first quarter of the fiscal year ending June 30, 2020. This standard, often referred to as “CECL” (reflecting a current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. This new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of the allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

Future changes in interest rates could reduce our profits.

Our profitability largely depends on our net interest income, which can be negatively affected by changes in interest rates. Net interest income is the difference between:

 

    the interest income we earn on our interest-earning assets, such as loans and securities; and

 

    the interest expense we incur on our interest-bearing liabilities, such as deposits and borrowings.

The interest rates on our loans are generally fixed for a longer period of time than the interest rates on our deposits. Like many savings institutions, our focus on deposits as a source of funds, which either have no stated maturity or shorter contractual maturities than mortgage loans, results in our liabilities having a shorter average duration than our assets. For example, as of June 30, 2017, 14.7% of our loans had remaining maturities of, or reprice after, 5 years or longer, while 48.7% of our certificates of deposit had remaining maturities of, or reprice in, one year or less. This imbalance can create significant earnings volatility because market interest rates change over time. In a period of rising interest rates, the interest we earn on our assets, such as loans and investments, may not increase as rapidly as the interest we pay on our liabilities, such as deposits. In a period of declining market interest rates, the interest income we earn on our assets may decrease more rapidly than the interest expense we incur on our liabilities, as borrowers prepay mortgage loans and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these cash flows at lower interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates generally results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.

We evaluate interest rate sensitivity using a model that estimates the change in our net portfolio value over a range of interest rate scenarios, also known as a “rate shock” analysis. Net portfolio value is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

The State of Illinois has significant financial difficulties, and this could adversely impact certain of our borrowers and the economic vitality of the state, which would have a negative impact on our business.

The State of Illinois has significant financial difficulties, including material pension funding shortfalls. The State of Illinois’ debt rating has been downgraded and its executive and legislative branches of government have been unable to reach agreement on a budget for the current fiscal year. These issues could impact the economic vitality of the state and the businesses operating there, encourage businesses to leave the State of Illinois, discourage new employers from starting or moving businesses to the state, and could result in an increase in the Illinois state income tax rate. In addition, population outflow from the State of Illinois could affect our ability to attract and retain customers.

 

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Some of the markets we are in include significant university and healthcare presence, which rely heavily on state funding and contracts. Payment delays by the State of Illinois to its vendors and government sponsored entities may have significant, negative effects on our markets, which could in turn adversely affect our financial condition and results of operations. In addition, adverse changes in agribusiness and capital goods exports could materially adversely affect downstate Illinois markets, which are heavily reliant upon these industries. Delays in the payment of accounts receivable owed to borrowers that are employed by or who do business with these industries or the State of Illinois could impair their ability to repay their loans when due and negatively impact our business.

Increased interest rates and changes in secondary mortgage market conditions could reduce our earnings from our mortgage banking operations.

Our mortgage banking income varies with movements in interest rates, and increases in interest rates could negatively affect our ability to originate loans in the same volume as we have in past years. In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the future. In light of current conditions, there is greater risk in retaining mortgage loans pending their sale to investors. As a result, a prolonged period of secondary market illiquidity may reduce our loan mortgage production volume and could have a material adverse effect on our financial condition and results of operations.

A portion of our loan portfolio consists of loan participations secured by properties outside of our primary market area. Loan participations may have a higher risk of loss than loans we originate because we are not the lead lender and we have limited control over credit monitoring.

We occasionally purchase loan participations secured by properties outside of our primary market area in which we are not the lead lender. Although we underwrite these loan participations consistent with our general underwriting criteria, loan participations may have a higher risk of loss than loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decision regarding the classification of a loan participation and loan loss provisions associated with a loan participation is made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the same manner as we would for loans that we originate. At June 30, 2017, our loan participations totaled $38.5 million, or 8.6% of our gross loans, most of which are within 100 miles of our primary lending market and consist primarily of multi-family, commercial real estate and commercial loans.

Additionally, we expect to continue to use loan participations as a way to effectively deploy our capital. If our underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings may decrease.

We have in the past purchased loans originated by other banks and mortgage companies, some of which have experienced a higher rate of losses than loans that we originate. If we continue to experience losses on these loans, our earnings will decrease.

In addition to loans that we originate, at June 30, 2017, our loan portfolio included $7.6 million of purchased loans. These loans were primarily purchased from three vendors: Irwin Mortgage Corporation (now serviced by the Association); Mid America Bank (now serviced by PNC Bank); and Countrywide Financial (now serviced by Bank of America). Of these loans, $1.8 million were purchased from Countrywide and have experienced a significantly higher rate of losses than loans that we originate. As of June 30, 2017, the loans purchased from Countrywide consisted of 4 loans secured by one- to four-family residential loans, primarily in the Chicago market area. Of these 4 loans, one is classified as substandard and and one is a TDR which is now performing in accordance with the modification. The other 2 loans are performing in accordance with their original terms. If we experience additional losses on these loans, our earnings will decrease.

 

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Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for savings associations and savings and loan holding companies, subject to a transition period. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision, and examination by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Federal regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of a savings association, the classification of assets by a savings association, and the adequacy of a savings association’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations or legislation, could have a material impact on our results of operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Any legislative, regulatory or policy changes adopted in the future could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Further, we expect any such new laws, rules or regulations will add to our compliance costs and place additional demands on our management team.

The short-term and long-term impact of the changing regulatory capital requirements and capital rules is uncertain.

In July, 2013, the federal banking agencies approved a rule that substantially amended the regulatory risk-based capital rules applicable to Iroquois Federal and If Bancorp. The rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The amended capital requirements include new minimum risk-based capital and leverage ratios, which were effective for Iroquois Federal and IF Bancorp on January 1, 2015, and refined the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The new rule also established a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities.

The application of more stringent capital requirements for Iroquois Federal and IF Bancorp could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.

 

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Strong competition within our market areas may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, credit unions, FinTech companies, mortgage brokerage firms, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.

We face significant operational risks because the financial services business involves a high volume of transactions.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.

Cyber-attacks or other security breaches could adversely affect our operations, net income or reputation.

We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, employees and others and concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.

Information security risks have generally increased in recent years because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial and other transactions and the increased sophistication and activities of perpetrators of cyber-attacks and mobile phishing. Mobile phishing, a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail, is an emerging threat targeting the customers of popular financial entities. A failure in or breach of our operational or information security systems, or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.

