Form 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended December 31, 2011

OR

 

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

For the transition period from              to             

Commission File No. 001-35226

 

 

IF Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   45-1834449

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

201 East Cherry Street, Watseka, Illinois   60970
(Address of Principal Executive Offices)   Zip Code

(815) 432-2476

(Registrant’s telephone number)

N/A

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

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

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

The Registrant had 4,811,255 shares of common stock, par value $0.01 per share, issued and outstanding as of February 10, 2012.

 

 

 


Table of Contents

IF Bancorp, Inc.

Form 10-Q

Index

 

         Page  
Part I. Financial Information   

Item 1.

 

Condensed Consolidated Financial Statements

     1   
 

Condensed Consolidated Balance Sheets as of December 31, 2011 (unaudited) and June 30, 2011

     1   
 

Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 31, 2011 and 2010 (unaudited)

     2   
 

Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended December 31, 2011 and 2010 (unaudited)

     3   
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2011 and 2010 (unaudited)

     4   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     5   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     30   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     45   

Item 4.

 

Controls and Procedures

     45   
Part II. Other Information   

Item 1.

 

Legal Proceedings

     46   

Item 1A.

 

Risk Factors

     46   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     46   

Item 3.

 

Defaults upon Senior Securities

     46   

Item 4.

 

[Removed and Reserved]

     46   

Item 5.

 

Other Information

     46   

Item 6.

 

Exhibits

     46   
 

Signature Page

     47   


Table of Contents

Part I. – Financial Information

 

Item 1. Financial Statements

IF Bancorp, Inc.

Condensed Consolidated Balance Sheets

(Dollars in thousands)

 

     December 31,
2011
    June 30,
2011
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 13,404      $ 53,811   

Interest-bearing demand deposits

     1,187        6,695   
  

 

 

   

 

 

 

Cash and cash equivalents

     14,591        60,506   
  

 

 

   

 

 

 

Interest-bearing time deposits in banks

     250        250   

Available-for-sale securities

     199,161        190,273   

Loans, net of allowance for loan losses of $3,108 and $3,149 at December 31, 2011 and June 30, 2011, respectively

     247,930        240,020   

Premises and equipment, net of accumulated depreciation of $5,002 and $4,749 at December 31, 2011 and June 30, 2011, respectively

     4,404        4,124   

Federal Home Loan Bank stock, at cost

     3,875        3,121   

Foreclosed assets held for sale

     787        710   

Accrued interest receivable

     1,619        1,684   

Deferred income taxes

     142        337   

Bank-owned life insurance

     7,367        7,235   

Mortgage servicing rights

     307        408   

Other

     1,270        2,148   
  

 

 

   

 

 

 

Total assets

   $ 481,703      $ 510,816   
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities

    

Deposits

    

Demand

   $ 10,145      $ 8,400   

Savings, NOW and money market

     121,503        230,283   

Certificates of deposit

     189,709        199,381   

Brokered certificates of deposit

     11,000        6,001   
  

 

 

   

 

 

 

Total deposits

     332,357        444,065   
  

 

 

   

 

 

 

Federal Home Loan Bank advances

     60,500        22,500   

Advances from borrowers for taxes and insurance

     974        841   

Accrued post-retirement benefit obligation

     2,070        1,932   

Accrued interest payable

     76        158   

Other

     1,595        1,879   
  

 

 

   

 

 

 

Total liabilities

     397,572        471,375   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock, $.01 par value, 100,000,000 shares authorized, 4,811,255 shares issued and outstanding

     48        0   

Additional paid-in capital

     46,351        0   

Unearned ESOP shares, at cost, 375,278 shares at December 31, 2011

     (3,753     0   

Retained earnings

     36,977        37,328   

Accumulated other comprehensive income, net of tax

     4,508        2,113   
  

 

 

   

 

 

 

Total stockholders’ equity

     84,131        39,441   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 481,703      $ 510,816   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

1


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statements of Income (Loss) (Unaudited)

(Dollars in thousands except per share amount)

 

     Three Months Ended December 31,     Six Months Ended December 31,  
     2011     2010     2011     2010  

Interest and Dividend Income

        

Interest and fees on loans

   $ 3,034      $ 3,206      $ 6,102      $ 6,457   

Securities:

        

Taxable

     1,439        995        2,808        2,087   

Tax-exempt

     33        32        63        63   

Federal Home Loan Bank dividends

     0        0        1        0   

Deposits with other financial institutions

     3        2        15        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     4,509        4,235        8,989        8,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     757        1,069        1,566        2,271   

Federal Home Loan Bank advances

     227        219        453        458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     984        1,288        2,019        2,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     3,525        2,947        6,970        5,882   

Provision for Loan Losses

     195        400        334        625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

     3,330        2,547        6,636        5,257   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Customer service fees

     176        160        332        323   

Other service charges and fees

     70        79        113        156   

Insurance commissions

     208        111        391        327   

Brokerage commissions

     108        160        229        301   

Net realized gains on sales of available-for-sale securities

     240        150        290        378   

Mortgage banking income, net

     109        244        81        420   

Bank-owned life insurance income, net

     65        65        131        130   

Other

     129        152        268        290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,105        1,121        1,835        2,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Compensation and benefits

     1,753        1,577        3,507        3,176   

Office occupancy

     111        126        232        238   

Equipment

     164        157        330        308   

Federal deposit insurance

     78        107        142        217   

Stationary, printing and office

     40        34        80        73   

Advertising

     89        77        167        141   

Professional services

     102        80        196        126   

Supervisory examinations

     33        0        98        53   

Audit and accounting services

     78        0        123        23   

Organizational dues and subscriptions

     14        25        32        41   

Insurance bond premiums

     26        29        50        53   

Telephone and postage

     62        52        117        100   

Gain on foreclosed assets, net

     (1     (8     (14     (84

Charitable contributions

     0        12        3,601        15   

Other

     266        256        500        587   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     2,815        2,524        9,161        5,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) Before Income Tax

     1,620        1,144        (690     2,515   

Provision (Benefit) for Income Tax

     596        432        (339     915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (Loss) Income

   $ 1,024      $ 712      $ (351   $ 1,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (Loss) Per Share:

        

Basic and diluted (Note 5)

   $ .23        N/A      $ (.08     N/A   

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2


Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)

(Dollars in thousands)

 

    Common
Stock
    Additional
Paid-In
Capital
    Unearned
ESOP  Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  

For the six months ended December 31, 2011

           

Balance, July 1, 2011

  $ 0      $ 0      $ 0      $ 37,328      $ 2,113      $ 39,441   

Comprehensive income:

           

Net loss

          (351       (351

Change in unrealized appreciation on available-for-sale securities, net of tax expense of $1,473

    0        0        0        0        2,395        2,395   
           

 

 

 

Total comprehensive income

              2,044   
           

 

 

 

Common stock issued in initial public offering, 4,811,255 shares, net of issuance costs of $1,725

    48        46,340              46,388   

Acquisition of ESOP shares, 384,900 shares

        (3,849         (3,849

ESOP shares earned, 9,622 shares

      11        96            107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

  $ 48      $ 46,351      $ (3,753   $ 36,977      $ 4,508      $ 84,131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended December 31, 2010

           

Balance, July 1, 2010

  $ 0      $ 0      $ 0      $ 34,498      $ 2,790      $ 37,288   

Comprehensive income:

           

Net income

          1,600          1,600   

Change in unrealized appreciation on available-for-sale securities, net of tax expense of $1,329

    0        0        0        0        (2,168     (2,168
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

              (568
           

 

 

 

Balance, December 31, 2010

  $ 0      $ 0      $ 0      $ 36,098      $ 622      $ 36,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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Table of Contents

IF Bancorp, Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

 

     Six Months Ended December 31,  
     2011     2010  

Operating Activities

    

Net income (loss)

   $ (351   $ 1,600   

Items not requiring (providing) cash

    

Depreciation

     203        191   

Provision for loan losses

     334        625   

Amortization of premiums and discounts on securities

     683        297   

Deferred income taxes

     (1,278     199   

Net realized gains on loan sales

     (81     (420

Net realized gains on sales of available-for-sale securities

     (290     (378

Gain on foreclosed assets held for sale

     (14     (84

Bank-owned life insurance income, net

     (131     (130

Originations of loans held for sale

     (7,181     (17,594

Proceeds from sales of loans held for sale

     7,363        18,098   

ESOP compensation expense

     107        0   

Contribution of stock to the Foundation

     3,148        0   

Changes in

    

Accrued interest receivable

     65        57   

Other assets

     878        (561

Accrued interest payable

     (82     45   

Post-retirement benefit obligation

     41        0   

Other liabilities

     (284     46   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,130        1,991   
  

 

 

   

 

 

 

Investing Activities

    

Net change in interest-bearing deposits

     0        (250

Purchases of available-for-sale securities

     (103,055     (87,143

Proceeds from the sales of available-for-sale securities

     68,270        52,694   

Proceeds from maturities and pay-downs of available-for-sale securities

     29,469        18,906   

Net change in loans

     (8,748     (7,707

Purchase of FHLB stock

     (754     0   

Purchase of premises and equipment

     (484     (204

Proceeds from sale of foreclosed assets

     441        306   
  

 

 

   

 

 

 

Net cash used in investing activities

     (14,861     (23,398
  

 

 

   

 

 

 

Financing Activities

    

Net increase (decrease) in demand deposits, money market, NOW and savings accounts

     (107,035     7,998   

Net increase (decrease) in certificates of deposit, including brokered certificates

     (4,673     4,636   

Net increase in advances from borrowers for taxes and insurance

     133        93   

Proceeds from Federal Home Loan Bank advances

     300,000        8,500   

Repayments of Federal Home Loan Bank advances

     (262,000     0   

Proceeds from issuance of common stock, net of costs

     43,240        0   

Stock issuance from Employee Stock Ownership Plan purchase

     (3,849     0   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (34,184     21,227   
  

 

 

   

 

 

 

Net Decrease in Cash and Cash Equivalents

     (45,915     (180

Cash and Cash Equivalents, Beginning of Period

     60,506        6,836   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 14,591      $ 6,656   
  

 

 

   

 

 

 

Supplemental Cash Flows Information

    

Interest paid

   $ 2,101      $ 2,683   

Income taxes paid, net of refunds

   $ 933      $ 908   

Foreclosed assets acquired in settlement of loans

   $ 504      $ 111   

Supplemental disclosure of noncash financing activities

    

With the initial public offering in July 2011, the Company loaned $3,849 to the Employee Stock Ownership Plan, which was used to acquire 384,900 shares of the Company’s common stock. The loan is secured by the shares purchased and is shown as unearned ESOP shares in the consolidated balance sheets. Payments on the loan in 2011 were $132 which included $74 in principal and $58 in interest. In addition, the Company donated 314,755 shares valued at $3,148 to a charitable foundation.

