10-K 1 d700361d10k.htm 10-K 10-K
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, 2018

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, 2017 was $60,233,522.

The number of shares outstanding of the registrant’s common stock as of September 4, 2018 was 3,871,408.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on November 19, 2018 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      59  

ITEM 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      59  

ITEM 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      59  

ITEM 9A.

   CONTROLS AND PROCEDURES      59  

ITEM 9B.

   OTHER INFORMATION      60  

PART III

     61  

ITEM 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      61  

ITEM 11.

   EXECUTIVE COMPENSATION      61  

ITEM 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS      61  

ITEM 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE      62  

ITEM 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      62  

PART IV

     63  

ITEM 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      63  

ITEM 16.

   FORM 10-K SUMMARY      64  

SIGNATURES

     65  

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”).

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, 2018 and 2017, we had consolidated assets of $638.9 million and $585.5 million, consolidated deposits of $480.4 million and $439.1 million and consolidated equity of $81.7 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, consumer loans (consisting primarily of automobile loans), and, to a much lesser extent, 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, 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.

 

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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. In August 2018, we opened a new branch at 2411 Village Green Place, Champaign, Illinois. Our primary lending market includes the Illinois counties of Vermilion, Iroquois, Champaign and Kankakee, as well as the adjacent 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 2017, a decrease of 6.1% since April 2010, Vermilion County had an estimated population of 78,000 in July 2017, a decrease of 4.6% since April 2010, and Kankakee County had an estimated population of 110,000 in July 2017, a decrease of 3.4% since April 2010, while Champaign County had an estimated population of 209,000 in July 2017, an increase of 3.9% 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 4.1% to 3.8% in Iroquois County, from 6.8% to 6.0% in Vermilion County, from 4.8% to 4.7% in Champaign County, and from 5.4% to 4.9% 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 County and Kankakee 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, 2017, the latest date for which FDIC data is available, we ranked first of 12 bank and thrift institutions with offices in Iroquois County with a 25.32% deposit market share. As of the same date, we ranked first of 16 bank and thrift institutions with offices in Vermilion County with a 17.82% deposit market share, we ranked 22nd of 29 bank and thrift institutions with offices in Champaign County, with a 0.52% deposit market share and we ranked 18th of 18 bank and thrift institutions with offices in Kankakee County, with a 0.06% deposit market share.

 

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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, consumer loans (consisting primarily of automobile loans), and, to a much lesser extent, 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, 2018 and 2017, the amount of such loans equaled $5.9 million and $7.6 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, 2018 and 2017, the amount of such loans equaled $32.9 million and $38.5 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 savings associations 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 $95.8 million and $88.7 million as of June 30, 2018 and 2017, 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.

 

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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 $206,000, $186,000, $0, $93,000 and $313,000 at June 30, 2018, 2017, 2016, 2015 and 2014, respectively.

 

    At June 30,  
    2018     2017     2016     2015     2014  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  

Real estate loans:

         

One- to four-family (1)

  $ 134,977       27.99   $ 140,647       31.47   $ 149,538       33.29   $ 144,887       40.18   $ 149,548       44.75

Multi-family

    107,436       22.28       87,228       19.52       84,200       18.15       58,399       16.20       61,603       18.45  

Commercial

    140,944       29.22       133,841       29.94       119,643       26.64       103,614       28.74       83,134       24.89  

Home equity lines of credit

    9,058       1.88       7,520       1.68       8,138       1.81       7,713       2.14       7,824       2.34  

Construction

    13,763       2.85       7,421       1.66       19,698       4.39       471       0.13       338       0.10  

Commercial

    68,720       14.25       62,392       13.96       57,826       12.87       37,151       10.30       23,120       6.92  

Consumer

    7,366       1.53       7,905       1.77       10,086       2.25       8,325       2.31       8,509       2.55  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    482,264       100.00     446,954       100.00     449,129       100.00     360,560       100.00     333,986       100.00
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Less:

                   

Unearned fees and discounts, net

    (161       (203       30         155         104    

Allowance for loan losses

    5,945         6,835         5,351         4,211         3,958    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total loans, net

  $ 476,480       $ 440,322       $ 443,748       $ 356,194       $ 329,924    
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

(1)

Includes home equity loans.

 

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Table of Contents

Loan Portfolio Maturities and Yields. The following table summarizes the scheduled repayments of our loan portfolio at June 30, 2018. We had no demand loans or loans having no stated repayment schedule or maturity at June 30, 2018.

 

     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,

                    

2019

   $ 3,665        4.81   $ 5,000        4.61   $ 16,533        4.49   $ 661        5.19

2020

     7,748        6.37       5,982        3.99       22,175        3.83       370        4.84  

2021 to 2022

     11,878        4.80       34,705        3.92       44,203        4.28       1,655        4.62  

2023 to 2027

     23,002        4.79       52,072        4.28       44,302        4.51       1,606        4.97  

2028 to 2032

     10,128        4.46       3,327        4.42       8,528        4.23       2,938        4.50  

2033 and beyond

     78,556        4.11       6,350        4.45       5,203        4.50       1,828        4.35  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 134,977        4.46   $ 107,436        4.18   $ 140,944        4.31   $ 9,058        4.64
  

 

 

      

 

 

      

 

 

      

 

 

    
     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,

                    

2019

   $ 1,476        4.72   $ 40,327        5.42   $ 1,255        4.52   $ 68,917        5.07

2020

     —          —         2,946        4.61       892        6.57       40,113        4.47  

2021 to 2022

     8,284        4.90       13,745        4.71       3,148        5.52       117,618        4.36  

2023 to 2027

     3,741        4.90       7,835        4.96       2,071        4.07       134,629        4.51  

2028 to 2032

     —          —         3,258        4.22       —          —         28,179        4.36  

2033 and beyond

     262        4.95       609        3.75       —          —         92,808        4.16  
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 13,763        4.88   $ 68,720        5.12   $ 7,366        5.07   $ 482,264        4.47
  

 

 

      

 

 

      

 

 

      

 

 

    

 

(1)

Includes home equity loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at June 30, 2018 that are contractually due after June 30, 2019.

 

     Due After June 30, 2019  
     Fixed      Adjustable      Total  
     (In thousands)  

Real estate loans:

        

One- to four-family (1)

   $ 45,938      $ 85,374      $ 131,312  

Multi-family

     92,696        9,740        102,436  

Commercial

     107,759        16,652        124,411  

Home equity lines of credit

     3,198        5,199        8,397  

Construction

     3,324        8,963        12,287  

Commercial

     27,783        610        28,393  

Consumer

     6,111        —          6,111  
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 286,809      $ 126,538      $ 413,347  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

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Table of Contents

One- to Four-Family Residential Mortgage Loans. At June 30, 2018, $135.0 million, or 28.0% 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, 2018, fixed-rate one- to four-family residential mortgage loans totaled $49.2 million, or 36.5% of our one- to four-family residential mortgage loans, and adjustable-rate one- to four-family residential mortgage loans totaled $85.7 million, or 63.5% 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 $453,100 for single-family homes. At June 30, 2018, 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, 2018, $31.9 million, or 23.7%, of our total one- to four-family residential loans had principal balances in excess of $453,100. 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 $3.6 million and $6.5 million for the years ended June 30, 2018 and 2017, 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 $14.3 million and $13.9 million for the years ended June 30, 2018 and 2017, 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, 2018, approximately $1.7 million, or 1.2% 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, 2018, $140.9 million, or 29.2% of our loan portfolio consisted of commercial real estate loans, and $107.4 million, or 22.3% of our loan portfolio consisted of multi-family (which we consider to be five or more units) residential real estate loans. At June 30, 2018, 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, 2018, loans secured by commercial real estate had an average loan balance of $518,000. 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, 2018, $20.7 million or 14.7% 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, 2018, $10.1 million or 9.4% 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, 2018, our largest commercial real estate loan had an outstanding balance of $6.7 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 $11.3 million, was secured by multiple apartment buildings with a total of 353 units, 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 or secondary 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 balloon terms of five years. At June 30, 2018 we had $9.1 million, or 1.9% of our total loan portfolio in home equity lines of credit. At that date we had $5.5 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, 2018, we had $68.7 million of commercial business loans outstanding, representing 14.2% of our total loan portfolio. At that date, we also had $18.5 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, 2018, our largest commercial business loan outstanding was for $5.5 million and was secured by business equipment and assets. At June 30, 2018, 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, 2018, $13.8 million, or 2.9%, 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, 2018, 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, 2018 was for a 93 unit apartment building and had a principal balance of $5.5 million. This loan was performing in accordance with its terms at June 30, 2018.