If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss.

Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, and that if mishandling, misuse or loss of information does occur, those events will be promptly detected and addressed. Similarly, when confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf, our policies and procedures require that the third party agree to maintain the confidentiality of the information, establish and maintain policies and procedures designed to preserve the confidentiality of the information, and permit us to confirm the third party’s compliance with the terms of the agreement. As information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

 

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Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur and may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

In addition, we outsource some of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failures, interruptions, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

We operate from our main office, five branch offices, an administrative office, and a data center located in Iroquois, Vermilion, Champaign and Kankakee Counties, Illinois, and our loan production and wealth management office in Osage Beach, Missouri. The net book value of our premises, land and equipment was $5.8 million at June 30, 2017. The following tables set forth information with respect to our banking offices, including the expiration date of leases with respect to leased facilities. We have signed a purchase agreement on a property located at 2411 Village Green Place, Champaign, Illinois in Champaign County, with the expectation that it may be used for a new branch sometime in the future, subject to regulatory notice requirements.

 

Location

   Year
Opened
     Owned/
Leased
 

Main Office:

     

201 East Cherry Street

Watseka, Illinois 60970

     1964        Owned  

Branches:

     

619 North Gilbert Street

Danville, Illinois 61832

     1973        Owned  

175 East Fourth Street

Clifton, Illinois 60927

     1977        Owned  

511 South Chicago Road

Hoopeston, Illinois 60942

     1979        Owned  

108 Arbours Drive

Savoy, Illinois 61874

     2014        Owned  

421 Brown Boulevard

Bourbonnais, Illinois 60914

     2017        Owned  

Loan Production Office:

     

3535 Highway 54

Osage Beach, Missouri 65065

     2006        Owned  

Administrative Office:

     

204 East Cherry Street

Watseka, Illinois 60970

     2001        Owned  

Data Center:

     

819 East 4000 South Road

Kankakee, Illinois 60901

     2012       

Leased

(expires May 30, 2018)

 

 

 

ITEM 3. LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market and Dividend Information.

The Company’s common stock is listed on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “IROQ.” The following table sets forth the high and low sales prices of the Company’s common stock as reported by NASDAQ, as well as dividends paid, during the periods indicated.

 

     High      Low      Dividend  
Fiscal 2017:         

First Quarter

   $ 19.74      $ 18.45      $ 0.08  

Second Quarter

   $ 19.70      $ 18.43        —    

Third Quarter

   $ 20.75      $ 18.47      $ 0.08  

Fourth Quarter

   $ 20.10      $ 19.45        —    

 

     High      Low      Dividend  
Fiscal 2016:         

First Quarter

   $ 17.43      $ 16.35      $ 0.05  

Second Quarter

   $ 18.77      $ 16.94        —    

Third Quarter

   $ 19.97      $ 17.25      $ 0.08  

Fourth Quarter

   $ 19.01      $ 17.70        —    

Holders.

As of September 1, 2017, there were 398 holders of record of the Company’s common stock.

Dividends.

The Company paid dividends of $0.05 per share in October 2015 and $0.08 per share in April 2016, October 2016 and April 2017. The payment of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, the Company’s ability to pay dividends is dependent on dividends received from Iroquois Federal. No assurances can be given that dividends will continue to be paid, or that, if paid, will not be reduced. For more information regarding restrictions on the payment of cash dividends by the Company and by Iroquois Federal, see “Business—Regulation and Supervision—Holding Company Regulation—Dividends” and “—Regulation and Supervision—Federal Savings Institution Regulation—Capital Distributions.”

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities.

Not applicable.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

The following table provides information regarding the Company’s purchase of its common stock during the quarter ended June 30, 2017.

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
     Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
 

4/1/17 – 4/30/17

     —        $ —          —          127,050  

5/1/17 – 5/31/17

     —          —          —          127,050  

6/1/17 – 6/30/17

     —          —          —          127,050  
  

 

 

       

 

 

    

Total

     —        $ —          —       
  

 

 

       

 

 

    

 

(1) 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 outstanding shares. As of June 30, 2017, 73,653 shares had been repurchased under this plan at an average price of $18.65 per share.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

     At June 30,  
     2017      2016      2015      2014      2013  
     (In thousands)  

Selected Financial Condition Data:

              

Total assets

   $ 585,474      $ 595,565      $ 563,668      $ 551,343      $ 547,535  

Cash and cash equivalents

     7,766        6,449        13,224        12,731        6,580  

Investment securities available for sale

     111,611        121,328        170,630        184,586        200,827  

Federal Home Loan Bank of Chicago stock

     2,543        5,425        5,425        5,425        5,425  

Loans held for sale

     186        —          93        313        492  

Loans receivable, net

     440,136        443,748        356,101        329,611        315,283  

Real estate owned

     429        338        50        436        418  

Bank-owned life insurance

     8,823        8,555        8,289        8,025        7,757  

Deposits

     439,146        433,708        415,544        404,593        371,203  

Federal Home Loan Bank of Chicago advances

     53,500        67,000        58,000        56,750        87,500  

Total equity

     83,969        83,972        80,436        82,086        81,749  
     For the Fiscal Year Ended June 30,  
     2017      2016      2015      2014      2013  
     (In thousands)  

Selected Operating Data:

              

Interest income

   $ 21,338      $ 20,373      $ 18,895      $ 18,961      $ 17,610  

Interest expense

     3,617        3,313        3,226        3,148        3,099  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     17,721        17,060        15,669        15,813        14,511  

Provision for loan losses

     1,721        1,366        460        502        595  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     16,000        15,694        15,209        15,311        13,916  

Noninterest income

     4,728        4,095        3,320        3,068        4,489  

Noninterest expense

     14,535        14,209        13,420        13,040        12,638  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     6,193        5,580        5,109        5,339        5,767  

Income tax expense

     2,274        2,014        1,835        1,862        2,057  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 3,919      $ 3,566      $ 3,274      $ 3,477      $ 3,710  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     At or For the Fiscal Years Ended June 30,  
     2017     2016     2015     2014     2013  

Selected Financial Ratios and Other Data:

          

Performance Ratios:

          

Return on average assets (net income as a percentage of average total assets)

     0.67     0.62     0.60     0.62     0.70

Return on average equity (net income as a percentage of average equity)

     4.69     4.35     3.92     4.26     4.34

Interest rate spread (1)

     3.02     3.00     2.87     2.83     2.75

Net interest margin (2)