    

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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IF Bancorp, Inc.

Form 10-Q (Unaudited)

(Table dollar amounts in thousands)

Notes to Condensed Consolidated Financial Statements

 

Note 1: Basis of Financial Statement Presentation

IF Bancorp, Inc., a Maryland corporation (the “Company”), became the holding company for Iroquois Federal Savings and Loan Association (the “Association”) upon completion of the Association’s conversion from the mutual form of organization to the stock holding company form of organization (the “Conversion”) on July 7, 2011. For more information regarding the Conversion, see Note 2 of these notes to condensed consolidated financial statements.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and with instructions for Form 10–Q and Regulation S–X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from these estimates. In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of December 31, 2011 and June 30, 2011, and the results of its operations for the three and six month periods ended December 31, 2011 and 2010. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011. The results of operations for the six-month period ended December 31, 2011 are not necessarily indicative of the results that may be expected for the entire year.

 

Note 2: The Conversion

On March 8, 2011, the Association’s Board of Directors adopted a Plan of Conversion (“Plan”), as amended on March 8, 2011, to convert from the mutual form of organization to the capital stock form of organization (the “Conversion”). The Company was formed in March 2011 to become the savings and loan holding company of the Association upon consummation of the Conversion. The Company filed a registration statement with the U.S. Securities and Exchange Commission which was declared effective on May 13, 2011. In the Conversion, the Association became a wholly owned subsidiary of the Company, and the Company issued and sold shares of its common stock, par value $0.01 per share, to eligible members of the Association. A total of 4,811,255 shares of common stock were issued in the offering. A total of 4,496,500 shares were sold on July 7, 2011 in the conversion at $10 per share, raising $44,965,000 of gross proceeds. The Company also donated 7% of the shares sold in the offering, or a total of 314,755 shares, to establish a charitable foundation (the “Foundation”). The Association also contributed $450,000 in cash to the Foundation. The 314,755 donated shares were valued at $3,147,550 ($10.00 per share) at the time of conversion. This $3,147,550 and the $450,000 cash donation were both expensed during the quarter ended September 30, 2011.

The subscription offering resulted in the receipt of $113 million in funds including transfers from deposit accounts, ESOP, and 401(k) accounts, which was in excess of the maximum amount of shares to be offered based on the Plan. At June 30, 2011, $113 million was held in escrow and reflected in deposits. During the quarter ended September 30, 2011, the Association refunded approximately $68.9 million to potential subscribers. The Company established an employee stock ownership plan that purchased 8% of the total shares issued in the offering, or 384,900 shares, for a total of $3,849,000. IF Bancorp, Inc.’s common stock began trading on the NASDAQ Capital Market under the symbol “IROQ” on July 8, 2011.

 

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The cost of the Conversion and issuing the capital stock were deferred and deducted from the proceeds of the offering on July 7, 2011. For the period January 1, 2011 through June 30, 2011, the Association had incurred approximately $766,209 in conversion costs, which were included in other assets on the balance sheet at June 30, 2011. The total amount of the conversion costs was approximately $1.73 million and was netted from the conversion proceeds.

In accordance with applicable regulations, at the time of the Conversion, the Association substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Association after the Conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Association, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Association may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

 

Note 3: New Accounting Pronouncements

Recent and Future Accounting Requirements

ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption was permitted. The Company adopted the provisions of this guidance and resulted in no additional loans classified as troubled debt restructures. The impact of ASU 2011-02 on our disclosures is reflected in Note 7 – Loans.

ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements. In April, 2011, FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May, 2011, FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.

The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

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ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company is currently evaluating the impact of this standard.

 

Note 4: Employee Stock Ownership Plan (ESOP)

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

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

A summary of ESOP shares at December 31, 2011 is as follows (dollars in thousands):

 

Shares committed for release

     9,622   

Unearned shares

     375,278   
  

 

 

 

Total ESOP shares

     384,900   
  

 

 

 

Fair value of unearned ESOP shares

   $ 4,211  (1) 
  

 

 

 

 

(1) Based on closing price of $11.22 per share on December 30, 2011

 

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Note 5: Earnings (Loss) Per Common Share (“EPS”)

Basic and diluted earnings (loss) per common share are presented for the three and six-month periods ended December 31, 2011. Loss per share data for 2011 is from the date of conversion on July 7, 2011, to December 31, 2011. Earnings (loss) per share data is not presented for the three or six months ended December 31, 2010 since there were no outstanding shares of common stock until the conversion on July 7, 2011. The factors used in the earnings per common share computation follow:

 

    Three Months Ended
December 31, 2011
    Six Months Ended
December 31, 2011
 

Net income (loss)

  $ 1,024      $ (351
 

 

 

   

 

 

 

Basic weighted average shares outstanding

    4,811,255        4,811,255   

Less: Average unallocated ESOP shares

    (380,037     (382,442
 

 

 

   

 

 

 

Basic average shares outstanding

    4,431,218        4,428,813   
 

 

 

   

 

 

 

Basic and diluted earnings (loss) per common share

  $ .23      $ (.08
 

 

 

   

 

 

 

There were no potential dilutive common shares for the periods presented. There were no common shares outstanding prior to July 7, 2011.

 

Note 6: Securities

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

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available-for-sale securities:

          

December 31, 2011 (unaudited):

          

U.S. government, federal agency, and government-sponsored enterprises (GSE)

   $ 144,317       $ 5,487       $ (22   $ 149,782   

Mortgage-backed:

          

GSE – residential

     44,624         1,556         (9     46,171   

State and political subdivisions

     2,977         231         0        3,208   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 191,918       $ 7,274       $ (31   $ 199,161   
  

 

 

    

 

 

    

 

 

   

 

 

 

June 30, 2011:

          

U.S. government, federal agency, and government-sponsored enterprises (GSE)

   $ 149,791       $ 3,132       $ (796   $ 152,127   

Mortgage-backed:

          

GSE – residential

     34,724         844         (32     35,536   

State and political subdivisions

     2,481         129         0        2,610   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 186,996       $ 4,105       $ (828   $ 190,273   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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With the exception of U.S. Government, federal agency and GSE securities and GSE residential mortgage-backed securities with a book value of approximately $144,317,000 and $44,624,000, respectively, and a market value of approximately $149,782,000 and $46,171,000, respectively, at December 31, 2011, the Company held no securities at December 31, 2011 with a book value that exceeded 10% of total equity.

All mortgage-backed securities at December 31, 2011, and June 30, 2011 were issued by GSEs.

The amortized cost and fair value of available-for-sale securities at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Available-for-Sale Securities  
     Amortized
Cost
     Fair
Value
 

Within one year

   $ 1,054       $ 1,083   

One to five years

     38,562         42,186   

Five to ten years

     107,614         109,653   

After ten years

     64         68   
  

 

 

    

 

 

 
     147,294         152,990   

Mortgage-backed securities

     44,624         46,171   
  

 

 

    

 

 

 

Totals

   $ 191,918       $ 199,161   
  

 

 

    

 

 

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $57,024,000 and $56,140,000 as of December 31, 2011 and June 30, 2011, respectively.

Gross gains of $299,000 and $378,000, and gross losses of $9,000 and $0, resulting from sales of available-for-sale securities were realized for the six month periods ended December 31, 2011 and 2010, respectively. The tax provision applicable to these net realized gains amounted to approximately $110,000 and $144,000, respectively.

Certain investments in debt and marketable equity securities are reported in the financial statements at amounts less than their historical cost. Total fair value of these investments at December 31, 2011 was $16,503,000, which is approximately 8.3% of the Company’s available-for-sale investment portfolio. These declines primarily resulted from recent increases in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Management believes the declines in fair value for these securities are temporary.

The following table shows the Company’s securities’ gross unrealized losses and fair value of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 (unaudited):

 

     Less than 12 Months     12 Months or More      Total  

Description of Securities

   Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Available-for-Sale Securities:

                

U.S. government, federal agency, and government-sponsored enterprises (GSE)

   $ 11,955       $ (22   $ 0       $ 0       $ 11,955       $ (22

Mortgage-backed:

                
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

GSE – residential

     4,548         (9     0         0         4,548         (9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 16,503       $ (31   $ 0       $ 0       $ 16,503       $ (31
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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The unrealized losses on the Company’s investments were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2011 (unaudited).

 

Note 7: Loans and Allowance for Loan Losses

Classes of loans include:

 

     December 31,
2011
     June 30, 2011  
     (Unaudited)         

Real estate loans:

     

One-to-four family, including home equity loans

   $ 148,056       $ 148,448   

Multifamily

     30,482         26,299   

Commercial

     30,052         27,402   

Home equity lines of credit

     9,632         10,043   
  

 

 

    

 

 

 

Construction

     5,017         4,039   

Commercial

     13,535         12,068   

Consumer

     14,865         15,779   
  

 

 

    

 

 

 

Total loans

     251,639         244,078   

Less:

     

Unearned fees and discounts, net

     52         19   

Loans in process

     549         890   

Allowance for loan losses

     3,108         3,149   
  

 

 

    

 

 

 

Loans, net

   $ 247,930       $ 240,020   
  

 

 

    

 

 

 

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

Management reviews and approves the Company’s lending policies and procedures on a routine basis. Management routinely (at least quarterly) reviews our allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Our underwriting standards are designed to encourage relationship banking rather than transactional banking. Relationship banking implies a primary banking relationship with the borrower that includes, at minimum, an active deposit banking relationship in addition to the

 

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lending relationship. The integrity and character of the borrower are significant factors in our loan underwriting. As a part of underwriting, tangible positive or negative evidence of the borrower’s integrity and character are sought out. Additional significant underwriting factors beyond location, duration, the sound and profitable cash flow basis underlying the loan and the borrower’s character are the quality of the borrower’s financial history, the liquidity of the underlying collateral and the reliability of the valuation of the underlying collateral.

