Executive Summary / Key Takeaways

• Profit Resurgence Driven by Strategic Shift: IF Bancorp, Inc. (IROQ) delivered a significant financial turnaround in fiscal year 2025, with net income surging to $4.3 million, a 140.4% increase year-over-year, primarily fueled by a strategic pivot towards higher-yielding commercial and multi-family real estate loans and effective interest rate management.
• Enhanced Net Interest Margin: The company successfully expanded its net interest margin to 2.47% and its interest rate spread to 2.13% in FY2025, reflecting improved asset yields and a reduction in interest expense on borrowings.
• Strong Asset Quality and Capital Position: Despite increasing its exposure to commercial lending, IROQ maintains robust asset quality with non-performing assets at a low 0.02% of total assets, and its Iroquois Federal subsidiary remains "well-capitalized" under regulatory guidelines.
• Technological Foundation for Customer Engagement: IROQ leverages alternative delivery channels like online and mobile banking, alongside a robust Information Security Program, to enhance customer experience and mitigate operational risks, reinforcing its community-focused banking model.
• Competitive Headwinds and Market Dynamics: Operating in a competitive Midwest banking landscape, IROQ faces challenges from larger regional banks and agile fintechs, necessitating continued focus on its relationship banking model and strategic loan portfolio adjustments amidst mixed regional demographic trends.

A Midwest Banking Stalwart's Evolving Strategy

IF Bancorp, Inc., through its Iroquois Federal Savings and Loan Association, has been a cornerstone of Midwest banking since its founding in 1883. Headquartered in Watseka, Illinois, and operating seven full-service branches across Illinois and a loan production office in Osage Beach, Missouri, the company has cultivated a deep-rooted community presence. This long history underpins a business model centered on traditional deposit-taking and lending activities, serving a diverse clientele of individuals and businesses.

In recent years, IF Bancorp has embarked on a deliberate strategic evolution, transitioning from a conventional thrift institution to a more dynamic commercial lender. This pivot involves an increased focus on originating commercial real estate, multi-family real estate, and commercial business loans. This strategic shift is designed to capture higher returns, benefit from shorter loan durations, and leverage adjustable interest rates, which are generally more favorable than those typically associated with one-to-four-family residential mortgage loans. The company's underwriting standards are tailored to foster "relationship banking," emphasizing a comprehensive banking relationship with borrowers, including active deposit accounts.

The company operates within a diverse economic landscape. While some of its primary Illinois counties, such as Iroquois, Vermilion, and Kankakee, have experienced population declines, Champaign County, home to two of its branches, has seen population growth. Unemployment rates across its primary markets have shown positive trends, decreasing over the last year. The economy in these areas is diversified, with significant employment in services, trade, government, and agriculture, providing a stable, albeit sometimes slow-growing, foundation for banking operations. The Osage Beach, Missouri market, evolving into a retirement community, presents a promising avenue for mortgage lending.

Technological Edge and Operational Resilience

IF Bancorp recognizes the critical role of technology in modern banking. The company offers a suite of "alternative delivery channels" including ATMs, online banking with bill pay, mobile banking with mobile deposit, ACH origination, remote deposit capture, and telephone banking. These technologies are not merely conveniences; they are integral to enhancing customer experience, improving operational efficiency, and extending the company's reach beyond its physical branch network. By providing these digital tools, IROQ aims to meet evolving customer expectations and maintain competitiveness against more digitally native financial institutions.

Underpinning these services is a robust information technology infrastructure that is "critical to our business" for managing customer relationships, general ledger, securities, deposits, and loans. The company's commitment to cybersecurity is evident in its established Information Security Program (ISP), which is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework. This program incorporates a range of defensive measures, including computer scanning, intrusion prevention services, firewalls, end-point detection and response, data loss prevention, access controls, internal and external penetration testing, and security monitoring. The Board of Directors actively oversees cybersecurity risk tolerance and reviews the ISP annually, demonstrating a high level of governance. While the threat of cyber-attacks is acknowledged as "severe," the company's "internal systems, processes and controls are designed to mitigate loss from cyber-attacks and, to date, risks from cybersecurity threats have not materially affected the Company." This proactive approach to technology and security provides a competitive moat by protecting customer data and ensuring operational continuity, which is paramount for maintaining trust and stability in the financial services sector.

Financial Performance: A Year of Significant Growth

IF Bancorp's financial performance for the fiscal year ended June 30, 2025, reflects the positive impact of its strategic adjustments and a favorable interest rate environment. Net income surged to $4.3 million, or $1.37 per basic and diluted share, a substantial increase from $1.8 million, or $0.57 per basic and diluted share, in the prior fiscal year. This impressive growth was primarily driven by a significant increase in net interest income, coupled with higher noninterest income and a decrease in provisions for credit losses.

Net interest income, the core profitability metric for banks, rose by $3.1 million, or 17.4%, to $20.8 million for the year ended June 30, 2025, compared to $17.7 million in the previous year. This improvement was a direct result of a $2.4 million increase in interest and dividend income and a $652,000 decrease in interest expense. The company's interest rate spread expanded by 35 basis points to 2.13%, and its net interest margin increased by 37 basis points to 2.47%. This indicates effective asset-liability management in a dynamic interest rate environment. Interest on loans, a key component, increased by $2.8 million, or 8%, driven by a 36 basis point rise in the average yield on loans to 5.81% and an $8.8 million increase in the average balance of loans. Conversely, interest income on securities decreased by $418,000, or 7.5%, due to an 11 basis point decrease in average yield and a $7.4 million decrease in average balance. Interest expense on borrowings also saw a favorable decrease of $864,000, or 15.4%, reflecting lower average borrowing balances and a 55 basis point reduction in their average cost.