     3.14     3.11     2.98     2.94     2.86

Efficiency ratio (3)

     64.75     67.17     70.67     69.06     66.52

Dividend payout ratio

     15.09     13.54     12.05     11.90     —    

Noninterest expense to average total assets

     2.48     2.49     2.45     2.33     2.37

Average interest-earning assets to average interest-bearing liabilities

     118.30     117.85     117.98     117.24     118.59

Average equity to average total assets

     14.27     14.33     15.21     14.61     16.03

Asset Quality Ratios:

          

Non-performing assets to total assets

     1.70     0.42     0.55     0.58     0.87

Non-performing loans to total loans

     2.13     0.49     0.85     0.82     1.35

Allowance for loan losses to non-performing loans

     71.66     244.39     137.30     143.10     91.12

Allowance for loan losses to total loans

     1.53     1.19     1.17     1.18     1.23

Net charge-offs (recoveries) to average loans

     0.05     0.05     0.01     0.15     0.07

Capital Ratios:

          

Total capital (to risk-weighted assets):

          

Company

     20.09     19.7     23.2     26.3     27.9

Association

     16.9     16.1     19.3     21.9     21.6

Tier 1 capital (to risk-weighted assets):

          

Company

     18.8     18.5     22.0     25.1     26.6

Association

     15.7     14.9     18.2     20.7     20.3

Common Equity Tier 1 Capital (to risk-weighted assets):

          

Company (4)

     18.8     18.5     22.0     —       —  

Association (4)

     15.7     14.9     18.2     —       —  

Tier 1 capital (to adjusted total assets):

          

Company

     14.3     14.4     14.5     14.7     15.0

Association

     12.0     11.1     11.9     12.1     11.4

Tangible capital (to adjusted total assets):

          

Company

     14.3     14.4     14.5     14.7     15.0

Association

     12.0     11.1     11.9     12.1     11.4

Other Data:

          

Number of full service offices

     6       5       5       5       4  

Full time equivalent employees

     100       95       98       95       92  

 

(1) The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
(3) The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.
(4) The common equity Tier 1 (“CET1”) capital is a new capital requirement adopted by the OCC, which became effective for the Association in January, 2015.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

We have grown our organization to $585.5 million in assets at June 30, 2017 from $377.2 million in assets at June 30, 2009. We have increased our assets primarily through increased investment securities and loan growth.

Historically, we have operated as a traditional thrift institution. As recently as June 30, 2009, approximately 72.4% of our loan portfolio, consisted of longer-term, one- to four-family residential real estate loans. However, in recent years, we have increased our focus on the origination of commercial real estate loans, multi-family real estate loans and commercial business loans, which generally provide higher returns than one- to four-family residential mortgage loans, have shorter durations and are often originated with adjustable rates of interest. As a result, 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 3.02% for the year ended June 30, 2017 from 2.53% for the year ended June 30, 2009. During this same period, many financial institutions have experienced interest rate spread compression. This contributed to a corresponding increase in net interest income (the difference between interest income and interest expense) to $17.7 million for the fiscal year ended June 30, 2017 from $9.5 million for the fiscal year ended June 30, 2009.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets. However, late in June, 2017, one large credit in the amount of $7.8 million, secured by 45 one- to four-family properties, was moved to non-performing when the borrower became involved in litigation, and subsequently filed for bankruptcy protection. The properties securing this loan are all existing homes that were acquired by the borrower to be renovated and resold. Our non-performing assets totaled $10.0 million or 1.70% of total assets at June 30, 2017.

Other than our loans for the construction of one- to four-family residential properties and the draw portion of our home equity lines of credit, we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest but no principal for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). We also do not own any private label mortgage-backed securities that are collateralized by Alt-A, low or no documentation or subprime mortgage loans.

The Association’s legal lending limit to any one borrower is 15% of unimpaired capital and surplus. On July 30, 2012 the Association received approval from the Office of the Comptroller of the Currency to participate in the Supplemental Lending Limits Program (SLLP). This program allows eligible institutions to make additional residential real estate loans or extensions of credit to one borrower, small business loans or extensions of credit to one borrower, or small farm loans or extensions of credit to one borrower. For our association this additional limit (or “supplemental limit(s)”) for one- to four-family residential real estate, small business, or small farm loans is 10% of our Association’s capital and surplus. In addition, the total outstanding amount of the Association’s loans or extensions of credit or parts of loans and extensions of credit made to all of its borrowers under the SLLP may not exceed 100% of the Association’s capital and surplus. By Association policy, participation of any credit facilities in the SLLP is to be infrequent and all credit facilities are to be with prior Board approval.

All of our mortgage-backed securities have been issued by Freddie Mac, Fannie Mae or Ginnie Mae, U.S. government-sponsored enterprises. These entities guarantee the payment of principal and interest on our mortgage-backed securities.

 

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On July 7, 2011, we completed our initial public offering of common stock in connection with Iroquois Federal’s mutual-to-stock conversion, selling 4,496,500 shares of common stock at $10.00 per share, including 384,900 shares sold to Iroquois Federal’s employee stock ownership plan, and raising approximately $45.0 million of gross proceeds. In addition, we issued 314,755 shares of our common stock to the Iroquois Federal Foundation.

In June, 2017 we opened a new branch office at 421 Brown Boulevard, Bourbonnais, Illinois, in Kankakee County.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. We believe that the allowance for loan losses and related provision for loan losses are particularly susceptible to change in the near term, due to changes in credit quality which are evidenced by trends in charge-offs and in the volume and severity of past due loans. In addition, our portfolio is comprised of a substantial amount of commercial real estate loans which generally have greater credit risk than one- to four-family residential mortgage and consumer loans because these loans generally have larger principal balances and are non-homogenous.

The allowance for loan losses is maintained at a level to cover probable credit losses inherent in the loan portfolio at the balance sheet date. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. The estimate of our credit losses is applied to two general categories of loans:

 

    loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and

 

    groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any underlying collateral. This 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. See also “Business — Allowance for Loan Losses.”

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 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

 

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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.

We believe our tax policies and practices are critical accounting policies because the determination of our tax provision and current and deferred tax assets and liabilities have a material impact on our net income and the carrying value of our assets. We believe our tax liabilities and assets are properly recorded in the consolidated financial statements at June 30, 2017 and no valuation allowance was necessary.