The Company’s policies and loan approval limits are established by the Board of Directors. The loan officers generally have authority to approve one-to-four family residential mortgage loans up to $100,000, other secured loans up to $50,000, and unsecured loans up to $10,000. Managing Officers (those with designated loan approval authority), generally have authority to approve one-to-four family residential mortgage loans up to $300,000, other secured loans up to $300,000, and unsecured loans up to $150,000. In addition, any two individual officers may combine their loan authority limits to approve a loan. Our Loan Committee may approve one-to-four family residential mortgage loans, commercial real estate loans, multi-family real estate loans and land loans up to $1,000,000 in aggregate loans or $750,000 for individual loans, and unsecured loans up to $500,000. All loans above these limits must be approved by the Operating Committee, consisting of the Chairman, the President, and up to four other Board members. At no time is a borrower’s total borrowing relationship to exceed our regulatory lending limit. Loans to related parties, including executive officers and the Company’s directorates, are reviewed for compliance with regulatory guidelines and the board of directors at least annually.

The Company conducts internal loan reviews that validate the loans against the Company’s loan policy quarterly for mortgage, consumer, and small commercial loans on a sample basis, and all larger commercial loans on an annual basis. Beginning January 1, 2011, the Association also began receiving independent loan reviews performed by a third party on larger commercial loans to be performed annually. In addition to compliance with our policy, the loan review process reviews the risk assessments made by our credit department, lenders and loan committees. Results of these reviews are presented to management and the board of directors.

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

One-to-four family Residential Mortgage Loans

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

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

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

Commercial Real Estate and Multi-Family Real Estate Loans

Commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied businesses, strip mall centers, farm loans secured by real estate and churches. In underwriting commercial real estate and multi-family real

 

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

Home Equity Lines of Credit

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

Commercial Business Loans

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

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

Real Estate Construction Loans

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

Consumer Loans

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

 

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The loan portfolio includes a concentration of loans secured by commercial real estate properties amounting to $60,534,000 and $53,701,000 as of December 31, 2011 and June 30, 2011, respectively. Generally, these loans are collateralized by multi-family and nonresidential properties. The loans are expected to be repaid from cash flows or from proceeds from the sale of the properties of the borrower.

The Company’s loans receivable included purchased loans of $19,684,000 and $20,966,000 at December 31, 2011 and June 30, 2011, respectively. All of these loans are out-of-area purchased loans which are secured by single family homes located primarily in the Midwest. The Company’s loans receivable also include commercial loan participations of $11,871,000 and $10,484,000 at December 31, 2011 and June 30, 2011, respectively, of which $8,301,000 and $6,385,000, at December 31, 2011 and June 30, 2011 were outside our primary market area. These participation loans are secured by real estate and other business assets.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of the three and six-month periods ended December 31, 2011 and the year ended June 30, 2011:

 

     Three Months Ended December 31, 2011 (Unaudited)
Real Estate Loans
 
     One-to-Four
Family
    Multi-Family Commercial     Home Equity
Lines of
Credit
 

Allowance for loan losses:

         

Balance, beginning of period

   $ 1,852      $ 270       $ 228      $ 114   

Provision charged to expense

     30        50         55        (19

Losses charged off

     (62     0         (49     0   

Recoveries

     7        0         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,827      $ 320       $ 234      $ 95   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 641      $ 16       $ 56      $ 9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,186      $ 304       $ 178      $ 86   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

         

Ending balance

   $ 148,056      $ 30,482       $ 30,052      $ 9,632   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 4,967      $ 1,556       $ 101      $ 37   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 143,089      $ 28,926       $ 29,951      $ 9,595   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Three Months Ended December 31, 2011 (Unaudited) (Continued)  
     Construction      Commercial      Consumer     Unallocated      Total  

Allowance for loan losses:

             

Balance, beginning of period

   $ 39       $ 315       $ 190      $ 12       $ 3,020   

Provision charged to expense

     8         68         (4     7         195   

Losses charged off

     0         0         (32     0         (143

Recoveries

     0         0         29        0         36   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 47       $ 383       $ 183      $ 19       $ 3,108   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 23       $ 64      $ 0       $ 809   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 47       $ 360       $ 119      $ 19       $ 2,299   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans:

             

Ending balance

   $ 5,017       $ 13,535       $ 14,865      $ 0       $ 251,639   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 39       $ 177      $ 0       $ 6,877   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 5,017       $ 13,496       $ 14,688      $ 0       $ 244,763   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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     Six Months Ended December 31, 2011 (Unaudited)
Real Estate Loans
 
     One-to-Four
Family
    Multi-Family Commercial     Home Equity
Lines of
Credit
 

Allowance for loan losses:

         

Balance, beginning of period

   $ 1,987      $ 250       $ 232      $ 120   

Provision charged to expense

     137        70         51        (25

Losses charged off

     (324     0         (49     0   

Recoveries

     27        0         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,827      $ 320       $ 234      $ 95   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 641      $ 16       $ 56      $ 9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,186      $ 304       $ 178      $ 86   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans:

         

Ending balance

   $ 148,056      $ 30,482       $ 30,052      $ 9,632   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 4,967      $ 1,556       $ 101      $ 37   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 143,089      $ 28,926       $ 29,951      $ 9,595   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six Months Ended December 31, 2011 (Unaudited) (Continued)  
     Construction      Commercial      Consumer     Unallocated      Total  

Allowance for loan losses:

             

Balance, beginning of period

   $ 30       $ 352       $ 169      $ 9       $ 3,149   

Provision charged to expense

     17         31         43        10         334   

Losses charged off

     0         0         (60     0         (433

Recoveries

     0         0         31        0         58   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 47       $ 383       $ 183      $ 19       $ 3,108   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 23       $ 64      $ 0       $ 809   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 47       $ 360       $ 119      $ 19       $ 2,299   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans:

             

Ending balance

   $ 5,017       $ 13,535       $ 14,865      $ 0       $ 251,639   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 39       $ 177      $ 0       $ 6,877   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 5,017       $ 13,496       $ 14,688      $ 0       $ 244,763   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended June 30, 2011
Real Estate Loans
 
     One-to-Four
Family
    Multi-Family Commercial      Home Equity
Lines of
Credit
 

Allowance for loan losses:

          

Balance, beginning of year

   $ 1,785      $ 202       $ 175       $ 71   

Provision charged to expense

     1,106        48         57         49   

Losses charged off

     (920     0         0         0   

Recoveries

     16        0         0         0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 1,987      $ 250       $ 232       $ 120   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 808      $ 0       $ 57       $ 31   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,179      $ 250       $ 175       $ 89   
  

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

          

Ending balance

   $ 148,448      $ 26,299       $ 27,402       $ 10,043   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 5,335      $ 0       $ 206       $ 73   
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 143,113      $ 26,299       $ 27,196       $ 9,970   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
     Year Ended June 30, 2011 (Continued)  
     Construction      Commercial     Consumer     Unallocated      Total  

Allowance for loan losses:

            

Balance, beginning of year

   $ 0       $ 400      $ 127      $ 7       $ 2,767   

Provision charged to expense

     30         (18     77        2         1,351   

Losses charged off

     0         (30     (54     0         (1,004

Recoveries

     0         0        19        0         35   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 30       $ 352      $ 169      $ 9       $ 3,149   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 0      $ 58      $ 0       $ 954   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 30       $ 352      $ 111      $ 9       $ 2,195   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

            

Ending balance

   $ 4,039       $ 12,068      $ 15,779      $ 0       $ 244,078   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 0       $ 4      $ 130      $ 0       $ 5,748   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 4,039       $ 12,064      $ 15,649      $ 0       $ 238,330   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Activity in the allowance for loan losses for the three and six month periods ended December 31, 2010 was as follows:

 

     Three Months
Ended
December 31,
2010
(Unaudited)
    Six Months
Ended
December  31,
2010
(Unaudited)
 

Balance, beginning of period

   $ 2,624      $ 2,767   

Provision charged to expense

     400        625   

Losses charged off, net of recoveries of $3,000 and $5,000 for the three and six months ended December 31, 2010

     (312     (680
  

 

 

   

 

 

 

Balance, end of period

   $ 2,712      $ 2,712   
  

 

 

   

 

 

 

 

15


Table of Contents

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

Allowance for Loan Losses

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

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

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

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

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

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

 

16


Table of Contents

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

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

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

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

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

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

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

 

     Real Estate Loans                              
     One-to-Four
Family
     Multi-Family Commercial      Home Equity
Lines of  Credit
     Construction      Commercial      Consumer      Total  

December 31, 2011 (Unaudited):

                       

Pass

   $ 142,835       $ 28,926       $ 29,951       $ 9,595       $ 5,017       $ 12,236       $ 14,680       $ 243,240   

Watch

     184         0         0         0         0         1,260         0         1,444   

Substandard

     5,037         1,556         101         37         0         39         185         6,955   

Doubtful

     0         0         0         0         0         0         0         0   

Loss

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 148,056       $ 30,482       $ 30,052       $ 9,632       $ 5,017       $ 13,535       $ 14,865       $ 251,639   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Real Estate Loans                              
     One-to-Four
Family
     Multi-Family Commercial      Home Equity
Lines of  Credit
     Construction      Commercial      Consumer      Total  

June 30, 2011:

                       

Pass

   $ 142,931       $ 24,787       $ 27,196       $ 9,970       $ 4,039       $ 10,739       $ 15,646       $ 235,308   

Watch

     71         0         0         0         0         1,325         3         1,399   

Substandard

     5,446         1,512         206         73         0         4         130         7,371   

Doubtful

     0         0         0         0         0         0         0         0   

Loss

     0         0         0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 148,448       $ 26,299       $ 27,402       $ 10,043       $ 4,039       $ 12,068       $ 15,779       $ 244,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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

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

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

 

     30-59 Days
Past Due
     60-89 Days
Past  Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
> 90 Days &
Accruing
 

December 31, 2011 (Unaudited):

                    

Real estate loans:

                    

One-to-four family

   $ 3,108       $ 1,064       $ 2,958       $ 7,130       $ 140,926       $ 148,056       $ 0   

Multi-family

     0         0         0         0         30,482         30,482         0   

Commercial

     187         0         0         187         29,865         30,052         0   

Home equity lines of credit

     64         59         37         160         9,472         9,632         0   

Construction

     0         0         0         0         5,017         5,017         0   

Commercial

     34         14         35         83         13,452         13,535         0   

Consumer

     192         111         139         442         14,423         14,865         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,585       $ 1,248       $ 3,169       $ 8,002       $ 243,637       $ 251,639       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     30-59 Days
Past Due
     60-89 Days
Past  Due
     Greater
Than 90
Days
     Total Past
Due
     Current      Total Loans
Receivable
     Total Loans
> 90 Days &
Accruing
 

June 30, 2011:

                    

Real estate loans:

                    

One-to-four family

   $ 2,619       $ 631       $ 3,458       $ 6,708       $ 141,740       $ 148,448       $ 0   

Multi-family

     0         0         0         0         26,299         26,299         0   

Commercial

     198         0         104         302         27,100         27,402         0   

Home equity lines of credit

     283         67         37         387         9,656         10,043         0   

Construction

     0         0         0         0         4,039         4,039         0   

Commercial

     19         0         0         19         12,049         12,068         0   

Consumer

     149         80         25         254         15,525         15,779         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,268       $ 778       $ 3,624       $ 7,670       $ 236,408       $ 244,078       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

18


Table of Contents

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

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlements with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring. Included in certain loan categories in the impaired loans are $4.2 million in troubled debt restructurings that were classified as impaired.