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 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.

 

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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-released 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, 2018 and 2017, the amount of commercial loan participations totaled $32.9 million and $38.5 million, respectively, of which $11.0 million and $10.3 million, at June 30, 2018 and 2017 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, 2018 and 2017, we sold $17.9 million and $20.4 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.

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At June 30, 2018, 2017, 2016, 2015 and 2014, we had troubled debt restructurings of approximately $2.9 million, $3.1 million, $2.3 million, $2.6 million and $2.9 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 3 years of payments as agreed, but it is still listed as delinquent more than 120 days.

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     At June 30,  
     2018     2017     2016     2015     2014  
     (Dollars in thousands)  

Non-accrual loans:

          

Real estate loans:

          

One- to four-family (1)

   $ 6,339     $ 9,105     $ 1,604     $ 2,724     $ 2,146  

Multi-family

     116       146       185       240       296  

Commercial

     50       25       63       46       55  

Home equity lines of credit

     —         24       316       —         28  

Construction

     —         —         —         —         —    

Commercial

     30       84       9       21       29  

Consumer

     —         —         —         14       30  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-accrual loans

     6,535       9,384       2,177       3,045       2,584  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans delinquent 90 days or greater and still accruing:

          

Real estate loans:

          

One- to four-family (1)

     293       155       4       15       182  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity line of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Consumer

     1       —         8       7       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans delinquent 90 days or greater and still accruing

     294       155       12       22       182  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     6,829       9,539       2,189       3,067       2,766  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Performing troubled debt restructurings

     2,675       2,211       2,084       1,855       1,959  

Total non-performing loans and performing troubled debt restructurings

   $ 9,504     $ 11,750     $ 4,273     $ 4,922     $ 4,725  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other real estate owned and foreclosed assets:

          

Real estate loans:

          

One- to four-family (1)

     —         210       338       50       416  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         20  

Home equity lines of credit

     —         —         —         —         —    

Construction

     —         —         —         —         —    

Commercial

     219       219       —         —         —    

Consumer

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other real estate owned and foreclosed assets

     219       429       338       50       436  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 7,048     $ 9,968     $ 2,527     $ 3,117     $ 3,202  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Non-performing loans to total loans

     1.42     2.13     0.49     0.85     0.82

Non-performing assets to total assets

     1.10     1.70     0.42     0.55     0.58

 

(1)

Includes home equity loans.

For the years ended June 30, 2018 and 2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $554,000 and $142,000, respectively. We recognized no interest income on such loans for the years ended June 30, 2018 and 2017.

At June 30, 2018, our non-accrual loans totaled $6.5 million. These non-accrual loans consisted primarily of 6 one- to four-family residential loans with aggregate principal balances totaling $6.3 million with no specific allowances, 3 commercial real estate loans with aggregate principal balances totaling $50,000 and specific allowances of $3,000, 2 multi-family loans with aggregate principal balances totaling $116,000 with no specific allowances, and 1 commercial business loan with a principal balance of $30,000 and no specific allowance.

 

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The $6.3 million of non-accrual one- to four-family loans at June 30, 2018 was related to one credit relationship. In June 2017, a $7.8 million loan 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. As of June 30, 2018, we have accrued real estate taxes of $577,000 and we have charged off $1.5 million of the credit to reflect the net realizable value of the properties. In July of 2018, we charged off the remaining $6.3 million of this loan and the 45 properties with an aggregate value of $6.3 million were moved to foreclosed assets held for sale.

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, 2018 and 2017, we had $2.9 million and $3.1 million, respectively, of troubled debt restructurings. At June 30, 2018 our troubled debt restructurings consisted of $1.6 million of residential one- to four-family mortgage loans, $1.2 million of multi-family real estate loans, $17,000 of commercial real estate loans, $26,000 of home equity lines of credit loans, $30,000 of commercial business loans, and $3,000 of consumer loans, all of which were impaired.

For the years ended June 30, 2018 and 2017, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $176,000 and $163,000, respectively. We recognized interest income of $137,000 and $136,000 on such modified loans for the years ended June 30, 2018 and 2017, 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, 2018

                 

Real estate loans:

                 

One- to four-family (1)

     4        207        10        6,633        14        6,840  

Multi-family

     —          —          1        2        1        2  

Commercial

     1        13        2        37        3        50  

Home equity lines of credit

     1        23        —          —          1        23  

Construction

     —          —          —          —          —          —    

Commercial

     —          —          1        30        1        30  

Consumer

     2        29        1        1        3        30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     8      $ 272        15      $ 6,703        23      $ 6,975  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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        2,379  

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

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Total delinquent loans increased by $6.2 million to $7.0 million at June 30, 2018 from $812,000 at June 30, 2017. The increase in delinquent loans was due primarily to an increase of $6.1 million in one- to four-family loans, an increase of $30,000 in commercial business loans, and an increase of $24,000 in consumer loans, partially offset by a decrease of $34,000 in commercial real estate loans.

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, 2018, we had $219,000 in foreclosed assets compared to $429,000 as of June 30, 2017. Foreclosed assets at June 30, 2018, consisted of $219,000 in commercial nonoccupied property, while foreclosed assets at June 30, 2017, consisted of $210,000 in residential real estate property and $219,000 in commercial nonoccupied 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, 2018 and 2017, include approximately $6.8 million and $9.5 million of nonperforming loans, respectfully. The related specific valuation allowance in the allowance for loan losses for such nonperforming loans was $3,000 and $1.5 million at June 30, 2018 and 2017, respectively. Substandard assets shown include foreclosed assets.

 

     At June 30,  
     2018      2017  
     (In thousands)  

Classified assets:

     

Substandard

   $ 2,617      $ 10,887  

Doubtful

     6,332        —    

Loss

     —          —    
  

 

 

    

 

 

 

Total classified assets

     8,949        10,887  

Watch

     2,294        4,323  
  

 

 

    

 

 

 

Total criticized assets

   $ 11,243      $ 15,210  
  

 

 

    

 

 

 

At June 30, 2018, substandard assets consisted of $1.3 million of one- to four-family residential mortgage loans, $116,000 in multi-family loans, $50,000 in commercial real estate loans, $23,000 in home equity lines of credit, $941,000 in commercial business loans, $3,000 in consumer loans, and $219,000 of foreclosed assets held for sale. At June 30, 2018, watch assets consisted of $1.1 million of commercial real estate loans, and $1.2 million of commercial business loans, while doubtful assets consisted of $6.3 million in one- to four-family residential

 

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mortgage loans and $30,000 in commercial business loans. In July 2018, the $6.3 million of one- to four-family loans classified as doubtful were moved to foreclosed assets held for sale in July 2018. The remaining $6.3 million of value of these loans was charged off upon the transfer to foreclosed assets. At June 30, 2018, no assets were classified as loss.

Other Loans of Concern. At June 30, 2018, 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 $14.3 million in loans under this program in the year ended June 30, 2018, and we continue to service approximately $34.3 million of these loans, for which our maximum potential credit risk is approximately $1.6 million. From June 2000 to June 30, 2018, we experienced only $170,000 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; educational loans; 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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The allowance for loan losses decreased $890,000 to $5.9 million at June 30, 2018, from $6.8 million at June 30, 2017. The decrease was a result of net charge-offs of $1.7 million, partially offset by an increase in outstanding loans and corresponding provision expense, and was necessary in order to bring the allowance for loan losses to a level that reflects management’s estimate of the probable loss in the Company’s loan portfolio at June 30, 2018.