Effective July 1, 2017, the Illinois state income tax rate was increased from 5.25% to 7.00%, which combined with the state’s 2.5% replacement tax, brings our Company’s Illinois state tax rate to 9.5% in 2018, from 7.75% in 2017.

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

Total assets decreased $10.1 million, or 1.7%, to $585.5 million at June 30, 2017 from $595.6 million at June 30, 2016. The decrease was primarily due to a $9.7 million decrease in investments securities and a $3.4 million decrease in net loans, partially offset by a $1.3 million increase in cash and cash equivalents.

Net loans receivable, including loans held for sale, decreased by $3.4 million, or 0.8%, to $440.3 million at June 30, 2017 from $443.7 million at June 30, 2016. The decrease in net loans receivable during this period was due primarily to a $12.3 million, or 62.3%, decrease in constructions loans, an $8.9 million, or 5.9%, decrease in one- to four-family loans, a $2.2 million, or 21.6%, decrease in consumer loans, and a $618,000, or 7.6%, decrease in home equity lines of credit, partially offset by a $14.2 million, or 11.9%, increase in commercial real estate loans, a $4.6 million, or 7.9%, increase in commercial business loans, and a $3.0 million, or 3.6%, increase in multi-family loans.

Investment securities, consisting entirely of securities available for sale, decreased $9.7 million, or 8.0%, to $111.6 million at June 30, 2017 from $121.3 million at June 30, 2016. We had no held-to-maturity securities at June 30, 2017 or June 30, 2016.

Compared to June 30, 2016, as of June 30, 2017, premises and equipment increased $1.3 million to $5.8 million, deferred income taxes increased $2.0 million to $3.7 million, mortgage servicing rights increased $270,000 to $710,000, and foreclosed assets held for sale increased $91,000 to $429,000, while accrued interest receivable decreased $264,000 to $1.5 million, other assets decreased $475,000 to $420,000 and Federal Home Loan Bank stock decreased $2.9 million to $2.5 million. The increase in premises and equipment was mostly due to the purchase of an office building, furniture and equipment for our newest office in Bourbonnais, Illinois. The increase in deferred income taxes was mostly due to an increase in the unrealized losses on sale of available-for sale securities, while the increase in mortgage servicing rights was a result of both an increase in the balance of FHLB MPF loans serviced and the market value of the servicing. The increase in foreclosed assets held for sale was due to an increase in the value of properties owned, while the decrease in accrued interest receivable was due to a decrease in our loan portfolio. The decrease in other assets resulted from a decrease in accounts receivable general due to a large receivable at June 30, 2016, for loan proceeds not yet received for the payoff of a purchased loan, that was not a receivable at June 30, 2017. The decrease in Federal Home Loan Bank stock was the result of a new Federal Home Loan Bank initiative whereby they automatically repurchase all excess stock over the calculated required amount.

At June 30, 2017, our investment in bank-owned life insurance was $8.8 million, an increase of $268,000 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 the Association’s Tier 1 capital plus our allowance for loan losses. At June 30, 2017, our investment of $8.8 million in bank-owned life insurance was 11.4% of our Tier 1 capital plus our allowance for loan losses.

 

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Deposits increased $5.4 million, or 1.3%, to $439.1 million at June 30, 2017 from $433.7 million at June 30, 2016. Savings, NOW, and money market accounts increased $14.5 million, or 9.3%, to $171.2 million, and noninterest bearing demand accounts increased $1.1 million, or 5.8%, to $20.1 million, while certificates of deposit, excluding brokered certificates of deposit, decreased $7.3 million, or 3.4%, to $209.0 million, and brokered certificates of deposit decreased $2.9 million, or 6.9%, to $38.8 million. Repurchase agreements decreased $2.2 million to $2.2 million.

Advances from the Federal Home Loan Bank of Chicago decreased $13.5 million, or 20.1%, to $53.5 million at June 30, 2017 from $67.0 million at June 30, 2016.

Total equity was $84.0 million at both June 30, 2017 and 2016. Equity was positively impacted by net income of $3.9 million, and ESOP and stock equity plan activity of $598,000, which was offset by a decrease in accumulated other comprehensive income, net of tax, of $2.6 million, the repurchase of 73,653 shares of the Company’s common stock at an aggregate cost of approximately $1.4 million and the payment of approximately $589,000 in dividends to our shareholders. The increase due to stock equity plan activity was the result of the vesting of restricted stock awards and the decrease in other accumulated comprehensive income was primarily due to an increase in unrealized losses on securities available for sale. A stock repurchase program was adopted on February 5, 2016, which authorized the Company to repurchase up to 200,703 shares of its common stock, or approximately 5% of its then current outstanding shares. As of June 30, 2017, 73,653 shares had been repurchased under this plan at an average pc ie of $18.65 per share

Comparison of Operating Results for the Years Ended June 30, 2017 and 2016

General. Net income increased $353,000, or 9.9%, to $3.9 million net income for the year ended June 30, 2017 from $3.6 million net income for the year ended June 30, 2016. The increase was primarily due to an increase in net interest income and an increase in noninterest income, partially offset by an increase in noninterest expense and an increase in provision for loan losses.

Net Interest Income. Net interest income increased by $661,000, or 3.9%, to $17.7 million for the year ended June 30, 2017 from $17.1 million for the year ended June 30, 2016. The increase was due to an increase of $965,000 in interest and dividend income, partially offset by an increase of $304,000 in interest expense. The increase in net interest income was primarily the result of an increase in the average balance of interest earning assets and higher average yields on interest earning assets. We had a $15.6 million, or 2.8%, increase in the average balance of interest earning assets, partially offset by a $11.4 million, or 2.5%, increase in the average balance of interest bearing liabilities. Our interest rate spread increased 2 basis points to 3.02% for the year ended June 30, 2017 from 3.00% for the year ended June 30, 2016, and our net interest margin increased by 3 basis points to 3.14% for the year ended June 30, 2017 from 3.11% for the year ended June 30, 2016.

Interest and Dividend Income. Interest and dividend income increased $965,000, or 4.7%, to $21.3 million for the year ended June 30, 2017 from $20.4 million for the year ended June 30, 2016. The increase in interest income was due to an increase in interest income on loans, partially offset by a decrease in interest income on securities. An increase of $1.4 million, or 8.1%, in interest on loans resulted from a $27.9 million, or 6.7%, increase in the average balance of loans to $445.8 million for the year ended June 30, 2017, and a 6 basis point, or 1.4%, increase in the average yield on loans to 4.14% from 4.08%. Interest on securities decreased $489,000, or 15.1%, due to a $13.2 million decrease in the average balance of securities to $110.5 million at June 30, 2017 from $123.7 million at June 30, 2016, and a 13 basis point, or 5.0%, decrease in the average yield on securities to 2.49% for the year ended June 30, 2017 from 2.62% for the year ended June 30, 2016.