The following tables present impaired loans:

 

                          Three Months Ended
December 31, 2011
     Six Months Ended
December 31, 2011
 
     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
     Average
Investment in
Impaired
Loans
     Interest
Income
Recognized
 

December 31, 2011 (Unaudited):

                    

Loans without a specific valuation allowance

                    

Real estate loans:

                    

One-to-four family

   $ 2,226       $ 2,226       $ 0       $ 2,216       $ 1       $ 2,217       $ 5   

Multi-family

     0         0         0         0         0         0         0   

Commercial

     0         0         0         0         0         0         0   

Home equity line of credit

     0         0         0         0         0         0         0   

Construction

     0         0         0         0         0         0         0   

Commercial

     0         0         0         0         0         0         0   

Consumer

     6         6         0         6         0         6         0   

Loans with a specific allowance

                    

Real estate loans:

                    

One-to-four family

     2,741         2,741         641         2,743         0         2,731         10   

Multi-family

     1,556         1,556         16         1,558         0         1,534         23   

Commercial

     101         101         56         101         0         102         0   

Home equity line of credit

     37         37         9         37         0         37         0   

Construction

     0         0         0         0         0         0         0   

Commercial

     39         39         23         39         0         40         1   

Consumer

     171         171         64         172         0         175         1   

Total:

                    

Real estate loans:

                    

One-to-four family

     4,967         4,967         641         4,959         1         4,948         15   

Multi-family

     1,556         1,556         16         1,558         0         1,534         23   

Commercial

     101         101         56         101         0         102         0   

Home equity line of credit

     37         37         9         37         0         37         0   

Construction

     0         0         0         0         0         0         0   

Commercial

     39         39         23         39         0         40         1   

Consumer

     177         176         64         178         0         181         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,877       $ 6,877       $ 809       $ 6,872       $ 1       $ 6,842       $ 40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
     Recorded
Balance
     Unpaid
Principal
Balance
     Specific
Allowance
     Average
Investment
in Impaired
Loans
     Interest
Income
Recognized
 

June 30, 2011:

              

Loans without a specific valuation allowance

              

Real estate loans:

              

One-to-four family

   $ 2,272       $ 2,272       $ 0       $ 2,292       $ 65   

Multi-family

     0         0         0         0         0   

Commercial

     104         104         0         105         2   

Home equity line of credit

     0         0         0         0         0   

Construction

     0         0         0         0         0   

Commercial

     0         0         0         0         0   

Consumer

     7         7         0         8         1   

Loans with a specific allowance

              

Real estate loans:

              

One-to-four family

     3,063         3,063         808         3,081         55   

Multi-family

     0         0         0         0         0   

Commercial

     102         102         57         116         7   

Home equity line of credit

     73         73         31         73         3   

Construction

     0         0         0         0         0   

Commercial

     4         4         0         19         1   

Consumer

     123         123         58         133         11   

Total:

              

Real estate loans:

              

One-to-four family

     5,335         5,335         808         5,373         120   

Multi-family

     0         0         0         0         0   

Commercial

     206         206         57         221         9   

Home equity line of credit

     73         73         31         73         3   

Construction

     0         0         0         0         0   

Commercial

     4         4         0         19         1   

Consumer

     130         130         58         141         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 5,748       $ 5,748       $ 954       $ 5,827       $ 145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

20


Table of Contents

The following table presents the Company’s nonaccrual loans at December 31, 2011 and June 30, 2011:

 

     December 31,
2011
     June 30, 2011  
     (Unaudited)         

Mortgages on real estate:

     

One-to-four family

   $ 4,796       $ 4,881   

Multi-family

     1,556         0   

Commercial

     101         206   

Home equity lines of credit

     37         73   

Construction loans

     0         0   

Commercial business loans

     39         4   

Consumer loans

     176         108   
  

 

 

    

 

 

 

Total

   $ 6,705       $ 5,272   
  

 

 

    

 

 

 

Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDR”), where economic concessions have been granted to borrowers who have experienced financial difficulties, which were classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and may be returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of a least six months, and typically are returned to performing status after twelve months, unless impairment still exists.

When loans and leases are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, and uses the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

Beginning with the quarter ended September 30, 2011, the Company adopted ASU 2011-02. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those receivables newly identified as impaired. As a result of adopting ASU 2011-02, the Company reassessed all restructurings that occurred on or after July 1, 2011, the beginning of our current fiscal year, for identification as TDRs. The Company identified no loans as troubled debt restructurings for which the allowance for loan losses had previously been measured under a general allowance for credit losses methodology. Therefore, there was no additional impact to the allowance for loan losses as a result of the adoption.

 

21


Table of Contents

The following table presents the recorded balance, at original cost, of troubled debt restructurings, all of which were performing according to the terms of the restructuring, as of December 31, 2011 and June 30, 2011. As of December 31, 2011 all loans listed were on nonaccrual except for two, one- to four-family residential loans totaling $177,000. All loans listed as of June 30, 2011 were on nonaccrual.

 

     December 31, 2011      June 30, 2011  
     (Unaudited)         

Real estate loans

     

One- to four-family

   $ 2,471       $ 1,633   

Home equity lines of credit

     0         0   

Multi-family

     1,556         0   

Commercial

     101         102   
  

 

 

    

 

 

 

Total real estate loans

     4,128         1,735   
  

 

 

    

 

 

 

Construction

     0         0   

Commercial and industrial

     3         4   

Consumer loans

     34         71   
  

 

 

    

 

 

 

Total

   $ 4,165       $ 1,810   
  

 

 

    

 

 

 

The following table represents loans modified as troubled debt restructurings during the three and six month periods ending December 31, 2011:

 

     Three Months Ended December 31, 2011      Six Months Ended December 31, 2011  

(Unaudited)

   Number of
Modifications
     Recorded
Investment
     Number of
Modifications
     Recorded
Investment
 

Real estate loans:

           

One- to four-family

     3       $ 282         13       $ 1,121   

Home equity lines of credit

     0         0         0         0   

Multi-family

     0         0         1         1,561   

Commercial

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     3         282         14         2,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loans

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 282         14       $ 2,682   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the three month period ended December 31, 2011, the Company modified 3 one- to four-family residential real estate loans, with a recorded investment of $282,000 which were deemed TDRs. None of the modifications included the lowering of the interest rate. All 3 of the modifications, totaling $282,000, involved payment adjustments or maturity concessions, and did not result in a reduction in the contractual interest rate or a write-off of the principal balance. Such loans are considered collateral dependent, and the modifications resulted in specific allowances of $1,000, based upon the fair value of the collateral.

 

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During the six month period ended December 31, 2011, the Company modified 13 one- to four-family residential real estate loans, with a recorded investment of $1.1 million, which were deemed TDRs. None of the modifications included the lowering of the interest rate. All 13 of the modifications, totaling $1.1 million involved payment adjustments or maturity concessions, and did not result in a reduction in the contractual interest rate or a write-off of the principal balance. Such loans are considered collateral dependent, and the modifications resulted in specific allowances of $64,000, based upon the fair value of the collateral.

In addition, the Company modified 1 multi-family residential real estate loan during the period, which had recorded investment of $1.6 million prior to modification and was deemed a TDR. The modification resulted in an extended maturity date without a change in interest rate, which resulted in a specific allowance of $16,000 based upon the fair value of the collateral.

The Company has had two TDRs, a 1-4 family residential for $139,000 and a consumer loan for $21,000, that have defaulted during the current year to date, and were restructured in the twelve month period prior to the default. The 1-4 family residential loan for $139,000 defaulted in the first quarter, and is now in foreclosure. The consumer loan for $21,000 defaulted in the most recent quarter and the property was repossessed and liquidated at no loss to the company. The company defines a default as any loan that becomes 90 days or more past due.

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

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

 

Note 8: Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula. The Company owned $3,875,000 and $3,121,000 of Federal Home Loan Bank stock as of December 31, 2011 and June 30, 2011 respectively. The increase in Federal Home Loan Bank stock allowed the Company to increase borrowing capacity of Federal Home Loan Bank advances. The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from its regulator, the Federal Housing Finance Board. During the six months ended December 31, 2011, FHLB’s new capital structure and repurchase plan were approved by the FHFA. This new capital structure established two subclasses of stock effective January 1, 2012, and the repurchase plan allows members to request that the FHLB repurchase all or a portion of their excess FHLB stock. The first repurchase date will be February 15, 2012. The FHLB continues to provide liquidity and funding through advances. With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and make appropriate request for approval. The FHLB did not pay a dividend in 2010; however, in calendar year-to-date 2011 the FHLB has declared dividends three times and paid quarterly dividends at an annualized rate of 10 basis points per share. Management performed an analysis as of December 31, 2011 and June 30, 2011 and deemed the cost method investment in FHLB stock was ultimately recoverable.

 

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Table of Contents
Note 9: Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes were as follows:

 

    

Six Months Ended

December 31,

 
     2011     2010  
     (Unaudited)  

Net unrealized gains (losses) on securities available-for-sale

   $ 4,256      $ (3,119

Less reclassification adjustment for realized gains included in income

     290        378   
  

 

 

   

 

 

 
     3,965        (3,497

Postretirement health plan

    

Amortization of transition obligation

     17        17   

Amortization of prior service cost

     (24     (24

Change in net gain (loss)

     (91     8   
  

 

 

   

 

 

 
     (98     1   

Other comprehensive income (loss), before tax effect

     3,868        (3,496

Less tax expense (benefit)

     1,473        (1,328
  

 

 

   

 

 

 

Other comprehensive income (loss)

   $ 2,395      $ (2,168
  

 

 

   

 

 

 

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

 

     December 31,
2011
    June 30, 2011  
     (Unaudited)        

Net unrealized gains on securities available-for-sale

   $ 7,243      $ 3,277   

Net unrealized postretirement health benefit plan obligations

     32        129   
  

 

 

   

 

 

 
     7,274        3,406   

Tax effect

     (2,766     (1,293
  

 

 

   

 

 

 

Total

   $ 4,508      $ 2,113   
  

 

 

   

 

 

 

 

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Table of Contents
Note 10: Income Taxes

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

 

     Three Months  Ended
December 31,
    Six Months Ended
December  31
 
     2011     2010     2011     2010  
     (Unaudited)     (Unaudited)  

Computed at the statutory rate (34%)

   $ 550      $ 389      $ (235   $ 855   

Decrease resulting from

        

Tax exempt interest

     (14     (1     (27     (8

Cash surrender value of life insurance

     (23     (22     (45     (44

State income taxes

     52        55        (22     81   

Other

     31        11        (10     31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Actual (benefit) expense

   $ 596      $ 432      $ (339   $ 915   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Note 11: Disclosures About Fair Value of Assets and Liabilities

ASC Topic 820, Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

 

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Table of Contents

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. There were no Level 1 securities as of December 31, 2011 or June 30, 2011. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid, offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. Government and federal agency, mortgage-backed securities (GSE – residential), state and political subdivision and corporate securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. There were no Level 3 securities as of December 31, 2011 or June 30, 2011.