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 has 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, 2018 and June 30, 2017:

 

Portfolio segment

   June 30, 2018
Net charge-offs –
12 quarter weighted  historical
    June 30, 2017
Net charge-offs –
12 quarter weighted  historical
 

Real Estate:

 

One- to four-family

     0.65     0.12

Multi-family

     —       —  

Commercial

     —       —  

HELOC

     0.23     0.17

Construction

     —       —  

Commercial business

     0.02     —  

Consumer

     0.04     0.05

Entire portfolio total

     0.20     0.05

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, 2018
    Qualitative factor applied at
June 30, 2017
 

Real Estate:

 

One- to four-family

     0.13     0.64

Multi-family

     1.56     1.56

Commercial

     1.21     1.20

HELOC

     0.77     0.84

Construction

     1.22     1.01

Commercial business

     1.98     1.99

Consumer

     0.74     0.76

Entire portfolio total

     1.05     1.17

At June 30, 2018, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $5.1 million, as compared to $5.2 million at June 30, 2017. The general decrease in qualitative factors was attributable primarily to actual losses versus minimum expected losses already factored.

 

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While management believes that our asset quality remains strong, it recognizes that, due to the continued growth in the loan portfolio, the increase in troubled debt restructurings and the potential changes in market conditions, our level of nonperforming assets and resulting 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,  
     2018     2017     2016     2015     2014  
     (Dollars in thousands)  

Balance at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs:

          

Real estate loans:

          

One- to four-family (1)

     (1,608     (232     (188     (231     (418

Multi-family

     —         —         —         —         —    

Commercial

     —         (8     (3     —         (28

Home equity lines of credit

     (24     —         (32     (35     (16

Construction

     —         —         —         —         —    

Commercial

     (30     —         —         —         (38

Consumer

     (14     (35     (10     (12     (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     (1,676     (275     (233     (278     (538

Recoveries:

          

Real estate loans:

          

One- to four-family (1)

     1       32       5       29       50  

Multi-family

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Home equity lines of credit

     —         —         —         13       —    

Construction

     —         —         —         —         —    

Commercial

     —         —         —         —         —    

Consumer

     8       6       2       29       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     9       38       7       71       56  

Net charge-offs

     (1,667     (237     (226     (207     (482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     777       1,721       1,366       460       502  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 5,945     $ 6,835     $ 5,351     $ 4,211     $ 3,958  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

          

Net charge-offs to average loans outstanding

     0.35     0.05     0.05     0.01     0.15

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

     87.06     71.66     244.39     137.30     143.10

Allowance for loan losses to total loans at end of period

     1.23     1.53     1.19     1.17     1.18

 

(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,  
     2018     2017     2016  
     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)

   $ 997        28.0   $ 2,519        31.5   $ 1,198        33.3

Multi-family

     1,650        22.3       1,336        19.5       1,202        18.8  

Commercial

     1,604        29.2       1,520        29.9       1,399        26.6  

Home equity lines of credit

     91        1.9       76        1.7       94        1.8  

Construction

     168        2.9       75        1.6       227        4.4  

Commercial

     1,373        14.2       1,242        14.0       1,140        12.9  

Consumer

     62        1.5       67        1.8       91        2.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     5,945          6,835          5,351     

Unallocated

     —            —            —       
  

 

 

      

 

 

      

 

 

    

Total

   $ 5,945        100.0   $ 6,835        100.0   $ 5,351        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes home equity loans.

 

     At June 30,  
     2015     2014  
     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)

   $ 1,216        40.2   $ 1,391        44.6

Multi-family

     827        16.2       842        18.4  

Commercial

     1,246        28.8       968        24.8  

Home equity lines of credit

     85        2.1       111        2.3  

Construction

     6        0.1       10        0.5  

Commercial

     744        10.3       543        6.9  

Consumer

     87        2.3       93        2.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total allocated allowance

     4,211          3,958     

Unallocated

     —            —       
  

 

 

      

 

 

    

Total

   $ 4,211        100.0   $ 3,958        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Includes home equity loans.

Net charge-offs increased from $237,000 for the year ended June 30, 2017 to $1.7 million for the year ended June 30, 2018, with most of the charge-offs during both periods involving one- to four-family residential real estate loans. In addition, non-performing loans decreased by $2.7 million during the year ended June 30, 2018.

The allowance for loan losses decreased $890,000, or 13.0%, to $5.9 million at June 30, 2018 from $6.8 million at June 30, 2017. The decrease was based on the amount in charge-offs, partially offset by an increase in the loan portfolio and the change in loan portfolio composition. At June 30, 2018, the allowance for loan losses represented 1.23% of total loans compared to 1.53% of total loans at June 30, 2017.

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

 

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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, 2018, 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.

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, 2018, we held $3.1 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, 2018, we held $3.3 million of Federal Home Loan Bank of Chicago common stock in connection with our borrowing activities totaling $67.5 million. The common stock of the Federal Home Loan Bank is carried at cost and classified as a restricted equity security.

 

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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, 2018, we had $8.8 million invested in bank-owned life insurance, which was 11.1% 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, 2018, 2017 and 2016 all of such securities were classified as available for sale.

 

     At June 30,  
     2018      2017      2016  
     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

   $ 24,757      $ 23,922      $ 25,230      $ 25,035      $ 87,193      $ 90,105  

U.S. government sponsored mortgage-backed securities

     100,534        97,059        81,088        80,962        26,418        27,245  

Small Business Administration

     1,965        1,891        2,048        2,032        —          —    

State and political subdivisions

     2,980        3,124        3,274        3,582        3,431        3,978  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 130,236      $ 125,996      $ 111,640      $ 111,611      $ 117,042      $ 121,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at June 30, 2018 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

   $ —          —     $ 8,778        2.09   $ 15,979        2.75   $ —          —     $ 24,757      $ 23,922        2.52

U.S. government sponsored mortgage-backed securities

     —          —         1,914        2.50       40,608        2.59       58,012        2.60       100,534        97,059        2.60  

Small Business Administration

     —          —         —          —         1,965        2.65       —          —         1,965        1,891        2.65  

State and political subdivisions

     134        3.32       1,150        6.11       63        4.83       1,633        3.25       2,980        3,124        4.39  
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

Total

   $ 134        3.32   $ 11,842        3.04   $ 58,615        2.64   $ 59,645        2.62   $ 130,236      $ 125,996        2.62
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

    

 

 

    

 

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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 or non-brokered certificates of deposit obtained through an internet listing service. At June 30, 2018, we had $34.3 million in brokered certificates of deposit and $12.9 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, 2018
    For the Fiscal Year Ended
June 30, 2017
 
     Average
Balance
     Percent     Weighted
Average
Rate
    Average
Balance
     Percent     Weighted
Average
Rate
 
     (Dollars in thousands)  

Deposit type:

              

Noninterest bearing demand

   $ 21,029        4.53     0.00   $ 19,011        4.43     0.00

Interest-bearing checking or NOW

     46,299        9.98       0.14       44,080        10.28       0.09  

Savings accounts

     43,159        9.31       0.24       40,191        9.38       0.12  

Money market accounts

     96,984        20.92       0.88       75,736        17.67       0.26  

Certificates of deposit

     256,250        55.26       1.34       249,689        58.24       1.04  
  

 

 

    

 

 

     

 

 

    

 

 

   

Total deposits

   $ 453,721        100.00     0.96   $ 428,707        100.00     0.67
  

 

 

    

 

 

     

 

 

    

 

 

   

 

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

Deposit type:

       

Noninterest bearing demand

   $ 18,760        4.51     0.00

Interest-bearing checking or NOW

     40,852        9.82       0.09  

Savings accounts

     38,399        9.24       0.13  

Money market accounts

     72,118        17.34       0.19  

Certificates of deposit

     245,699        59.09       0.88  
  

 

 

    

 

 

   

Total deposits

   $ 415,828        100.00     0.57
  

 

 

    

 

 

   

 

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As of June 30, 2018, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $110.5 million. The following table sets forth the maturity of those certificates as of June 30, 2018.