Interest Expense. Interest expense increased $304,000, or 9.2%, to $3.6 million for the year ended June 30, 2017 from $3.3 million for the year ended June 30, 2016. The increase was primarily due to increased average balance of interest-bearing liabilities and higher market rates of interest during the period.

Interest expense on interest-bearing deposits increased $516,000, or 21.7%, to $2.9 million for the year ended June 30, 2017, from $2.4 million for the year ended June 30, 2016. This increase was primarily due to an increase in the average balance of interest-bearing deposits to $409.7 million for the year ended June 30, 2017, from $397.1 million for the year ended June 30, 2016, and also an 11 basis point, or 18.0% increase in the average cost of interest-bearing deposits to 0.71% from 0.60%.

Interest expense on borrowings, including FHLB advances and repurchase agreements, decreased $212,000, or 22.6%, to $726,000 for the year ended June 30, 2017 from $938,000 for the year ended June 30, 2016.

 

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This decrease was due to a $1.2 million, or 1.8%, decrease in the average balance of borrowings to $67.9 million for the year ended June 30, 2017 from $69.1 million for the year ended June 30, 2016, and a 29 basis point decrease in the average cost of such borrowings to 1.07% for the year ended June 30, 2017 from 1.36% for the year ended June 30, 2016.

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable credit losses inherent in our loan portfolio. We recorded a provision for loan losses of $1.7 million for the year ended June 30, 2017, compared to a provision for loan losses of $1.4 million for the year ended June 30, 2016. The allowance for loan losses was $6.8 million, or 1.53% of total loans, at June 30, 2017, compared to $5.4 million, or 1.19% of total loans, at June 30, 2016. Non-performing loans increased during the year ended June 30, 2017, to $9.5 million, from $2.2 million at June 30, 2016. During the year ended June 30, 2017 and 2016, $237,000 and $226,000, respectively, in net charge-offs were recorded.

 

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

 

     Year Ended
June 30, 2017
    Year Ended
June 30, 2016
 

Allowance to non-performing loans

     71.66     244.39

Allowance to total loans outstanding at the end of the period

     1.53     1.19

Net charge-offs to average total loans outstanding during the period

     0.05     0.05

Total non-performing loans to total loans

     2.13     0.49

Total non-performing assets to total assets

     1.70     0.42

Noninterest Income. Noninterest income increased $633,000, or 15.5%, to $4.7 million for the year ended June 30, 2017 from $4.1 million for the year ended June 30, 2016. The increase was primarily due to increases in net realized gains on the sale of available-for-sale securities, mortgage banking income, net, and gains on sale of loans, partially offset by a decrease in brokerage commissions. For the year ended June 30, 2017, net realized gains on the sale of available-for-sale securities increased to $904,000 from $620,000, mortgage banking income, net, increased $487,000 from $126,000, and gains on sale of loans increased to $295,000 from $216,000, while brokerage commissions decreased to $583,000 from $672,000. The increase 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 year ended June 30, 2017, compared to the year ended June 30, 2016. The increase in mortgage banking income, net, was due to an increase in the balance of Federal Home Loan Bank of Chicago MPF loans serviced and the market value of the servicing, and the increase in gains on sale of loans was primarily due to an increase in the number of loans sold to the Federal Home Loan Bank of Chicago in the year ended June 30, 2017. The decrease in brokerage commissions reflects decreased activity due to movement in market interest rates.

Noninterest Expense. Noninterest expense increased $326,000, or 2.3%, to $14.5 million for the year ended June 30, 2017 from $14.2 million for the year ended June 30, 2016. The largest components of this increase were compensation and benefits, which increased $499,000, or 5.6%, equipment expense, which increased $187,000, or 19.0%, professional services, which increased $44,000, or 9.1%, and audit and accounting services, which increased $92,000, or 66.7%. Increased staffing, medical insurance costs, and normal salary increases primarily accounted for the increase in compensation and benefits expense. The increase in equipment expense was the result of technology upgrades and the opening of a new office in the year ended June 30, 2017. The increase in professional services and audit and accounting were due to additional services received during the year ended June 30, 2017. These increases were partially offset by decreases in federal deposit insurance expense, which decreased $139,000, or 44.4%, and telephone and postage expense, which decreased $77,000, or 24.8%. 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 $2.3 million for the year ended June 30, 2017, compared to a provision for income tax of $2.0 million for the year ended June 30, 2016, reflecting effective tax rates of 36.7% and 36.1%, respectively.

Asset Quality and Allowance for Loan Losses

For information regarding asset quality and allowance for loan loss activity, see “Item 1. Business—Non-performing and Problem Assets” and “Item 1. Business—Allowance for Loan Losses.”

 

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Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. 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 Iroquois Federal. 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 Fiscal Years Ended June 30,  
     2017     2016     2015  
     Average
Outstanding
Balance
    Interest      Yield/
Rate
    Average
Outstanding
Balance
    Interest      Yield/
Rate
    Average
Outstanding
Balance
    Interest      Yield/
Rate
 
     (Dollars in thousands)  

Interest-earning assets:

                     

Loans:

                     

Real estate loans:

                     

One- to four-family (1)

   $ 145,662     $ 6,119        4.20   $ 149,752     $ 6,164        4.12   $ 146,802     $ 6,123        4.17

Multi-family

     83,292       3,275        3.93       77,544       3,029        3.91       57,526       2,303        4.00  

Commercial

     123,706       5,029        4.07       114,137       4,644        4.07       90,891       3,699        4.07  

Home equity lines of credit

     7,735       336        4.34       7,882       328        4.16       7,855       334        4.25  

Construction loans

     19,738       789        4.00       10,046       372        3.70       1,113       44        3.95  

Commercial business loans

     56,975       2,490        4.37       49,372       2,086        4.23       30,733       1,378        4.48  

Consumer loans

     8,687       405        4.66       9,193       432        4.70       8,512       440        5.17  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     445,795       18,443        4.14       417,926       17,055        4.08       343,432       14,321        4.17  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Securities:

                     

U.S. government, federal agency and government-sponsored enterprises

     69,920       1,802        2.58       88,017       2,310        2.62       106,432       2,860        2.69  

U.S. government sponsored mortgage-backed securities

     37,238       870        2.34       32,213       848        2.63       63,046       1,586        2.52  

State and political subdivisions

     3,340       75        2.25       3,496       78        2.23       3,492       84        2.41  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     110,498       2,747        2.49       123,726       3,236        2.62       172,970       4,530        2.62  

Other

     8,716       148        1.70       7,757       82        1.06       9,634       44        0.46  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     565,009       21,338        3.78       549,409       20,373        3.71       526,036       18,895        3.59  
    

 

 

        

 

 

        

 

 

    

Noninterest-earning assets

     20,403            22,380            22,784       
  

 

 

        

 

 

        

 

 

      

Total assets

   $ 585,412          $ 571,789          $ 548,820       
  

 

 

        

 

 

        

 

 

      

Interest-bearing liabilities:

                     

Interest-bearing checking or NOW

   $ 44,080       40        0.09     $ 40,852       37        0.09     $ 36,177       33        0.09  

Savings accounts

     40,191       49        0.12       38,399       50        0.13       35,480       60        0.17  

Money market accounts

     75,736       195        0.26       72,118       138        0.19       59,570       116        0.19  

Certificates of deposit

     249,689       2,607        1.04       245,699       2,150        0.88       262,372       2,224        0.85  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     409,696       2,891        0.71       397,068       2,375        0.60       393,599       2,433        0.62  

Federal Home Loan Bank advances and repurchase agreements

     67,899       726        1.07       69,111       938        1.36       52,273       793        1.52  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     477,595       3,617        0.76       466,179       3,313        0.71       445,872       3,226        0.72  
    

 

 

        

 

 

        

 

 

    

Noninterest-bearing liabilities

     24,279            23,645            19,489       
  

 

 

        

 

 

        

 

 

      

Total liabilities

     501,874            489,824            465,361       

Equity

     83,538            81,965            83,459       
  

 

 

        

 

 

        

 

 

      

Total liabilities and equity

     585,412            571,789            548,820       
  

 

 

        

 

 

        

 

 

      

Net interest income

     $ 17,721          $ 17,060          $ 15,669     
    

 

 

        

 

 

        

 

 

    

Net interest rate spread (2)

          3.02          3.00          2.87

Net interest-earning assets (3)

   $ 87,414          $ 83,230          $ 80,164       
         

 

 

        

 

 

      

Net interest margin (4)

          3.14          3.11          2.98

Average interest-earning assets to interest-bearing liabilities

     118          118          118     

 

(1) Includes home equity loans.
(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average total interest-earning assets.

 

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Table of Contents

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 net 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.

 

     Fiscal Years Ended June 30,
2017 vs. 2016
    Fiscal Years Ended June 30,
2016 vs. 2015
 
     Increase (Decrease)
Due to
    Total
Increase
(Decrease)
    Increase (Decrease)
Due to
    Total
Increase
(Decrease)
 
     Volume     Rate       Volume     Rate    
     (In thousands)  

Interest-earning assets:

            

Loans

   $ 1,137     $ 251     $ 1,388     $ 3,049     $ (315   $ 2,734  

Securities

     (312     (177     (489     (1,294     —         (1,294

Other

     9       57       66       (10     48       38  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 834     $ 131     $ 965     $ 1,745     $ (267   $ 1,478  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Interest-bearing checking or NOW

   $ 3     $ —       $ 3     $ 4     $ —       $ 4  

Savings accounts

     2       (3     (1     5       (15     (10

Certificates of deposit

     32       425       457       (149     75       (74

Money market accounts

     7       50       57       22       —         22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     44       472       516       (118     60       (58

Federal Home Loan Bank advances

     (16     (196     (212     236       (91     145  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 28     $ 276     $ 304     $ 118     $ (31   $ 87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 806     $ (145   $ 661     $ 1,627     $ (236   $ 1,391  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Management of Market Risk

General. Because the majority of our assets and liabilities are sensitive to changes in interest rates, our most significant form of market risk is interest rate risk. We are vulnerable to an increase in interest rates to the extent that our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, a principal part of our business strategy is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee pursuant to our Interest Rate Risk Management Policy that is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.

As part of our ongoing asset-liability management, we currently use the following strategies to manage our interest rate risk:

 

  (i) sell the majority of our long-term, fixed-rate one- to four-family residential mortgage loans that we originate;

 

  (ii) lengthen the weighted average maturity of our liabilities through retail deposit pricing strategies and through longer-term wholesale funding sources such as brokered certificates of deposit and fixed-rate advances from the Federal Home Loan Bank of Chicago;

 

  (iii) invest in shorter- to medium-term investment securities and interest-earning time deposits;

 

  (iv) originate commercial mortgage loans, including multi-family loans and land loans, commercial loans and consumer loans, which tend to have shorter terms and higher interest rates than one- to four-family residential mortgage loans, and which generate customer relationships that can result in larger noninterest-bearing demand deposit accounts; and

 

  (v) maintain adequate levels of capital.

We currently do not engage in hedging activities, such as futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligations, residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.

In addition, changes in interest rates can affect the fair values of our financial instruments. For additional information regarding the fair values of our assets and liabilities, see Note 17 to the Notes to our Consolidated Financial Statements.

Interest Rate Risk Analysis

We also perform an interest rate risk analysis that assesses our earnings at risk and our value at risk (or net economic value of equity at risk). Earnings at risk represents the underlying threat to earnings associated with the continual repricing of a financial institution’s various assets and liabilities in differing amounts, at different times, at different interest rate levels, all within the context of a continually changing, global interest rate environment. Our analysis of our earnings at risk is completed monthly on our net interest income for periods extending twelve and twenty-four months forward. Simulations include a base line analysis with no change in the current interest rate environment and alternative interest rate possibilities including rising and falling interest rates of 100, 200, 300, and 400 basis points in interest rates under ramp, shock, static and dynamic rate environments to generate the estimated impact on net interest income. Value at risk represents the threat to the underlying value of a financial institution’s various assets and liabilities, and consequently its capital, given the potential for change in the interest rate structure in which these financial instruments might either reprice, or fail to reprice, in an environment of constantly changing interest rates. Our analysis of our value at risk is completed quarterly and the calculation measures the net effect on the market value of the bank’s equity position when quantifying the impact when interest rates rise and fall for the range of -400 basis points to +400 basis points. Details of our general ledger along with key data from each deposit, loan, investment, and borrowing are downloaded into our forecasting model, which takes into account both market and internal trends. Historical testing is done internally on a regular basis to confirm the validity of the model, while third-party testing is done periodically. Details of our interest rate risk analysis are reviewed by the Asset/Liability Management Committee and presented to the Board on a quarterly basis.