Mortgage Servicing Rights

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

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and June 30, 2011:

 

            Fair Value Measurements Using  
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

December 31, 2011 (Unaudited):

           

Available-for-sale securities:

           

US Government and federal agency and GSEs

   $ 149,782       $ 0       $ 149,782       $ 0   

Mortgage-backed securities – GSE residential

     46,171         0         46,171         0   

State and political subdivisions

     3,208         0         3,208         0   

Mortgage servicing rights

     307         0         0         307   

 

            Fair Value Measurements Using  
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

June 30, 2011:

           

Available-for-sale securities:

           

US Government and federal agency and GSEs

   $ 152,127       $ 0       $ 152,127       $ 0   

Mortgage-backed securities – GSE residential

     35,536         0         35,536         0   

State and political subdivisions

     2,610         0         2,610         0   

Mortgage servicing rights

     408         0         0         408   

 

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Table of Contents

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

 

Balance, July 1, 2011

   $ 408   

Total realized and unrealized gains and loss included in net income

     (119

Servicing assets resulting from asset transfers

     41   

Payments received and loans refinanced

     (23
  

 

 

 

Balance, December 31, 2011

   $ 307   
  

 

 

 

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date

   $ (119
  

 

 

 

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amounts of impairment include estimating fair value include using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Fair value adjustments on impaired loans were $17,000 for the six month period ended December 31, 2011, compared to $(282,000) for the year ended June 30, 2011.

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2011 and June 30, 2011:

 

     Fair Value Measurements Using  
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

December 31, 2011 (Unaudited):

           

Impaired loans (collateral dependent)

   $ 2,883       $ 0       $ 0       $ 2,883   

June 30, 2011:

           

Impaired loans (collateral dependent)

   $ 2,370       $ 0       $ 0       $ 2,370   

 

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Table of Contents

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

Cash and Cash Equivalents, Interest-Bearing Time Deposits in Banks, Accrued Interest Receivable and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Securities

Fair value is estimated based on quoted market prices of similar securities.

Loans

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

Deposits

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

Accrued Interest Payable and Advances From Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

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

Commitments to Originate Loans and Lines of Credit

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

 

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Table of Contents

The following table presents estimated fair values of the Company’s financial instruments at December 31, 2011 and June 30, 2011:

 

     December 31, 2011      June 30, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  
     (Unaudited)                

Financial assets

           

Cash and cash equivalents

   $ 14,591       $ 14,591       $ 60,506       $ 60,506   

Interest-bearing time deposits in banks

     250         250         250         250   

Available-for-sale securities

     199,161         199,161         190,273         190,273   

Loans, net of allowance for loan losses

     247,930         253,249         240,020         246,867   

Federal Home Loan Bank stock

     3,875         3,875         3,121         3,121   

Mortgage servicing rights

     307         307         408         408   

Accrued interest receivable

     1,619         1,619         1,684         1,684   

Financial liabilities

           

Deposits

     332,357         333,111         444,065         444,749   

Federal Home Loan Bank advances

     60,500         63,089         22,500         24,862   

Advances from borrowers for taxes and insurance

     974         974         841         841   

Accrued interest payable

     76         76         158         158   

Unrecognized financial instruments (net of contract amount)

           

Commitments to originate loans

     0         0         0         0   

Lines of credit

     0         0         0         0   

 

Note 12: Commitments

Commitments to Originate Loans

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

Lines of Credit

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

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts, but rather are statements based on management’s current expectations regarding its business strategies and their intended results and the Company’s future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our actual results include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Association’s loan or investment portfolios. Additional factors that may affect our results are discussed under “Item 1A. – Risk Factors”, in the Company’s Annual Report on Form 10-K for the year ended June 30, 2011. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. IF Bancorp, Inc. assumes no obligation to update any forward-looking statement, except as may be required by law.

Overview

On July 7, 2011 we completed our initial public offering of common stock in connection with Iroquois Federal’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 bringing our total shares to 4,811,255. The 314,755 shares donated to the foundation were valued at $3,147,550 ($10.00 per share) at the time of the conversion. This $3,147,550 and a $450,000 cash donation to the foundation were both expensed during the quarter ended September 30, 2011.

IF Bancorp, Inc. (“Company”) is a savings and loan holding company and is subject to regulation by the Board of Governors of the Federal Reserve System. The Company’s business activities are limited to oversight of its investment in Iroquois Federal Savings & Loan Association (“Association”).

The Association is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers within a 100-mile radius of its locations in Watseka, Danville, Clifton and Hoopeston, Illinois and Osage Beach, Missouri. The principal activity of the Association’s wholly-owned subsidiary, L.C.I. Service Corporation (“L.C.I.”), is the sale of property and casualty insurance. The Association is subject to regulation by the Office of the Controller of the Currency, Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation.

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

 

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Table of Contents

Our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) decreased to 2.89% for the six months ended December 31, 2011 from 3.01% for the six months ended December 31, 2010. An increase in interest-earning assets contributed to an increase in net interest income to $13.9 million on an annualized basis for the six months ended December 31, 2011 from $11.8 million for the six months ended December 31, 2010.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets at a time when many financial institutions are experiencing significant asset quality issues. Our non-performing assets totaled $7.5 million or 1.6% of total assets at December 31, 2011, and $6.0 million, or 1.2% of total assets at June 30, 2011.

At December 31, 2011, the Association was categorized as “well capitalized” under regulatory capital requirements.

Our net loss for the six months ended December 31, 2011 was $351,000, compared to net income of $1.6 million for the six months ended December 31, 2010. The decrease in net income was due to an increase in noninterest expense, which included a $3.6 million contribution to our newly established charitable foundation, and a decrease in noninterest income, partially offset by an increase in interest income, and decreases in interest expense and the provision for loan losses.

Management’s discussion and analysis of the financial condition and results of operations at and for three and six months ended December 31, 2011 and 2010 is intended to assist in understanding the financial condition and results of operations of the Association. The information contained in this section should be read in conjunction with the unaudited financial statements and the notes thereto, appearing in Part I, Item 1 of this quarterly report on Form 10-Q.

Critical Accounting Policies

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

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

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

 

   

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

 

   

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

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

 

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Table of Contents

Income Tax Accounting. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under U.S. GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize the deferred tax assets is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. Any required valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings. Positions taken in our tax returns may be subject to challenge by the taxing authorities upon examination. The benefit of an uncertain tax position is initially recognized in the financial statements only when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts. Differences between our position and the position of tax authorities could result in a reduction of a tax benefit or an increase to a tax liability, which could adversely affect our future income tax expense.

There are no material changes to the critical accounting policies disclosed in IF Bancorp, Inc.’s prospectus dated May 13, 2011, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 20, 2011.

Comparison of Financial Condition at December 31, 2011 and June 30, 2011

Total assets decreased $29.1 million, or 5.7%, to $481.7 million at December 31, 2011 from $510.8 million at June 30, 2011. The decrease was primarily due to a $45.9 million decrease in cash and cash equivalents partially offset by an increase of $8.9 million in investment securities and an increase of $7.9 million in net loans. This large change was a result of our mutual-to-stock conversion that closed on July 7, 2011. The stock offering in connection with the conversion was oversubscribed which resulted in $68.9 million in over subscriptions being refunded to subscribers shortly after the closing of the conversion. This was somewhat offset by an increase of $38.0 million in FHLB advances during the period.

Net loans receivable, including loans held for sale, increased by $7.9 million, or 3.3%, to $247.9 million at December 31, 2011 from $240.0 million at June 30, 2011. The increase in net loans receivable during this period was due primarily to a $4.2 million, or 15.9%, increase in multi-family loans, a $2.7 million, or 9.7% increase in commercial real estate loans, a $1.5 million, or 12.2%, increase in commercial business loans, and a $978,000, or 24.2% increase in construction loans. These increases were partially offset by a $914,000, or 5.8%, decrease in consumer loans, a $411,000, or 4.1% decrease in home equity lines of credit, and a $392,000, or 0.26% decrease in one-to-four family residential loans (due primarily to increased sales of loans originated).

Investment securities, consisting entirely of securities available for sale, increased $8.9 million, or 4.7%, to $199.2 million at December 31, 2011 from $190.3 million at June 30, 2011. Purchased investment securities, consisted primarily of agency debt obligations with terms of four to seven years and fixed-rate mortgage backed securities with terms of 15 years, all of which are held as available for sale. We had no securities held to maturity at December 31, 2011 or June 30, 2011.

As of December 31, 2011, other assets decreased $878,000 to $1.3 million, Federal Home Loan Bank stock increased $754,000 to $3.9 million, and mortgage servicing rights decreased $101,000 to $307,000 from the balance as of June 30, 2011. The decrease in other assets was attributable to prepaid conversion costs which were $766,000 at June 30, 2011 and reduced to zero at December 31, 2011. Federal Home Loan Bank stock increased as a result of stock purchases to support an increase in Federal Home Loan Bank advances. Mortgage servicing rights decreased due to a reduction in the fair value mortgage servicing rights as a result of decreased market interest rates at December 31, 2011.

 

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At December 31, 2011, our investment in bank-owned life insurance was $7.4 million, an increase of $132,000 from $7.2 million at June 30, 2011. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is non-taxable. Federal regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses, which totaled $14.8 million at December 31, 2011.