 

     At
June 30, 2018
 
     (In thousands)  

Three months or less

   $ 20,869  

Over three months through six months

     13,994  

Over six months through one year

     39,220  

Over one year to three years

     30,672  

Over three years

     5,714  
  

 

 

 

Total

   $ 110,469  
  

 

 

 

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

 

     At June 30,  
     2018      2017      2016  
     (In thousands)  

Interest Rate:

        

Less than 2.00%

   $ 216,275      $ 242,262      $ 257,237  

2.00% to 2.99%

     45,565        5,531        747  

3.00% to 3.99%

     1,740        —          —    

4.00% to 4.99%

     —          —          —    

5.00% to 5.99%

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

   $ 263,580      $ 247,793      $ 257,984  
  

 

 

    

 

 

    

 

 

 

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Chicago and repurchase agreements. At June 30, 2018, we had access to additional Federal Home Loan Bank of Chicago advances of up to $142.3 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,  
     2018     2017     2016  
     (Dollars in thousands)  

Federal Home Loan Bank of Chicago

      

Balance at end of period

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

Average balance during period

     61,374       64,622       64,000  

Maximum outstanding at any month end

     67,500       74,000       75,500  

Weighted average interest rate at end of period

     1.88     1.02     1.57

Average interest rate during period

     1.34     1.10     1.43

Repurchase Agreements

      

Balance at end of period

   $ 2,281     $ 2,183     $ 4,392  

Average balance during period

     2,623       3,277       5,111  

Maximum outstanding at any month end

     2,980       4,817       5,776  

Weighted average interest rate at end of period

     0.94     0.38     0.45

Average interest rate during period

     0.63     0.42     0.42

 

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Personnel

At June 30, 2018, the Association had 102 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. The 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 subject to examination and regulation by the OCC, and is also subject to examination by the 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. Iroquois Federal also is a member of and owns stock in the FHLB-Chicago, which is one of the 11 regional banks in the Federal Home Loan Bank System.

Under this system of regulation, the regulatory authorities have extensive discretion in connection with their supervisory, enforcement, rulemaking and examination activities and policies, including rules or policies that: establish minimum capital levels; restrict the timing and amount of dividend payments; govern the classification of assets; determine the adequacy of loan loss reserves for regulatory purposes; and establish the timing and amounts of assessments and fees. Moreover, as part of their examination authority, the banking regulators assign numerical ratings to banks and savings institutions relating to capital, asset quality, management, liquidity, earnings and other factors. The receipt of a less than satisfactory rating in one or more categories may result in enforcement action by the banking regulators against a financial institution. A less than satisfactory rating may also prevent a financial institution, such as Iroquois Federal or its holding company, from obtaining necessary regulatory approvals to access the capital markets, pay dividends, acquire other financial institutions or establish new branches.

In addition, we must comply with significant anti-money laundering and anti-terrorism laws and regulations, Community Reinvestment Act laws and regulations, and fair lending laws and regulations. Government agencies have the authority to impose monetary penalties and other sanctions on institutions that fail to comply with these laws and regulations, which could significantly affect our business activities, including our ability to acquire other financial institutions or expand our branch network.

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.

Any change in applicable laws or regulations, whether by the OCC, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the operations and financial performance of IF Bancorp and Iroquois.

Set forth below is a brief description of material regulatory requirements that are applicable to Iroquois Federal and IF Bancorp. The description is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Irquois Federal and IF Bancorp.

 

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Table of Contents

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Iroquois Federal may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Iroquois Federal 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 federally insured depository institutions 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 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 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.

Legislation enacted in May 2018 requires the federal banking agencies, including the OCC, to establish for institutions with assets of less than $10 billion of assets a “community bank leverage ratio” of between 8 to 10%. Institutions with capital meeting the specified requirement will be considered to comply with the applicable regulatory capital requirements, including the risk-based requirements. The establishment of the community bank leverage ratio is subject to notice and comment rulemaking by the federal regulators.

At June 30, 2018, 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 savings associations 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)

 

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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, 2018, 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, 2018, Iroquois Federal held 72.95% 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;

 

   

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

 

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conversion to stock form. In addition, Iroquois Federal’s ability to pay dividends is now 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.

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.

 

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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.

Interstate Banking and Branching. Federal law permits well capitalized and well managed holding companies to acquire banks in any state, subject to Federal Reserve Board approval, certain concentration limits and other specified conditions. Interstate mergers of banks are also authorized, subject to regulatory approval and other specified conditions. In addition, among other things, recent amendments made by the Dodd-Frank Act permit banks to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for the banks chartered by that state.

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.

 

   

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, 2018, 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.

 

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Assessments for institutions with less than $10 billion of assets, such as Iroquois Federal, are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years, with institutions deemed less risky paying lower assessments. That system, effective July 1, 2016, replaced a previous system under which institutions were placed into risk categories.

The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the risk-based assessment range (inclusive of possible adjustments) at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund’s reserve ratio achieving 1.15%, the assessment range was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points, effective July 1, 2016. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s deposits.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, which has exercised that discretion by establishing a long range fund ratio of 2%.

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 by 2019. For the quarter ended June 30, 2018, the annualized FICO assessment was equal to 0.44 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.

USA Patriot Act. Iroquois Federal is subject to the USA PATRIOT Act, which gives federal agencies additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act contains provisions intended to encourage information sharing among bank regulatory agencies and law enforcement bodies and imposes affirmative obligations on financial institutions, such as enhanced recordkeeping and customer identification requirements.

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.

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, 2018, Iroquois Federal was in compliance with this requirement.

 

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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, 2018, 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 of 1975, 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 of 1978, 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.

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;

 

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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, 2018, 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.

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

 

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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 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. Legislation enacted in 2018 directed the Federal Reserve Board to expand the applicability of the exception to holding companies of up to $3.0 billion of consolidated assets.

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

We intend to continue to grow our commercial real estate, multi-family and commercial business loans and increase these loans as a percentage of our total loan portfolio. As a result, our credit risk will continue to increase, and downturns in the local real estate market or economy could have a more severe adverse effect on our earnings.

We intend to continue growing our portfolio of commercial real estate, multi-family and commercial business loans. Historically, we operated as a traditional thrift institution. At June 30, 2007, 78.8% of our loan portfolio, consisted of longer-term, one- to four-family residential real estate loans. Since then we have emphasized the origination of our commercial loans. At June 30, 2018, $140.9 million, or 29.2%, of our total loan portfolio consisted of commercial real estate loans, $107.4 million, or 22.3%, of our total loan portfolio consisted of multi-family loans, and $68.7 million, or 14.2%, 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.

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, 2018, 11.3% of our loans had remaining maturities of, or reprice after, 5 years or longer, while 59.9% 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.”

 

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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.

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.

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.

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.

We may be adversely affected by recent changes in U.S. tax laws.

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans and for home equity loans, (ii) a limitation on the deductibility of business interest expense and (iii) a limitation on the deductibility of property taxes and state and local income taxes.

 

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The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could materially adversely affect our business, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

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

We face intense competition in making loans and attracting deposits. Price competition from other financial institutions, credit unions, money market and mutual funds, insurance companies, and other non-traditional competitors such as financial technology companies for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. Our competitors also may price loan and deposit products aggressively when they enter into new lines of business or new market areas. We expect competition to increase in the future as a result of legislative, regulatory, and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to compete effectively in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.

Our funding sources may prove insufficient to replace deposits and support our future growth.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These additional sources consist primarily of FHLB advances, certificates of deposit and brokered certificates of deposit and, to a lesser extent, repurchase agreements. As we continue to grow, we are likely to become more dependent on these sources. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.

 

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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, 2018, our loan participations totaled $32.9 million, or 6.8% 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.

If our non-performing loans and other non-performing assets increase, or the value of our foreclosed assets decreases our earnings will decrease.

At June 30, 2018, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent and still accruing, and real estate owned) totaled $7.0 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. In July of 2018, we charged off $6.3 million of these loans and the 45 properties with an aggregate value of $6.3 million were moved to foreclosed assets held for sale. The fair value of these foreclosed assets is the estimated 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. If we have overestimated the fair value of these assets, or if we are unable to quickly sell the properties, our earnings will be negatively impacted.

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 1.23% of total loans at June 30, 2018. 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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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 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.

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.

 

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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.

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. In the year ended June 30, 2018, we purchased a building at 2411 Village Green Place, Champaign, Illinois, which served as a satellite office until opening as a branch in August, 2018. The net book value of our premises, land and equipment was $10.2 million at June 30, 2018. The following tables set forth information with respect to our banking offices, including the expiration date of leases with respect to leased facilities.