 

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Table of Contents

The tables below illustrate the simulated impact of rate shock scenarios up to 400 basis points over a two-year period on our earnings at risk for net interest income. The earnings at risk tables show net interest income decreasing in a rising rate environment. The net economic value of equity at risk table below sets forth our calculation of the estimated changes in our net economic value of equity at June 30, 2017 resulting from immediate rate shocks ranging from -400 basis points to +400 basis points.

Earnings at Risk

 

Change in Interest

Rates (basis points)

   % Change in Net Interest Income  
   6/30/18      6/30/19  

+400

     (9.52      (8.66

+300

     (6.04      (4.89

+200

     (3.49      (2.33

+100

     (1.60      (0.93

      0

     —          —    

-100

     0.40        1.20  

-200

     (2.03      (2.34

-300

     (4.53      (4.96

-400

     (6.86      (7.39

Net Economic Value of Equity (NEVE) at Risk

 

Change in Interest

Rates (basis points)

   Estimated NEVE      % Change NEVE  

+400

     80,442        (3.03

+300

     79,066        (4.69

+200

     77,734        (6.29

+100

     80,377        (3.11

      0

     82,956        —    

-100

     80,294        (3.21

-200

     76,706        (7.53

-300

     73,059        (11.93

-400

     69,278        (16.49

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. We also utilize brokered certificates of deposit, internet funding, borrowings from the Federal Reserve, and sales of securities, when appropriate. 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 years ended June 30, 2017 and 2016, our liquidity ratio averaged 19.0% and 21.4% of our total assets, respectively. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 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 June 30, 2017, cash and cash equivalents totaled $7.8 million.

 

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Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Statements of Cash Flows included in our financial statements.

At June 30, 2017, we had $25.4 million in loan commitments outstanding, and $42.7 million in unused lines of credit to borrowers. Certificates of deposit due within one year of June 30, 2017 totaled $120.8 million, or 27.5% 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 June 30, 2017. Additionally, 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.

Our primary investing activity is originating loans. During the years ended June 30, 2017 and 2016, we originated $145.9 million and $203.0 million of loans, respectively.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We had a net increase in total deposits of $5.4 million for the year ended June 30, 2017, and a net increase in total deposits of $18.2 million for the year ended June 30, 2016. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

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 $53.5 million at June 30, 2017. At June 30, 2017, we had the ability to borrow up to an additional $151.8 million from the Federal Home Loan Bank of Chicago based on our collateral and had the ability to borrow an additional $32.4 million from the Federal Reserve based upon current collateral pledged.

Iroquois Federal 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. At June 30, 2017, Iroquois Federal exceeded all regulatory capital requirements. Iroquois Federal is considered “well capitalized” under regulatory guidelines. See “Note 12– Regulatory Matters of the notes to the financial statements included in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 19 – Commitments and Credit Risk of the notes to the financial statements included in this Annual Report on Form 10-K.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Recent Accounting Pronouncements

For a discussion of the impact of recent and future accounting pronouncements, see Note 1 of the notes to our consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K.

Impact of Inflation and Changing Prices

Our financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on our performance than the effects of inflation.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements, including supplemental data, of IF Bancorp begin on page F-1 of this Annual Report.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of June 30, 2017. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by the Company, including Iroquois Federal, in reports that are filed or submitted under the Exchange Act, is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely discussions regarding required disclosures.

Changes in Internal Controls Over Financial Reporting.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting.

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017, utilizing the framework established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of June 30, 2017 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial

 

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statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

ITEM 9B. OTHER INFORMATION

Not applicable.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to the directors and officers of the Company, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for the Registrant’s Annual Meeting of Stockholders, to be held on November 20, 2017 (the “Proxy Statement”) under the captions “Proposal 1—Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Nominating Committee Procedures—Procedures to be Followed by Stockholders,” “Corporate Governance—Committees of the Board of Directors” and “—Audit Committee” is incorporated herein by reference.

The Company has adopted a code of ethics that applies to its principal executive officer, the principal financial officer and principal accounting officer. The Code of Ethics is posted on the Company’s Internet Web site.

 

ITEM 11. EXECUTIVE COMPENSATION

The information regarding executive compensation, compensation committee interlocks and insider participation is incorporated herein by reference to the Proxy Statement under the captions “Executive Officers—Executive Compensation” and “Director Compensation.”

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

 

  (a) Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

  (b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

 

  (c) Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

 

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Equity Compensation Plan Information

The following table sets forth information as of June 30, 2017 about Company common stock that may be issued upon the exercise of options under the IF Bancorp, Inc. 2012 Equity Incentive Plan. The plan was approved by the Company’s stockholders.

 

Plan Category

   Number of securities to be
issued upon the exercise of
outstanding options,
warrants and rights
     Weighted-average
exercise price of
outstanding options,
warrants and rights
     Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in the first column)
 

Equity compensation plans approved by security holders

     153,143        $16.63        314,125  

Equity compensation plans not approved by security holders

     N/A        N/A        N/A  
  

 

 

       

 

 

 

Total

     153,143        $16.63        314,125  
  

 

 

       

 

 

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Proxy Statement under the captions “Transactions with Related Persons” and “Proposal 1 — Election of Directors.”

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information relating to the principal accounting fees and expenses is incorporated herein by reference to the Proxy Statement under the captions “Proposal III—Ratification of Independent Registered Public Accounting Firm—Audit Fees” and “—Pre-Approval of Services by the Independent Registered Public Accounting Firm.”

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (1) The financial statements required in response to this item are incorporated by reference from Item 8 of this report.