Deposits decreased $111.7 million, or 25.2%, to $332.4 million at December 31, 2011 from $444.1 million at June 30, 2011. Certificates of deposit decreased $9.7 million, or 4.9%, to $189.7 million, savings, NOW, and money market accounts decreased $108.8 million, or 47.2%, to $121.5 million, brokered certificates of deposit increased $5.0 million, or 83.3%, to $11.0 million, and noninterest bearing demand accounts increased $1.7 million, or 20.8%, to $10.1 million. The primary reason for the large decrease in deposits was due to our mutual-to-stock conversion which closed on July 7, 2011, for which we held approximately $113 million in escrow deposit balances at June 30, 2011.

Borrowings, which consisted solely of advances from the Federal Home Loan Bank of Chicago, increased $38.0 million, or 168.9%, to $60.5 million at December 31, 2011 from $22.5 million at June 30, 2011. We increased our borrowings to fund loans, replace deposit outflow, and purchase investment securities as we reposition our portfolio in anticipation of securities being called over the next several months. Current interest rates on borrowings are more favorable than rates paid on deposits.

Other liabilities decreased $284,000, or 15.1%, to $1.6 million at December 31, 2011 from $1.9 million on June 30, 2011. The decrease was attributable to a general decrease in accounts payable and accrued expenses payable due to timing of payments.

Total equity increased $44.7 million, or 113.3%, to $84.1 million at December 31, 2011 from $39.4 million at June 30, 2011. The increase was primarily the result of our mutual-to-stock conversion which increased capital $46.4 million net of conversion costs of $1.73 million. Equity was also increased due to an increase in unrealized gains on securities available for sale of $2.4 million. These increases to equity were partially offset by the purchase of ESOP shares of $3.8 million and a net loss of $351,000. The increase in unrealized gains on securities available-for-sale was due to higher market values of available-for-sale securities. The employee stock ownership plan was established at the time of conversion. The net loss was impacted by a contribution to our newly established charitable foundation, Iroquois Federal Foundation, Inc., of 314,755 shares of IF Bancorp, Inc. stock (valued at $3,147,550 at time of conversion) as well as a cash donation of $450,000.

Comparison of Operating Results for the Six Months Ended December 31, 2011 and 2010

General. Net income decreased $2.0 million, or 121.9%, to a ($351,000) net loss for the six months ended December 31, 2011 from $1.6 million net income for the six months ended December 31, 2010. The decrease was primarily due to a $4.1 million increase in noninterest expense and a $490,000 decrease in noninterest income, partially offset by a $1.1 million increase in net interest income, a $291,000 decrease in provision for loan losses, and a $1.3 million reduction in income tax expense. The increase in noninterest expense was primarily due to contributions to the charitable foundation that was established at the time of our mutual-to-stock conversion. IF Bancorp, Inc. donated 314,755 shares of its stock (valued at $3,147,550 at the time of conversion) and the Association made a cash donation of $450,000.

Net Interest Income. Net interest income increased by $1.1 million, or 18.5%, to $7.0 million for the six months ended December 31, 2011 from $5.9 million for the six months ended December 31, 2010. The increase was due to a decrease of $710,000 in interest expense and an increase in $378,000 in interest income. The increase in net interest income was primarily the result of a $79.7 million, or 21.1% increase in the average balance of interest earning assets, partially offset by a $34.4 million, or 9.8% increase in average balance of interest bearing liabilities. Our net interest margin decreased 7 basis points to 3.05% for the six months ended December 31, 2011 compared to 3.12% for the six months ended December 31, 2010, and our net interest rate spread decreased 12 basis points to 2.89% for the six months ended December 31, 2011 compared to 3.01% for the six months ended December 31, 2010.

 

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Interest Income. Interest income increased $378,000, or 4.4%, to $9.0 million for the six months ended December 31, 2011 from $8.6 million for the six months ended December 31, 2010. The increase in interest income was primarily due to a $721,000 increase in interest income on securities, which resulted from an increase in the average balance of securities of $68.7 million, or 51.6%, to $201.9 million for the six months ended December 31, 2011 from $133.2 million for the six months ended December 31, 2010. The average balance of securities increased due to the investment of the proceeds received in the mutual-to-stock conversion. This growth was partially offset by a 39 basis point, or 12.1% decrease in the average yield on securities from 3.22% to 2.84%. The decrease in the average yield was primarily due to lower market interest rates during the period.

Interest income on loans decreased $355,000 as a $7.6 million increase in the average balance of loans to $244.6 million at December 31, 2011 was more than offset by a 45 basis point decrease in the average yield on loans from 5.44% to 4.99%. The decrease in the average yield on loans reflected both a reduction in the current interest rates charged on loans originated during the period versus the average rates on existing loans in the portfolio, and the adjustment of a portion of our adjustable rate one-to-four family residential loans to a lower rate at the contractual adjustment term.

Interest Expense. Interest expense decreased $710,000, or 26.0%, to $2.0 million for the six months ended December 31, 2011 from $2.7 million for the six months ended December 31, 2010. The decrease occurred due to lower market interest rates during the period partially offset by higher deposit balances.

Interest expense on interest-bearing deposits decreased by $705,000, or 31.0%, to $1.6 million for the six months ended December 31, 2011 from $2.3 million for the six months ended December 31, 2010. This decrease was primarily due to a decrease of 44 basis points in the average cost of interest-bearing deposits to 0.96% for the six months ended December 31, 2011 from 1.40% for the six months ended December 31, 2010. We experienced decreases in the average cost across all categories of interest-bearing deposits for the six months ended December 31, 2011, reflecting lower market interest rates as compared to the prior period. The decrease in average cost was partially offset by a $774,000, or 0.2%, increase in the average balance of interest-bearing deposits to $324.6 million for the six months ended December 31, 2011 from $323.8 million for the six months ended December 31, 2010.

Interest expense on borrowings decreased $5,000, or 1.1%, to $453,000 for the six months ended December 31, 2011 from $458,000 for the six months ended December 31, 2010. This decrease was due to a 185 basis point decrease in the average cost of such borrowings to 1.48% for the six months ended December 31, 2011 from 3.33% for the six months ended December 31, 2010. This was partially offset by an increase in the average balance of borrowings to $61.2 million for the six months ended December 31, 2011 from $27.5 million for the six months ended December 31, 2010.

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 $334,000 for the six months ended December 31, 2011, compared to a provision for loan losses of $625,000 for the six months ended December 31, 2010. The allowance for loan losses was $3.1 million, or 1.23% of total loans, at December 31, 2011, compared to $2.7 million, or 1.11% of total loans, at December 31, 2010 and $3.1 million, or 1.29% of total loans, at June 30, 2011. Non-performing loans increased during the six month period ended December 31, 2011 due to the addition of one loan relationship totaling $2.1 million due to a troubled debt restructure. The loans were substantially collateralized, thus the impact to the allowance for loan losses was minimal. During the six months ended December 31, 2011 and 2010, $375,000 and $680,000 in net charge-offs were recorded.

 

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

 

     Six Months
Ended
December 31,
2011
    Year Ended
June 30, 2011
 

Allowance to non-performing loans

     46.35     59.73

Allowance to total loans outstanding at the end of the period

     1.23     1.29

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

     0.31     .40

Total non-performing loans to total loans

     2.66     2.16

Total non-performing assets to total assets

     1.56     1.17

Noninterest Income. Noninterest income decreased $490,000, or 21.1%, to $1.8 million for the six months ended December 31, 2011 compared to $2.3 million for the six months ended December 31, 2010. The decrease was primarily due to decreases in mortgage banking income, net realized gains on the sale of available-for-sale securities, brokerage commissions and other service charges and fees. For the six months ended December 31, 2011, mortgage banking income decreased $339,000 to $81,000, net realized gains on sale of available-for-sale securities decreased $88,000 to $290,000, brokerage commissions decreased $72,000 to $229,000 and other service charges and fees decreased $43,000 to $113,000. The decrease in mortgage banking income was due primarily to a reduction in the fair value of mortgage servicing rights as a result of decreased market interest rates and a slow down of mortgage refinancing. The decrease in the net realized gains on the sale of available-for-sale securities was due to the interest rate environment in the six months ended December 31, 2010, that allowed for profits to be gained when repositioning the investment portfolio that were not available in the six months ended December 31, 2011. The decrease in brokerage commissions was a result of less activity due to decreased market interest rates and the decrease in other service charges and fees reflects fewer service charges and fees collected.

Noninterest Expense. Noninterest expense increased $4.1 million, or 80.8%, to $9.2 million for the six months ended December 31, 2011 from $5.1 million for the six months ended December 31,, 2010. The largest components of this increase were charitable contributions, which increased $3.6 million, compensation and benefits, which increased $331,000, or 10.4%, professional services expense, which increased $70,000, or 55.6%, audit and accounting, which increased $100,000, or 434.8%, and loss on foreclosed assets, net, which increased $70,000, or 83.3%. The increase in charitable contributions was primarily due to a contribution to our newly established charitable foundation, Iroquois Federal Foundation, Inc., of 314,755 shares of IF Bancorp, Inc. stock (valued at $3,147,550 at time of conversion) as well as a cash donation of $450,000. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense. Increases in professional services and audit and accounting expense were a result of increased costs associated with transitioning to a public company. These increases were partially offset by a decrease of $75,000 in deposit insurance premium resulting from the new FDIC formula used to calculate this premium.

Income Tax Expense. We recorded a benefit for income tax of $(339,000) for the six months ended December 31, 2011, compared to a provision for income tax of $915,000 for the six months ended December 31, 2010, reflecting effective tax rates of (49.1%) and 36.4%, respectively. The tax benefit for the six months ended December 31, 2011 was due to a contribution to our newly established charitable foundation, Iroquois Federal Foundation, Inc., of 314,755 shares of IF Bancorp, Inc. stock (valued at $3,147,550 at time of conversion) as well as a cash donation of $450,000.

 

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Comparison of Operating Results for the Three Months Ended December 31, 2011 and 2010

General. Net income increased $312,000, or 43.8%, to a $1.0 million net income for the three months ended December 31, 2011 from $712,000 net income for the three months ended December 31, 2010. The increase was primarily due to a $274,000 increase in interest income, a $304,000 decrease in interest expense, and a $205,000 decrease in provision for loan losses, partially offset by a $16,000 decrease in noninterest income, a $291,000 increase in noninterest expense, and a $164,000 reduction in income tax expense.

Net Interest Income. Net interest income increased by $578,000, or 19.6%, to $3.5 million for the three months ended December 31, 2011 from $2.9 million for the three months ended December 31, 2010. The increase was due to a decrease of $304,000 in interest expense and an increase of $274,000 in interest income. The increase in net interest income was primarily the result of a $79.6 million, or 20.7% increase in the average balance of interest earning assets, partially offset by a $34.9 million, or 9.8% increase in average balance of interest bearing liabilities. Our net interest margin decreased 3 basis points to 3.04% for the three months ended December 31, 2011 compared to 3.07% for the three months ended December 31, 2010, and our net interest rate spread decreased 8 basis points to 2.89% for the three months ended December 31, 2011 compared to 2.97% for the three months ended December 31, 2010.