 

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
April 30,
2019)

Champaign Satellite Office:

     

2411 Village Green Place

Champaign, Illinois 61822

   2018    Owned

 

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 2018:         

First Quarter

   $ 20.42      $ 19.31      $ 0.10  

Second Quarter

   $ 20.00      $ 19.10        —    

Third Quarter

   $ 20.45      $ 19.21      $ 0.10  

Fourth Quarter

   $ 24.65      $ 19.90        —    

 

     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        —    

Holders.

As of September 4, 2018, there were 388 holders of record of the Company’s common stock.

Dividends.

The Company paid dividends of $0.10 per share in October 2017 and April 2018, and $0.08 per share in 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, 2018.

 

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)
 

4/1/18 – 4/30/18

     20,000      $ 20.00        20,000        58,050  

5/1/18 – 5/31/18

     —          —          —          58,050  

6/1/18 – 6/30/18

     —          —          —          58,050  
  

 

 

       

 

 

    

Total

     20,000      $ 20.00        20,000     
  

 

 

       

 

 

    

 

(1)

The Company announced a new stock repurchase plan on February 5, 2016, whereby the Company could repurchase up to 200,703 shares of its common stock, or approximately 5% of its then outstanding shares. There were 20,000 shares of the Company’s common stock repurchased by the Company during the three months ended June 30, 2018, and there were 58,050 shares yet to be repurchased under the plan as of June 30, 2018.

 

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ITEM 6.

SELECTED FINANCIAL DATA

 

     At June 30,  
     2018      2017      2016      2015      2014  
     (In thousands)  

Selected Financial Condition Data:

              

Total assets

   $ 638,923      $ 585,474      $ 595,565      $ 563,668      $ 551,343  

Cash and cash equivalents

     4,754        7,766        6,449        13,224        12,731  

Investment securities available for sale

     125,996        111,611        121,328        170,630        184,586  

Federal Home Loan Bank of Chicago stock

     3,285        2,543        5,425        5,425        5,425  

Loans held for sale

     206        186        —          93        313  

Loans receivable, net

     476,274        440,136        443,748        356,101        329,611  

Real estate owned

     219        429        338        50        436  

Bank-owned life insurance

     8,803        8,823        8,555        8,289        8,025  

Deposits

     480,421        439,146        433,708        415,544        404,593  

Federal Home Loan Bank of Chicago advances

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

Total equity

     81,675        83,969        83,972        80,436        82,086  

 

     For the Fiscal Year Ended June 30,  
     2018      2017      2016      2015      2014  
     (In thousands)  

Selected Operating Data:

              

Interest income

   $ 22,794      $ 21,338      $ 20,373      $ 18,895      $ 18,961  

Interest expense

     5,289        3,617        3,313        3,226        3,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     17,505        17,721        17,060        15,669        15,813  

Provision for loan losses

     777        1,721        1,366        460        502  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     16,728        16,000        15,694        15,209        15,311  

Noninterest income

     4,115        4,728        4,095        3,320        3,068  

Noninterest expense

     16,380        14,535        14,209        13,420        13,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     4,463        6,193        5,580        5,109        5,339  

Income tax expense

     2,725        2,274        2,014        1,835        1,862  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,738      $ 3,919      $ 3,566      $ 3,274      $ 3,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     At or For the Fiscal Years Ended June 30,  
     2018     2017     2016     2015     2014  

Selected Financial Ratios and Other Data:

          

Performance Ratios:

          

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

     0.28     0.67     0.62     0.60     0.62

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

     2.09     4.69     4.35     3.92     4.26

Interest rate spread (1)

     2.77     3.02     3.00     2.87     2.83

Net interest margin (2)

     2.93     3.14     3.11     2.98     2.94

Efficiency ratio (3)

     75.76     64.75     67.17     70.67     69.06

Dividend payout ratio

     42.55     15.09     13.54     12.05     11.90

Noninterest expense to average total assets

     2.66     2.48     2.49     2.45     2.33

Average interest-earning assets to average interest-bearing liabilities

     118.01     118.30     117.85     117.98     117.24

Average equity to average total assets

     13.48     14.27     14.33     15.21     14.61

Asset Quality Ratios:

          

Non-performing assets to total assets

     1.10     1.70     0.42     0.55     0.58

Non-performing loans to total loans

     1.42     2.13     0.49     0.85     0.82

Allowance for loan losses to non-performing loans

     87.06     71.66     244.39     137.30     143.10

Allowance for loan losses to total loans

     1.23     1.53     1.19     1.17     1.18

Net charge-offs (recoveries) to average loans

     0.35     0.05     0.05     0.01     0.15

Capital Ratios:

          

Total capital (to risk-weighted assets):

          

Company

     18.48     20.09     19.7     23.2     26.3

Association

     16.1     16.9     16.1     19.3     21.9

Tier 1 capital (to risk-weighted assets):

          

Company

     17.3     18.8     18.5     22.0     25.1

Association

     14.9     15.7     14.9     18.2     20.7

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

          

Company (4)

     17.3     18.8     18.5     22.0    

Association (4)

     14.9     15.7     14.9     18.2    

Tier 1 capital (to adjusted total assets):

          

Company

     13.4     14.3     14.4     14.5     14.7

Association

     11.5     12.0     11.1     11.9     12.1

Tangible capital (to adjusted total assets):

          

Company

     13.4     14.3     14.4     14.5     14.7

Association

     11.5     12.0     11.1     11.9     12.1

Other Data:

          

Number of full service offices

     6       6       5       5       5  

Full time equivalent employees

     104       100       95       98       95  

 

(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 $638.9 million in assets at June 30, 2018 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.

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on our interest-bearing liabilities, consisting primarily of savings and transaction accounts, certificates of deposit, repurchase agreements, and Federal Home Loan Bank of Chicago advances. Our results of operations also are affected by our provision for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of customer service fees, brokerage commission income, insurance commission income, net realized gains on loan sales, mortgage banking income, and income on bank-owned life insurance. Noninterest expense consists primarily of compensation and benefits, occupancy and equipment, data processing, professional fees, marketing, office supplies, federal deposit insurance premiums, and foreclosed assets. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) was 2.77% and 3.02% for the year ended June 30, 2018 and 2017, respectively. Net interest income decreased to $17.5 million for the year ended June 30, 2018, from $17.7 million for the year ended June 30, 2017.

Our net income for the year ended June 30, 2018 was $1.7 million, compared to a net income of $3.9 million for the year ended June 30, 2017. The year ended June 30, 2018 included an additional $1.3 million income tax expense due to a downward adjustment to our net deferred tax asset (“DTA”) related to the Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017. The Tax Act provides for a reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018, which resulted in the downward adjustment to our DTA. The decrease in net income for the year ended June 30, 2018 was also impacted by a $1.8 million increase in noninterest expense, a $613,000 decrease in noninterest income, and a $216,000 decrease in net interest income, partially offset by a $944,000 decrease in the provision for loan losses. Excluding the $1.3 million impact of the adjustment to the DTA, the Company’s net income for the year ended June 30, 2018 would have been $3.1 million, or a decrease of $864,000 from the year ended June 30, 2017. Management believes that presenting net income on a non-GAAP basis excluding the impact of the adjustment to the DTA in the year ended June 30, 2018 provides useful information for evaluating the Company’s operating results and any related trends that may be affecting the Company’s business. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets. However, 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. As of June 30, 2018, we have accrued real estate taxes of $577,000 and we have charged off $1.5 million of the credit to reflect the net realizable value of the properties. Subsequent to our June 30, 2018 year-end, these 45 properties with an aggregate value of $6.3 million, were moved to foreclosed assets held for sale in July 2018. Our non-performing loans totaled $6.8 million, or 1.4% of total loans at June 30, 2018 and $9.5 million or 2.1% of total loans at June 30, 2017. Our non-performing assets totaled $7.0 million or 1.1% of total assets at June 30, 2018, and $10.0 million, or 1.7% of assets at June 30, 2017.

 

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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 savings associations 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.

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.