 

  (2) All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

 

  (3) Exhibits

 

  3.1 Articles of Incorporation of IF Bancorp, Inc. (1)
  3.2 Bylaws of IF Bancorp, Inc. (1)
  4.1 Specimen Stock Certificate of IF Bancorp, Inc. (1)
  10.1 Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (2)
  10.2 Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (2)
  10.3 Change in Control Agreement of Pamela J. Verkler (3)
  10.4 Change in Control Agreement of Thomas J. Chamberlain
  10.5 Amendment One to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (4)
  10.6 Amendment One to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (4)
  10.7 Amendment Two to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (5)
  10.8 Amendment Two to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (5)
  10.9 Directors Non Qualified Retirement Plan (1)
  10.10 IF Bancorp, Inc. 2012 Equity Incentive Plan (6)
  21.0 List of Subsidiaries (1)
  23.0 Consent of BKD, LLP
  31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
  31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
  32.0 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (7)
  101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2017 and 2016, (ii) the Consolidated Statements of Income for the years ended June 30, 2017 and 2016, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended June 30, 2017 and 2016, (iv) the Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2017 and 2016, (v) the Consolidated Statements of Cash Flows for the years ended June 30, 2017 and 2016, and (vi) the notes to the Consolidated Financial Statements.

 

(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 (333-172843), as amended, initially filed with the SEC on March 16, 2011.
(2) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 1, 2015.
(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2011.
(4) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2016.
(5) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 15, 2017.
(6) Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on October 12, 2012.
(7) This information is furnished and not filed for purposes of Sections 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 Section 13 or 15(d) 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: September 5, 2017     By:   /s/ Walter H. Hasselbring, III
        Walter H. Hasselbring, III
        President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures

  

Title

 

Date

/s/ Walter H. Hasselbring, III

Walter H. Hasselbring, III

  

President, Chief Executive Officer and

Director (Principal Executive Officer)

  September 5, 2017

/s/ Pamela J. Verker

Pamela J. Verkler

   Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   September 5, 2017

/s/ Gary Martin

Gary Martin

   Chairman of the Board   September 5, 2017

/s/ Alan D. Martin

Alan D. Martin

   Director   September 5, 2017

/s/ Joseph A. Cowan

Joseph A. Cowan

   Director   September 5, 2017

/s/ Wayne A. Lehmann

Wayne A. Lehmann

   Director   September 5, 2017

/s/ Frank J. Simutis

Frank J. Simutis

   Director   September 5, 2017

/s/ Dennis C. Wittenborn

Dennis C. Wittenborn

   Director   September 5, 2017

/s/ Rodney E. Yergler

Rodney E. Yergler

   Director   September 5, 2017

 

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IF Bancorp, Inc.

Consolidated Financial Statements

Years Ended June 30, 2017 and 2016

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

     F-2  

Consolidated Balance Sheets

     F-3  

Consolidated Statements of Income

     F-5  

Consolidated Statements of Comprehensive Income (Loss)

     F-7  

Consolidated Statements of Stockholders’ Equity

     F-8  

Consolidated Statements of Cash Flows

     F-9  

Notes to Consolidated Financial Statements

     F-11  

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

Audit Committee and Board of Directors

IF Bancorp, Inc.

Watseka, Illinois

We have audited the accompanying consolidated balance sheets of IF Bancorp, Inc. (Company) as of June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IF Bancorp, Inc. as of June 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BKD, LLP

 

Decatur, Illinois

September 11, 2017

 

F-2


Table of Contents

IF Bancorp, Inc.

Consolidated Balance Sheets

June 30, 2017 and 2016

(in thousands)

Assets

 

     2017      2016  

Cash and due from banks

   $ 7,252      $ 5,451  

Interest-bearing demand deposits

     514        998  
  

 

 

    

 

 

 

Cash and cash equivalents

     7,766        6,449  
  

 

 

    

 

 

 

Interest-bearing time deposits in banks

     1,750        252  

Available-for-sale securities

     111,611        121,328  

Loans, net of allowance for loan losses of $6,835 and $5,351 at June 30, 2017 and 2016, respectively

     440,322        443,748  

Premises and equipment, net of accumulated depreciation of $6,249 and $5,925 at June 30, 2017 and 2016, respectively

     5,840        4,586  

Federal Home Loan Bank stock, at cost

     2,543        5,425  

Foreclosed assets held for sale

     429        338  

Accrued interest receivable

     1,539        1,803  

Bank-owned life insurance

     8,823        8,555  

Mortgage servicing rights

     710        440  

Deferred income taxes

     3,721        1,746  

Other

     420        895  
  

 

 

    

 

 

 

Total assets

   $ 585,474      $ 595,565  
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

F-3


Table of Contents

Liabilities and Stockholders’ Equity

 

     2017     2016  

Liabilities

    

Deposits

    

Demand

   $ 20,140     $ 19,036  

Savings, NOW and money market

     171,213       156,688  

Certificates of deposit

     209,020       216,343  

Brokered certificates of deposit

     38,773       41,641  
  

 

 

   

 

 

 

Total deposits

     439,146       433,708  
  

 

 

   

 

 

 

Repurchase agreements

     2,183       4,392  

Federal Home Loan Bank advances

     53,500       67,000  

Advances from borrowers for taxes and insurance

     754       932  

Accrued post-retirement benefit obligation

     2,874       2,967  

Accrued interest payable

     55       59  

Other

     2,993       2,535  
  

 

 

   

 

 

 

Total liabilities

     501,505       511,593  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, $.01 par value, 100,000,000 shares authorized, 3,940,408 and 4,014,061 shares issued and outstanding at June 30, 2017 and 2016, respectively

     39       40  

Additional paid-in capital

     47,940       47,535  

Unearned ESOP shares, at cost, 269,430 and 288,675 shares at June 30, 2017 and 2016, respectively

     (2,694     (2,887

Retained earnings

     39,051       37,095  

Accumulated other comprehensive income (loss), net of tax

     (367     2,189  
  

 

 

   

 

 

 

Total stockholders’ equity

     83,969       83,972  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 585,474     $ 595,565  
  

 

 

   

 

 

 

 

F-4


Table of Contents

IF Bancorp, Inc.

Consolidated Statements of Income

Years Ended June 30, 2017 and 2016

(in thousands)

 

     2017      2016  

Interest Income

     

Interest and fees on loans

   $ 18,443      $ 17,055  

Securities

     

Taxable

     2,604        3,088  

Tax-exempt

     143        148  

Federal Home Loan Bank dividends

     104        67  

Deposits with financial institutions

     44        15  
  

 

 

    

 

 

 

Total interest and dividend income

     21,338        20,373  
  

 

 

    

 

 

 

Interest Expense