Interest Income. Interest income increased $274,000, or 6.5%, to $4.5 million for the three months ended December 31, 2011 from $4.2 million for the three months ended December 31, 2010. The increase in interest income was primarily due to a $444,000 increase in interest income on securities, which resulted from an increase in the average balance of securities of $66.9 million, or 47.3%, to $208.4 million for the three months ended December 31, 2011 from $141.5 million for the three months ended December 31, 2010. The average balance of securities increased due to the investment of the proceeds received in the mutual-to-stock conversion. This growth was partially offset by a 8 basis point, or 2.8% decrease in the average yield on securities from 2.90% to 2.82%. The decrease in the average yield was primarily due to lower market interest rates during the period.

Interest income on loans decreased $172,000 as a $8.6 million increase in the average balance of loans to $246.1 million at December 31, 2011 was more than offset by a 47 basis point decrease in the average yield on loans from 5.40% to 4.93%. The decrease in the average yield on loans reflected a reduction in the current interest rates charged on loans originated during the period versus the average rates on existing loans in the portfolio.

Interest Expense. Interest expense decreased $304,000, or 23.6%, to $984,000 for the three months ended December 31, 2011 from $1.3 million for the three months ended December 31, 2010. The decrease occurred due to lower market interest rates during the period partially offset by higher deposit balances.

Interest expense on interest-bearing deposits decreased by $312,000, or 29.2%, to $757,000 for the three months ended December 31, 2011 from $1.1 million for the three months ended December 31, 2010. This decrease was primarily due to a decrease of 37 basis points in the average cost of interest-bearing deposits to .93% for the three months ended December 31, 2011 from 1.30% for the three months ended December 31, 2010. We experienced decreases in the average cost across all categories of interest-bearing deposits for the three months ended December 31, 2011, reflecting lower market interest rates as compared to the prior period. The decrease in average cost was also partially due to a $2.9 million, or 0.89%, decrease in the average balance of interest-bearing deposits to $325.1 million for the three months ended December 31, 2011 from $328.0 million for the three months ended December 31, 2010.

Interest expense on borrowings increased $8,000, or 3.7%, to $227,000 for the three months ended December 31, 2011 from $219,000 for the three months ended December 31, 2010. This increase was due to an increase in the average balance of borrowings to $67.2 million for the three months ended December 31, 2011 from $29.3 million for the three months ended December 31, 2010. This was partially offset by a 164 basis point decrease in the average cost of such borrowings to 1.35% for the three months ended December 31, 2011 from 2.99% for the three months ended December 31, 2010.

 

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Provision for Loan Losses. We recorded a provision for loan losses of $195,000 for the three months ended December 31, 2011, compared to a provision for loan losses of $400,000 for the three months ended December 31, 2010. During the three months ended December 31, 2011 and 2010, $107,000 and $334,000 in net charge-offs were recorded.

Noninterest Income. Noninterest income decreased $16,000, or 1.4%, to $1.1 million for the three months ended December 31, 2011 compared to $1.1 million for the three months ended December 31, 2010. The decrease was primarily due to decreases in mortgage banking income and brokerage commissions, partially offset by increases in insurance commissions and net realized gains on the sale of securities available for sale. For the three months ended December 31, 2011, mortgage banking income decreased $135,000 to $109,000 and brokerage commissions decreased $52,000 to $108,000. The decrease in mortgage banking income was due primarily to a reduction in the fair value of mortgage servicing rights as a result of decreased market interest rates. The decrease in brokerage commissions was a result of less activity due to decreased market interest rates.

Noninterest Expense. Noninterest expense increased $291,000, or 11.5%, to $2.8 million for the three months ended December 31, 2011 from $2.5 million for the three months ended December 31, 2010. The largest components of this increase were compensation and benefits, which increased $176,000, or 11.2%, professional services expense, which increased $22,000, or 27.5%, audit and accounting, which increased $78,000, or 100.0%, and supervisory exam expense, which increased $33,000, or 100.0%. Increased staffing, normal salary increases and increases in payroll taxes primarily accounted for the increase in compensation and benefits expense. Increases in professional services and audit and accounting expense were a result of increased costs associated with transitioning to a public company. The increase in supervisory exam expense resulted from the transition from the Office of Thrift Supervision to the Office of the Controller of the Currency payment schedule. These increases were partially offset by a decrease of $29,000 in deposit insurance premium resulting from the new FDIC formula used to calculate this premium.

Income Tax Expense. We recorded a provision for income tax of $596,000 for the three months ended December 31, 2011, compared to a provision for income tax of $432,000 for the three months ended December 31, 2010, reflecting effective tax rates of 36.8% and 37.8%, respectively.

Asset Quality

At December 31, 2011, our non-accrual loans totaled $6.7 million, including $4.8 million in one- to four-family loans, $1.6 million in multi-family loans, $101,000 in commercial real estate loans, $37,000 in home equity lines of credit, $39,000 in commercial business loans and $176,000 in consumer loans. The commercial real estate loans are secured by commercial rental properties. At December 31, 2011, we had no loans delinquent 90 days or greater and still accruing interest.

At December 31, 2011, loans classified as substandard equaled $7.0 million. Loans classified as substandard consisted of $5.0 million in one- to four-family loans, $1.6 million in multi-family loans, $101,000 in commercial real estate loans, $37,000 in home equity lines of credit, $39,000 in commercial business loans and $185,000 in consumer loans. At December 31, 2011, no loans were classified as doubtful or loss.

At December 31, 2011, one- to four-family residential mortgage loans classified as substandard equal $5.0 million compared to $5.4 million at June 30, 2011. At December 31, 2011, special mention assets consisted of $1.3 million in commercial business loans and $184,000 in one- to four-family loans.

Troubled Debt Restructuring. Troubled debt restructurings include loans for which economic concessions have been granted to borrowers with financial difficulties. We periodically modify loans to extend the term or make other concessions to help borrowers stay current on their loans and to avoid foreclosure. At December 31, 2011 and June 30, 2011, we had $4.2 million and $1.8 million, respectively, of troubled debt restructurings. At December 31, 2011 our troubled debt restructurings consisted of $2.5 million in one- to four-family loans, $1.6 million in multi-family loans, $101,000 in commercial real estate loans, $3,000 in commercial business loans and $34,000 in consumer loans.

 

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Of the increase in troubled debt restructurings, an increase of $654,000 in one- to-four family and $1.6 million in multi-family real estate loans were the result of the Company modifying loans by advancing funds for real estate taxes, in exchange for the taxes being capitalized into the loan and all future loan payments to include real estate tax escrow in addition to principal and interest payments. Prior to this troubled debt restructuring, only principal and interest payments were being made by the customers.

At December 31, 2011, we had $787,000 in foreclosed assets compared to $710,000 as of June 30, 2011. Foreclosed assets at December 31, 2011, consisted of $784,000 in residential real estate properties and $3,000 in other repossessed assets while foreclosed assets at June 30, 2011, consisted of $690,000 in residential real estate and $20,000 in other repossessed assets.

Allowance for Loan Loss Activity

The Company regularly reviews its allowance for loan losses and makes adjustments to its balance based on management’s analysis of the loan portfolio, the amount of non-performing and classified loans, as well as general economic conditions. Although the Company maintains its allowance for loan losses at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies, which can order the establishment of additional loss provisions. The following table summarizes changes in the allowance for loan losses over the six-month periods ended December 30, 2011 and 2010:

 

     Six months ended December 31,  
     2011     2010  

Balance, beginning of period

   $ 3,149      $ 2,767   

Loans charged off

    

Real estate loans

    

One-to-four family

     (324     (654

Multi-family

     0        0   

Commercial

     (49     0   

HELOC

     0        0   

Construction

     0        0   

Commercial business

     0        0   

Consumer

     (60     (31
  

 

 

   

 

 

 

Gross charged off loans

     (433     (685
  

 

 

   

 

 

 

Recoveries of loans previously charged off

    

Real estate loans

    

One-to-four family

     27        1   

Multi-family

     0        0   

Commercial

     0        0   

HELOC

     0        0   

Construction

     0        0   

Commercial business

     0        0   

Consumer

     31        4   
  

 

 

   

 

 

 

Gross recoveries of charged off loans

     58        5   
  

 

 

   

 

 

 

Net charge offs

     (375     (680
  

 

 

   

 

 

 

Provision charged to expense

     334        625   
  

 

 

   

 

 

 

Balance, end of period

   $ 3,108      $ 2,712   
  

 

 

   

 

 

 

The allowance for loan losses has been calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Company’s loans. Management considers such factors as the repayment status of a loan, the

 

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estimated net fair value of the underlying collateral, the borrower’s intent and ability to repay the loan, local economic conditions, and the Company’s historical loss ratios. We maintain the allowance for loan losses through the provisions for loan losses that we charge to income. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. The allowance for loan losses decreased $41,000 to $3.1 million at December 31, 2011, from $3.1 million at June 30, 2011. The decrease was a result of a decrease in required specific reserves 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 December 31, 2011.

In its quarterly evaluation of the adequacy of its allowance for loan losses, the Company employs historical data including past due percentages, charge offs, and recoveries. The Company’s allowance methodology weights the most recent twelve-quarter period’s net charge offs and uses this information as one of the primary factors for evaluation of allowance adequacy. The most recent four-quarter net charge offs are given a higher weight of 50%, while quarters 5-8 are given a 30% weight and quarters 9-12 are given only a 20% weight. The average net charge offs in each period are calculated as net charge offs by portfolio type for the period as a percentage of the quarter end balance of respective portfolio type over the same period. As the Company and the industry have seen increases in loan defaults in the past several years, the Company believes that it is prudent to emphasize more recent historical factors in the allowance evaluation. The following table sets forth the Company’s weighted average historical net charge offs as of December 31, 2011, and June 30, 2011:

 

Portfolio segment

   December 31, 2011
Net charge offs –

12 quarter weighted
historical
    June 30, 2011
Net charge offs –
12 quarter weighted
historical
 

Real Estate

    

One-to-four family

     .45     .52

Multi-family

     .03     .00

Commercial

     .16     .12

HELOC

     .03     .14

Construction

     .00     .00

Commercial business

     .14     .09

Consumer

     .14     .35
  

 

 

   

 

 

 

Entire portfolio total

     .33     .38

Additionally, in its quarterly evaluation of the adequacy of the allowance for loan losses, the Company evaluates changes in financial conditions of individual borrowers; changes in local, regional, and national economic conditions; the Company’s historical loss experience; and changes in market conditions for property pledged to the Company as collateral. The Company has identified specific qualitative factors that address these issues and subjectively assigns a percentage to each factor. At December 31, 2011, these qualitative factors included: (1) management’s assumptions regarding the minimal level of risk for a given loan category; (2) changes in lending policies and procedures, including changes in underwriting standards, and charge-off and recovery practices not considered elsewhere in estimating credit losses; (3) changes in international, national, regional and local economics and business conditions and developments that affect the collectability of the portfolio, including the conditions of various market segments; (4) changes in the nature and volume of the portfolio and in the terms of loans; (5) changes in the experience, ability, and depth of the lending officers and other relevant staff; (6) changes in the volume and severity of past due loans, the volume of non-accrual loans, the volume of troubled debt restructured and other loan modifications, and the volume and severity of adversely classified loans; (7) changes in the quality of the loan review system; (8) changes in the value of the underlying collateral for collateral-dependent loans; (9) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and (10) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current environment.