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.”

 

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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 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, 2018 and no valuation allowance was necessary.

The Tax Cuts and Jobs Act, enacted on December 22, 2017, provides for a reduction in the federal corporate income rate from 35% to 21% effective January 1, 2018. As a result, our blended federal corporate income tax rate for the year ended June 30, 2018 was 27.6%.

Comparison of Financial Condition at June 30, 2018 and June 30, 2017

Total assets increased $53.4 million, or 9.1%, to $638.9 million at June 30, 2018 from $585.5 million at June 30, 2017. The increase was primarily due to a $36.2 million increase in net loans, a $14.4 million increase in investments, and a $4.4 million increase in premises and equipment, partially offset by a $3.0 million decrease in cash and cash equivalents.

Net loans receivable, including loans held for sale, increased by $36.2 million, or 8.2%, to $476.5 million at June 30, 2018 from $440.3 million at June 30, 2017. The increase in net loans receivable during this period was due primarily to a $20.2 million, or 23.2%, increase in multi-family loans, a $7.1 million, or 5.3%, increase in

 

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commercial real estate loans, a $1.5 million, or 20.5%, increase in home equity lines of credit, a $6.3 million, or 85.5%, increase in construction loans, and a $6.3 million, or 10.1%, increase in commercial business loans, partially offset by a $5.7 million, or 4.0%, decrease in one- to four-family loans, and a $539,000, or 6.8%, decrease in consumer loans.

Investment securities, consisting entirely of securities available for sale, increased $14.4 million, or 12.9%, to $126.0 million at June 30, 2018 from $111.6 million at June 30, 2017. We had no held-to-maturity securities at June 30, 2018 or June 30, 2017.

Compared to June 30, 2017, as of June 30, 2018, premises and equipment increased $4.4 million to $10.2 million, deferred income taxes increased $282,000 to $4.0 million, mortgage servicing rights increased $156,000 to $866,000, accrued interest receivable increased $282,000 to $1.8 million, Federal Home Loan Bank (FHLB) stock increased $742,000 to $3.3 million, and other assets increased $300,000 to $720,000, while foreclosed assets held for sale decreased $210,000 to $219,000. The increase in premises and equipment was mostly due to the purchase of an office building, furniture and equipment for our newest office in Champaign, 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 accrued interest receivable was due to increase in both our loan and investment portfolios, while the increase in FHLB stock was due to an increase in FHLB advances. The increase in other assets resulted from an increase in accounts receivable general at June 30, 2018. The decrease in foreclosed assets held for sale was due to a decrease in the number of properties owned.

At June 30, 2018, our investment in bank-owned life insurance was $8.8 million, a decrease of $20,000 from $8.8 million at June 30, 2017. The decrease in bank-owned life insurance was due to a decrease in cash surrender value of bank-owned life insurance as a result of a benefit claim. 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, 2018, our investment of $8.8 million in bank-owned life insurance was 11.1% of our Tier 1 capital plus our allowance for loan losses.

Deposits increased $41.3 million, or 9.4%, to $480.4 million at June 30, 2018 from $439.1 million at June 30, 2017. Savings, NOW, and money market accounts increased $24.3 million, or 14.2%, to $195.5 million, and noninterest bearing demand accounts increased $1.2 million, or 6.0%, to $21.4 million, while certificates of deposit, excluding brokered certificates of deposit, increased $20.2 million, or 9.7%, to $229.2 million, and brokered certificates of deposit decreased $4.4 million, or 11.4%, to $34.3 million. Repurchase agreements increased $98,000 to $2.3 million.

Advances from the Federal Home Loan Bank of Chicago increased $14.0 million, or 26.2%, to $67.5 million at June 30, 2018 from $53.5 million at June 30, 2017.

Total equity decreased $2.3 million, or 2.7%, to $81.7 million at June 30, 2018 from $84.0 million at June 30, 2017. Equity decreased due to a $2.7 million decrease in accumulated other comprehensive income (loss), net of tax, the repurchase of 69,000 shares of common stock at an aggregate cost of approximately $1.4 million, and the payment of approximately $730,000 in dividends to our shareholders, partially offset by net income of $1.7 million and ESOP and stock equity plan activity of $613,000. The decrease in other accumulated comprehensive income (loss) was primarily due to unrealized depreciation on available-for-sale securities, net of taxes. The Company adopted ASU 2018-02, which allowed for the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company announced a stock repurchase plan on February 5, 2016, whereby the Company could repurchase up to 200,703 shares of its common stock, or approximately 5% of its then current outstanding shares. As of June 30, 2018, there were 58,050 shares yet to be repurchased under the plan.

 

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Comparison of Operating Results for the Years Ended June 30, 2018 and 2017

General. Net income decreased $2.2 million, or 55.7%, to $1.7 million net income for the year ended June 30, 2018 from $3.9 million net income for the year ended June 30, 2017. The decrease was primarily due to a decrease in net interest income, a decrease in noninterest income, an increase in noninterest expense and an increase in income tax expense, partially offset by a decrease in provision for loan losses.

Net Interest Income. Net interest income decreased by $216,000, or 1.2%, to $17.5 million for the year ended June 30, 2018 from $17.7 million for the year ended June 30, 2017. The decrease was due to an increase of $1.7 million in interest expense, partially offset by an increase of $1.5 million in interest and dividend income. A $33.0 million, or 5.8%, increase in the average balance of interest earning assets was partially offset by a $29.1 million, or 6.1%, increase in the average balance of interest bearing liabilities. Our interest rate spread decreased 25 basis points to 2.77% for the year ended June 30, 2018 from 3.02% for the year ended June 30, 2017, and our net interest margin decreased by 21 basis points to 2.93% for the year ended June 30, 2018 from 3.14% for the year ended June 30, 2017. The decrease in spread and margin was primarily due to the increasing interest rate environment, as our interest earning assets repriced more slowly than our interest bearing liabilities.

Interest and Dividend Income. Interest and dividend income increased $1.5 million, or 6.8%, to $22.8 million for the year ended June 30, 2018 from $21.3 million for the year ended June 30, 2017. The increase in interest income was due to a $1.2 million increase in interest income on loans, a $206,000 increase in interest income on securities, and a $77,000 increase in other interest income. An increase of $1.2 million, or 6.4%, in interest on loans resulted from a $24.0 million, or 5.4%, increase in the average balance of loans to $469.7 million for the year ended June 30, 2018, and a 4 basis point, or 0.9%, increase in the average yield on loans to 4.18% from 4.14%. Interest on securities increased $206,000, or 7.5%, due to an $8.4 million increase in the average balance of securities to $118.9 million at June 30, 2018 from $110.5 million at June 30, 2017, partially offset by a 1 basis point, or 0.4%, decrease in the average yield on securities to 2.48% for the year ended June 30, 2018 from 2.49% for the year ended June 30, 2017.

Interest Expense. Interest expense increased $1.7 million, or 46.2%, to $5.3 million for the year ended June 30, 2018 from $3.6 million for the year ended June 30, 2017. 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 $1.6 million, or 53.9%, to $4.5 million for the year ended June 30, 2018, from $2.9 million for the year ended June 30, 2017. This increase was primarily due to an increase in the average balance of interest-bearing deposits to $442.7 million for the year ended June 30, 2018, from $409.7 million for the year ended June 30, 2017, and also a 30 basis point, or 42.5% increase in the average cost of interest-bearing deposits to 1.01% from 0.71%.

Interest expense on borrowings, including FHLB advances and repurchase agreements, increased $113,000, or 15.6%, to $839,000 for the year ended June 30, 2018 from $726,000 for the year ended June 30, 2017. This increase was due to a 24 basis point increase in the average cost of such borrowings to 1.31% for the year ended June 30, 2018 from 1.07% for the year ended June 30, 2017, partially offset by a $3.9 million, or 5.8%, decrease in the average balance of borrowings to $64.0 million for the year ended June 30, 2018 from $67.9 million for the year ended June 30, 2017.

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 $777,000 for the year ended June 30, 2018, compared to a provision for loan losses of $1.7 million for the year ended June 30, 2017. The allowance for loan losses was $5.9 million, or 1.23% of total loans, at June 30, 2018, compared to $6.8 million, or 1.53% of total loans, at June 30, 2017. Non-performing loans decreased during the year ended June 30, 2018, to $6.8 million, from $9.5 million at June 30, 2017. During the year ended June 30, 2018 and 2017, $1.7 million and $237,000, respectively, in net charge-offs were recorded. Of the $1.7 million charged off in the year ended June 30, 2018, $1.5 million related to one large credit discussed under “Overview” above. In July of 2018, we charged off the remaining $6.3 million of this large credit and the 45 properties with an aggregate value of $6.3 million were moved to foreclosed assets held for sale.

 

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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, 2018
    Year Ended
June 30, 2017
 

Allowance to non-performing loans

     87.06     71.66

Allowance to total loans outstanding at the end of the period

     1.23     1.53

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

     0.35     0.05

Total non-performing loans to total loans

     1.42     2.13

Total non-performing assets to total assets

     1.10     1.70

Noninterest Income. Noninterest income decreased $613,000, or 13.0%, to $4.1 million for the year ended June 30, 2018 from $4.7 million for the year ended June 30, 2017. The decrease was primarily due to a decrease in net realized gains on the sale of securities available for sale, a decrease in mortgage banking income, net, a decrease in insurance commissions, and a decrease in customer service fees, partially offset by an increase in bank-owned life insurance, net, an increase in other service charges and fees, and an increase in brokerage commissions. For the year ended June 30, 2018, net realized gains on the sale of securities available for sale decreased $891,000 to $13,000, mortgage banking income, net decreased $99,000 to $388,000, insurance commissions decreased $73,000 to $599,000, and customer service fees decreased $134,000 to $377,000, while bank-owned life insurance, net increased $109,000 to $377,000, brokerage commissions increased $292,000 to $875,000, and other service charges and fees increased $102,000 to $358,000. The decrease in net realized gains on the sale of available-for-sale securities was a result of a larger amount of securities sold at a gain in the year ended June 30, 2017, than in the year ended June 30, 2018, and the decrease in mortgage banking income, net, was a result of a larger increase in the valuation of mortgage servicing rights in the year ended June 30, 2017, than in the year ended June 30, 2018. The decrease in insurance commissions was the result of higher contingency commissions earned in the year ended June 30, 2017, and the decrease in customer service fees was the result fewer fees charged and the waiving of customer fees during the month of our core system conversion which occurred in the year ended June 30, 2018. The increase in bank-owned life insurance, net, was due to a benefit claim, the increase in other service charges and fees was due to an increase in the number of loan fees, and the increase in brokerage commissions was due to a change in the timing of commission payments.

Noninterest Expense. Noninterest expense increased $1.8 million, or 12.7%, to $16.4 million for the year ended June 30, 2018 from $14.5 million for the year ended June 30, 2017. The largest components of this increase were other expenses, which increased $1.4 million, or 108.1%, compensation and benefits, which increased $262,000, or 2.8%, office occupancy, which increased $178,000, or 30.5%, equipment expense, which increased $113,000, or 9.7%, and advertising expense, which increased $132,000, or 38.6%. These increases were partially offset by decreases in audit and accounting, which decreased $89,000, or 38.7%, and professional services, which decrease $177,000, or 33.5%. The other expenses increased as a result of the accrual of real estate taxes and closing costs on a large credit in bankruptcy. Compensation and benefits increased due to increased staffing changes including additional staff for the Bourbonnais office that opened in June 2017 and the Champaign office that will open in August 2018, as well as, normal salary increases and increased medical costs. Office occupancy, equipment expense, and advertising expense all increased as a result of the addition of the new Bourbonnais and Champaign offices. Equipment increased as a result of our core system conversion which occurred in the year ended June 30, 2018. Expenses for audit and accounting and professional services decreased as a result of extra services received during the year ended June 30, 2017.

Income Tax Expense. We recorded a provision for income tax of $2.7 million for the year ended June 30, 2018, compared to a provision for income tax of $2.3 million for the year ended June 30, 2017, reflecting effective tax rates of 61.1% and 36.7%, respectively. The effective tax rate for the year ended June 30, 2018, reflects the impact of the adjustment to the DTA, as discussed above under “Overview”.

 

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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.”

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.

 

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Table of Contents
     For the Fiscal Years Ended June 30,  
     2018     2017     2016  
     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)

   $ 139,529     $ 5,866        4.20   $ 145,662     $ 6,119        4.20   $ 149,752     $ 6,164        4.12

Multi-family

     97,767       3,857        3.95       83,292       3,275        3.93       77,544       3,029        3.91  

Commercial

     138,351       5,584        4.04       123,706       5,029        4.07       114,137       4,644        4.07  

Home equity lines of credit

     8,269       358        4.33       7,735       336        4.34       7,882       328        4.16  

Construction loans

     10,945       491        4.49       19,738       789        4.00       10,046       372        3.70  

Commercial business loans

     66,962       3,092        4.62       56,975       2,490        4.37       49,372       2,086        4.23  

Consumer loans

     7,923       368        4.64       8,687       405        4.66       9,193       432        4.70  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total loans

     469,746       19,616        4.18       445,795       18,443        4.14       417,926       17,055        4.08  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Securities:

                     

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

     22,594       543        2.40       69,920       1,802        2.58       88,017       2,310        2.62  

U.S. government sponsored mortgage-backed securities

     93,247       2,345        2.51       37,238       870        2.34       32,213       848        2.63  

State and political subdivisions

     3,103       65        2.09       3,340       75        2.25       3,496       78        2.23  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     118,944       2,953        2.48       110,498       2,747        2.49       123,726       3,236        2.62  

Other

     9,276       225        2.43       8,716       148        1.70       7,757       82        1.06  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     597,966       22,794        3.81       565,009       21,338        3.78       549,409       20,373        3.71  
    

 

 

        

 

 

        

 

 

    

Noninterest-earning assets

     17,948            20,403            22,380       
  

 

 

        

 

 

        

 

 

      

Total assets

   $ 615,914          $ 585,412          $ 571,789       
  

 

 

        

 

 

        

 

 

      

Interest-bearing liabilities:

                     

Interest-bearing checking or NOW

   $ 46,299       66        0.14     $ 40,080       40        0.09     $ 40,852       37        0.09  

Savings accounts

     43,159       102        0.24       40,191       49        0.12       38,399       50        0.13  

Money market accounts

     96,984       853        0.88       75,736       195        0.26       72,118       138        0.19  

Certificates of deposit

     256,250       3,429        1.34       249,689       2,607        1.04       245,699       2,150        0.88  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     442,692       4,450        1.01       409,696       2,891        0.71       397,068       2,375        0.60  

Federal Home Loan Bank advances and repurchase agreements

     63,997       839        1.31       67,899       726        1.07       69,111       938        1.36  
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     506,689       5,289        1.04       477,595       3,617        0.76       466,179       3,313        0.71  
    

 

 

        

 

 

        

 

 

    

Noninterest-bearing liabilities

     26,193            24,279            23,645       
  

 

 

        

 

 

        

 

 

      

Total liabilities

     532,882            501,874            489,824       

Equity

     83,032            83,538            81,965       
  

 

 

        

 

 

        

 

 

      

Total liabilities and equity

     615,914            585,412            571,789       
  

 

 

        

 

 

        

 

 

      

Net interest income

     $ 17,505          $ 17,721          $ 17,060     
    

 

 

        

 

 

        

 

 

    

Net interest rate spread (2)

          2.77          3.02          3.00

Net interest-earning assets (3)

   $ 91,277          $ 87,414          $ 83,230       
  

 

 

        

 

 

        

 

 

      

Net interest margin (4)

          2.93          3.14          3.11

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,
2018 vs. 2017
    Fiscal Years Ended June 30,
2017 vs. 2016
 
     Increase (Decrease)
Due to
    Total
Increase
(Decrease)
    Increase
(Decrease) Due to
    Total
Increase
(Decrease)
 
     Volume     Rate     Volume     Rate  
     (In thousands)  

Interest-earning assets:

            

Loans

   $ 996     $ 177     $ 1,173     $ 1,137     $ 251     $ 1,388  

Securities

     217       (11     206       (312     (177     (489

Other

     9       68       77       9       57       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 1,222     $ 234     $ 1,456     $ 834     $ 131     $ 965  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Interest-bearing checking or NOW

   $ 2     $ 24     $ 26     $ 3     $     $ 3  

Savings accounts

     4       49       53       2       (3     (1

Certificates of deposit

     68       754       822       32       425       457  

Money market accounts

     37       621       658       7       50       57  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     111       1,448       1,559       44       472       516  

Federal Home Loan Bank advances and repurchase agreements

     (44     157       113       (16     (196     (212
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ 67     $ 1,605     $ 1,672     $ 28     $ 276     $ 304  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 1,155     $ (1,371   $ (216   $ 806     $ (145   $ 661  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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      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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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, 2018 resulting from immediate rate shocks ranging from -400 basis points to +400 basis points..