 

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

 

Portfolio segment

   Qualitative factor
applied at

December 31, 2011
    Qualitative factor
applied at

June 30, 2011
 

Real Estate

    

One-to-four family

     .38     .31

Multi-family

     1.02     .95

Commercial

     .44     .53

HELOC

     .87     .76

Construction

     .95     .75

Commercial business

     2.53     2.83

Consumer

     .64     .32
  

 

 

   

 

 

 

Entire portfolio total

     .60     .54

At December 31, 2011, the amount of our allowance for loan losses attributable to these qualitative factors was approximately $1.5 million, as compared to $1.3 million at June 30, 2011. The general increase in qualitative factors was attributable primarily to the increase in non-accrual loans as a result of higher troubled debt restructurings.

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.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan sales and repayments, advances from the Federal Home Loan Bank of Chicago, and maturities of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. For the six months ended December 31, 2011 and the year ended June 30, 2011, our liquidity ratio averaged 42.7% and 35.3% of our total assets, respectively. We believe that we had enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2011.

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 December 31, 2011, cash and cash equivalents totaled $14.6 million. Interest-earning time deposits which can offer additional sources of liquidity, totaled $250,000 at December 31, 2011.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Condensed Consolidated Statement of Cash Flows included in our financial statements. Net cash provided by (used in) operating activities were $3.1 million and $2.0 million for the six months ended December 31, 2011 and 2010,

 

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respectively. Net cash provided by (used in) investing activities consisted primarily of disbursements for loan originations and the purchase of securities, offset by net cash provided by principal collections on loans, and proceeds from maturing securities and pay downs on mortgage-backed securities. Net cash used in investing activities were $(14.9) million and $(23.4) million for the six months ended December 31, 2011 and 2010, respectively. Net cash provided by (used in) financing activities consisted primarily of the activity in deposit accounts and Federal Home Loan Bank borrowings. The net cash provided by (used in) financing activities was $(34.2) million and $21.2 million for the six months ended December 31, 2011 and 2010, respectively.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at December 31, 2011 and June 30, 2011.

 

     December 31,
2011
     June 30, 2011  

Commitments to fund loans

   $ 14,994       $ 6,251   

Lines of credit

     12,908         12,512   

At December 31, 2011, certificates of deposit due within one year of December 31, 2011 totaled $157.8million, or 47.5% of total deposits. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2012. Moreover, it is our intention as we continue to grow our commercial real estate portfolio, to emphasize lower cost deposit relationships with these commercial loan customers and thereby replace the higher cost certificates with lower cost deposits. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago, which provides an additional source of funds. Federal Home Loan Bank advances were $60.5 million at December 31, 2011. At December 31, 2011, we had the ability to borrow up to an additional $39.3 million from the Federal Home Loan Bank of Chicago and had the ability to borrow $33.8 million from the Federal Reserve.

The Association is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2011, the Association exceeded all regulatory capital requirements. The Association is considered “well capitalized” under regulatory guidelines.

 

     December 31, 2011     June 30, 2011     Minimum to Be Well  
     Actual     Actual     Capitalized  

Tier 1 capital to total assets

      

Association

     11.9     7.3     5.0

Company

     16.8     7.3     N/A   

Tier 1 capital to risk-weighted assets

      

Association

     23.5     15.7     6.0

Company

     33.3     15.7     N/A   

Total capital to risk-weighted assets

      

Association

     24.5     16.6     10.0

Company

     33.6     16.6     N/A   

 

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The net proceeds from the Company’s stock offering in connection with its conversion have significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of new loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, our return on equity will be adversely affected until we can deploy the proceeds effectively.

Average Balances and Yields

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

 

     For the Three Months Ended December 31,  
   2011     2010  
   Average
Balance
     Interest
Income/
Expense
     Yield/
Cost
    Average
Balance
     Interest
Income/
Expense
     Yield/
Cost
 
   (Dollars in thousands)  

Assets

                

Loans

   $ 246,128         3,034         4.93   $ 237,542         3,206         5.40

Securities:

                

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

     160,872         1,056         2.63     126,362         849         2.69

U.S. government-sponsored enterprise MBS

     44,696         401         3.59     12,553         146         4.65

State and political subdivisions

     2,822         14         1.98     2,585         32         4.95
  

 

 

    

 

 

      

 

 

    

 

 

    

Total securities

     208,390         1,471         2.82     141,501         1,027         2.90

Other

     9,365         4         0.17     5,249         2         0.15
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     463,883         4,509         3.89     384,292         4,235         4.41

Non-interest earning assets

     26,554              23,172         
  

 

 

         

 

 

       

Total assets

   $ 490,437            $ 407,464         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest-bearing liabilities:

                

Interest-bearing checking or NOW

   $ 27,562         14         0.20   $ 25,173         15         0.24

Savings accounts

     26,771         22         0.33     22,373         28         0.50

Money market accounts

     68,377         52         0.30     71,904         88         0.49

Certificates of deposit

     202,432         669         1.32     208,595         938         1.80
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     325,142         757         0.93     328,045         1,069         1.30

Federal Home Loan Bank Advances

     67,167         227         1.35     29,333         219         2.99
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     392,309         984         1.00     357,378         1,288         1.44

 

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Table of Contents
     For the Three Months Ended December 31,  
   2011     2010  
   Average
Balance
    Interest
Income/
Expense
     Yield/
Cost
    Average
Balance
    Interest
Income/
Expense
     Yield/
Cost
 
   (Dollars in thousands)  

Noninterest-bearing liabilities

     14,550             12,012        
  

 

 

        

 

 

      

Total liabilities

     406,859             369,390        

Stockholders’ equity

     83,578             38,073        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 490,437           $ 407,464        
  

 

 

        

 

 

      

Net interest income

     $ 3,525           $ 2,947      
    

 

 

        

 

 

    

Interest rate spread (1)

          2.89          2.97

Net interest margin (2)

          3.04          3.07

Net interest-earning assets (3)

   $ 71,574           $ 26,914        
  

 

 

        

 

 

      

Average interest-earning assets to interest-bearing liabilities

     118          108     

 

(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Tax exempt income is not recorded on a tax equivalent basis.

 

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     For the Six Months Ended December 31,  
   2011     2010  
   Average
Balance
    Interest
Income/
Expense
     Yield/
Cost
    Average
Balance
    Interest
Income/
Expense
     Yield/
Cost
 
   (Dollars in thousands)  

Assets

              

Loans

   $ 244,620        6,102         4.99   $ 236,999        6,457         5.44

Securities:

              

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

     156,474        2,050         2.62     117,247        1,776         3.03

U.S. government-sponsored enterprise MBS

     42,713        791         3.70     13,335        311         4.66

State and political subdivisions

     2,695        27         2.00     2,600        63         4.85
  

 

 

   

 

 

      

 

 

   

 

 

    

Total securities

     201,882        2,868         2.84     133,182        2,150         3.22

Other

     10,292        19         0.37     6,959        4         0.11
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     456,794        8,989         3.94     377,140        8,611         4.57

Non-interest earning assets

     26,658             24,640        
  

 

 

        

 

 

      

Total assets

   $ 483,452           $ 401,780        
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities:

              

Interest-bearing checking or NOW

   $ 26,971        28         0.21   $ 23,967        29         0.24

Savings accounts

     26,057        48         0.37     22,198        69         0.62

Money market accounts

     68,079        105         0.31     71,147        215         0.60

Certificates of deposit

     203,487        1,385         1.36     206,507        1,958         1.90
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     324,593        1,566         0.96     323,819        2,271         1.40

Federal Home Loan Bank Advances

     61,167        453         1.48     27,522        458         3.33
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     385,760        2,019         1.05     351,341        2,729         1.55

Noninterest-bearing liabilities

     14,667             15,239        
  

 

 

             

Total liabilities

     400,427             366,580        

Stockholders’ equity

     83,025             35,200        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 483,452           $ 401,780        
  

 

 

        

 

 

      

Net interest income

     $ 6,970           $ 5,882      
    

 

 

        

 

 

    

Interest rate spread (1)

          2.89          3.01

Net interest margin (2)

          3.05          3.12

Net interest-earning assets (3)

   $ 71,034           $ 25,799        
  

 

 

        

 

 

      

Average interest-earning assets to interest-bearing liabilities

     118          107     

 

(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average total interest-earning assets.
(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4) Tax exempt income is not recorded on a tax equivalent basis.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable, as the Company is a smaller reporting company.

 

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2011. Based upon such evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended December 31, 2011, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II – Other Information

 

Item 1. Legal Proceedings

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

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item1A.- Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, which could materially affect our business, financial condition or future results of operations. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. [Removed and Reserved]

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
  32    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101    Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of December 31, 2011 and June 30, 2011, (ii) the Condensed Consolidated Statements of Income for the six months ended December 31, 2011 and 2010, (iii) The Condensed Consolidated Statements of Stockholders’ Equity for the six months ended December 31, 2011 and 2010, (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2011 and 2010, and (v) the notes to the Condensed Consolidated Financial Statements.*

 

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

 

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SIGNATURES

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

 

    IF BANCORP, INC.
Date: February 10, 2012    

/s/ Alan D. Martin

    Alan D. Martin
    President and Chief Executive Officer
Date: February 10, 2012    

/s/ Pamela J. Verkler

    Pamela J. Verkler
    Vice President and Chief Financial Officer

 

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