Earnings at Risk

 

Change in Interest    % Change in Net
Interest Income
 
Rates (basis points)    6/30/19      6/30/20  

+400

     (18.33      (23.65

+300

     (12.94      (16.26

+200

     (7.87      (9.48

+100

     (3.70      (4.41

      0

     

-100

     3.79        3.81  

-200

     6.61        7.56  

-300

     3.07        4.12  

-400

     (0.28      0.71  

Net Economic Value of Equity (NEVE) at Risk

 

Change in Interest

Rates (basis points)

   Estimated NEVE      % Change NEVE  

+400

     52,219        (34.66

+300

     59,565        (25.47

+200

     66,651        (16.61

+100

     73,473        (8.07

      0

     

-100

     85,239        6.65  

-200

     87,268        9.19  

-300

     88,659        10.93  

-400

     90,801        13.61  

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, 2018 and 2017, our liquidity ratio averaged 19.8% and 19.0% 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, 2018.

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, 2018, cash and cash equivalents totaled $4.8 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, 2018, we had $9.2 million in loan commitments outstanding, and $53.5 million in unused lines of credit to borrowers. Certificates of deposit due within one year of June 30, 2018 totaled $157.1 million, or 32.7% 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, 2018. 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, 2018 and 2017, we originated $224.1 million and $145.9 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 $41.3 million for the year ended June 30, 2018, and a net increase in total deposits of $5.4 million for the year ended June 30, 2017. 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 $67.5 million at June 30, 2018. At June 30, 2018, we had the ability to borrow up to an additional $142.3 million from the Federal Home Loan Bank of Chicago based on our collateral and had the ability to borrow an additional $22.7 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, 2018, 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, 2018. 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, 2018 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, 2018, utilizing the framework established in Internal Control — Integrated Framework (1992) 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, 2018 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 statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts

 

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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 19, 2018 (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, 2018 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

Amended and Restated Bylaws of IF Bancorp, Inc. (2)

 

    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 (3)

 

  10.2

Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (3)

 

  10.3

Change in Control Agreement of Pamela J. Verkler (4)

 

  10.4

Change in Control Agreement of Thomas J. Chamberlain (4)

 

  10.5

Amendment One to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (5)

 

  10.6

Amendment One to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (5)

 

  10.7

Amendment Two to Employment Agreement between Iroquois Federal Savings and Loan Association and Walter H. Hasselbring, III (6)

 

  10.8

Amendment Two to Employment Agreement between IF Bancorp, Inc. and Walter H. Hasselbring, III (6)

 

  10.9

Directors Non Qualified Retirement Plan (1)

 

  10.10

IF Bancorp, Inc. 2012 Equity Incentive Plan (7)

 

  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 (8)

 

  101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2018 and 2017, (ii) the Consolidated Statements of Income for the years ended June 30, 2018 and 2017, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended June 30, 2018 and 2017, (iv) the Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2018 and 2017, (v) the Consolidated Statements of Cash Flows for the years ended June 30, 2018 and 2017, and (vi) the notes to the Consolidated Financial Statements.

  

 

(1)   Incorporated by reference to the Company’s Registration Statement on Form S-1 (333-172842), 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 March 8, 2018.

(3)   Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 1, 2015.

(4)   Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2011.

(5)   Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 31, 2016.

(6)   Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 15, 2017.

(7)   Incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on October 12, 2012.

(8)   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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ITEM 16.

FORM 10-K SUMMARY

None.

 

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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 11, 2018     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 11, 2018

/s/ Pamela J. Verkler

Pamela J. Verkler

   Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   September 11, 2018

/s/ Gary Martin

Gary Martin

   Chairman of the Board   September 11, 2018

/s/ Alan D. Martin

Alan D. Martin

   Director   September 11, 2018

/s/ Joseph A. Cowan

Joseph A. Cowan

   Director   September 11, 2018

/s/ Wayne A. Lehmann

Wayne A. Lehmann

   Director   September 11, 2018

/s/ Frank J. Simutis

Frank J. Simutis

   Director   September 11, 2018

/s/ Dennis C. Wittenborn

Dennis C. Wittenborn

   Director   September 11, 2018

/s/ Rodney E. Yergler

Rodney E. Yergler

   Director   September 11, 2018

 

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IF Bancorp, Inc.

Consolidated Financial Statements

Years Ended June 30, 2018 and 2017

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

To the Shareholders, Board of Directors and Audit Committee

IF Bancorp, Inc.

Watseka, Illinois

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of IF Bancorp, Inc. (Company) as of June 30, 2018 and 2017, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and 2017, 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.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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 included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2009.

 

/s/ BKD, LLP

Decatur, Illinois

September 12, 2018

 

F-2


Table of Contents

IF Bancorp, Inc.

Consolidated Balance Sheets

June 30, 2018 and 2017

(in thousands)

 

     2018      2017  

Assets

     

Cash and due from banks

   $ 4,240      $ 7,252  

Interest-bearing demand deposits

     514        514  
  

 

 

    

 

 

 

Cash and cash equivalents

     4,754        7,766  
  

 

 

    

 

 

 

Interest-bearing time deposits in banks

     1,750        1,750  

Available-for-sale securities

     125,996        111,611  

Loans, net of allowance for loan losses of $5,945 and $6,835 at June 30, 2018 and 2017, respectively

     476,480        440,322  

Premises and equipment, net of accumulated depreciation of $6,717 and $6,249 at June 30, 2018 and 2017, respectively

     10,226        5,840  

Federal Home Loan Bank stock, at cost

     3,285        2,543  

Foreclosed assets held for sale

     219        429  

Accrued interest receivable

     1,821        1,539  

Bank-owned life insurance

     8,803        8,823  

Mortgage servicing rights

     866        710  

Deferred income taxes

     4,003        3,721  

Other

     720        420  
  

 

 

    

 

 

 

Total assets

   $ 638,923      $ 585,474  
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

F-3


Table of Contents

Liabilities and Stockholders’ Equity

 

     2018     2017  

Liabilities

    

Deposits

    

Demand

   $ 21,350     $ 20,140  

Savings, NOW and money market

     195,491       171,213  

Certificates of deposit

     229,236       209,020  

Brokered certificates of deposit

     34,344       38,773  
  

 

 

   

 

 

 

Total deposits

     480,421       439,146  
  

 

 

   

 

 

 

Repurchase agreements

     2,281       2,183  

Federal Home Loan Bank advances

     67,500       53,500  

Advances from borrowers for taxes and insurance

     309       754  

Accrued post-retirement benefit obligation

     2,770       2,874  

Accrued interest payable

     188       55  

Other

     3,779       2,993  
  

 

 

   

 

 

 

Total liabilities

     557,248       501,505  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, $.01 par value, 100,000,000 shares authorized, 3,871,408 and 3,940,408 shares issued and outstanding at June 30, 2018 and 2017, respectively

     39       39  

Additional paid-in capital

     48,361       47,940  

Unearned ESOP shares, at cost, 250,185 and 269,430 shares at June 30, 2018 and 2017, respectively

     (2,502     (2,694

Retained earnings

     38,885       39,051  

Accumulated other comprehensive loss, net of tax

     (3,108     (367
  

 

 

   

 

 

 

Total stockholders’ equity

     81,675       83,969  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 638,923     $ 585,474  
  

 

 

   

 

 

 

 

F-4