Noninterest income also contributed positively, increasing by $558,000, or 12.7%, to $4.9 million. This growth was primarily attributable to higher customer service fees, insurance commissions, brokerage commissions, and a notable boost from an insurance settlement related to HELOC check fraud. On the expense side, noninterest expense increased by $814,000, or 4.1%, to $20.5 million. This was mainly due to increases in "normal salary increases, annual incentive plan increase and an increase in medical costs" within compensation and benefits, higher equipment expense from core processing costs, and increased professional services. These increases were partially offset by a decrease in federal deposit insurance premiums, reflecting an "improvement in the sum of financial ratio contributions to assessment rate."

Asset quality remains a strong point for IF Bancorp. Non-performing assets totaled a low $211,000, representing just 0.02% of total assets at June 30, 2025. The allowance for credit losses (ACL) decreased by $872,000, or 11.6%, to $6.6 million at June 30, 2025, from $7.5 million at June 30, 2024. This reduction was attributed to "a decrease in loan growth and one loan relationship being upgraded from a criticized risk rating to a pass rating." The company's liquidity position is sound, with a liquidity ratio averaging 24.10% of total assets for FY2025, and substantial available borrowing capacity from the FHLB-Chicago, a correspondent bank, and the Federal Reserve Discount Window. Total equity increased by $7.9 million, or 10.7%, to $81.8 million, and Iroquois Federal maintains a "well-capitalized" status under regulatory guidelines, opting into the Community Bank Leverage Ratio framework.

Competitive Landscape and Strategic Positioning

IF Bancorp operates in a highly competitive regional banking environment, contending with a mix of larger regional banks, credit unions, and increasingly, non-traditional financial technology companies. In its core markets, IROQ demonstrates strong local presence, ranking second in Iroquois County with a 21.47% deposit market share and first in Vermilion County with a 26.87% deposit market share as of June 30, 2024. However, in newer markets like Champaign and Kankakee Counties, its market share is considerably lower, indicating the challenge of competing against established players with greater name recognition and resources.

Direct competitors such as First Mid Bancshares, Inc. (FMBH), Heartland Financial USA, Inc. (HTLF), Old National Bancorp (ONB), and Wintrust Financial Corporation (WTFC) often possess "substantially greater resources and lending limits" and may offer a broader array of services. Price competition for both loans and deposits from these rivals, as well as from fintech companies, can compress net interest income by forcing IROQ to offer lower loan rates and higher deposit rates. This competitive pressure also impacts the cost and difficulty of attracting and retaining qualified employees.

IROQ's competitive advantages, or moats, are primarily its strong local brand, extensive branch network, and the comprehensive suite of financial services offered through its regulatory licenses for insurance and wealth management. The company's long-standing presence and community-oriented approach foster significant customer loyalty, which can translate into stable funding sources and potentially stronger margins in its established markets. The integrated financial services offering differentiates IROQ from more specialized competitors, enabling cross-selling opportunities and contributing to fee-based income.

However, IROQ faces vulnerabilities, particularly its "limited geographic scale," which can restrict revenue opportunities and market share growth compared to rivals with broader footprints. Potential "technological gaps" relative to digitally advanced competitors could also impact efficiency and market share in online services. While the banking industry's high barriers to entry, including stringent regulatory approvals and capital requirements, protect IROQ from numerous new entrants, these same factors can favor larger, more established competitors who can more easily absorb compliance costs and invest in advanced technologies.

Outlook and Risk Considerations

IF Bancorp's outlook is shaped by its continued strategic focus on commercial lending and its disciplined approach to risk management. The company expects commercial real estate, multi-family, and commercial business loans to "continue to increase as a percentage of our total loan portfolio," signaling a sustained commitment to this higher-return segment. Management has expressed satisfaction with its dividend policy, with CEO Walter H. Hasselbring, III stating, "We are pleased to continue paying a cash dividend to our stockholders." Future dividend payments, however, will be contingent on capital requirements, financial condition, results of operations, and general economic conditions. The company also anticipates contributing $113,000 to its post-retirement health benefit plan in fiscal year 2026.

Despite the positive momentum, several risks warrant investor attention. The increased concentration in commercial real estate, multi-family, and commercial business loans inherently carries "more risk" than residential mortgages, as repayment is closely tied to the successful operation of properties and businesses, making the portfolio vulnerable to "adverse conditions in the local real estate market or economy." These loans often involve "relatively large loan balances to individual borrowers or groups of related borrowers," increasing concentration risk.

The company's reliance on deposits as a primary funding source, supplemented by FHLB-Chicago advances and brokered certificates of deposit, means that "adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources." Interest rate risk remains a significant concern, as the company's liabilities generally have a shorter average duration than its assets, creating "significant earnings volatility because market interest rates change over time." Management actively monitors and manages this risk through various strategies, including selling long-term fixed-rate mortgages and lengthening liability maturities.

Broader economic conditions, including the persistent inflation that "has had and may continue to have a negative effect on our results of operations and financial condition," pose a risk, particularly for small to medium-sized business customers. Cybersecurity threats, despite robust mitigation efforts, are a constant operational risk that could lead to financial loss, regulatory action, or reputational damage. Furthermore, intense competition from larger institutions and fintech companies could limit growth and profitability by pressing pricing and increasing the cost of attracting talent.

Conclusion

IF Bancorp, Inc. has demonstrated a compelling financial resurgence in fiscal year 2025, largely attributable to its strategic pivot towards higher-yielding commercial and multi-family real estate lending and adept interest rate risk management. The company's strong net interest income growth, coupled with robust asset quality and a well-capitalized subsidiary, paints a picture of a regional bank effectively executing its strategy. Its long-standing community ties, reinforced by a commitment to modern digital banking channels and a comprehensive cybersecurity framework, provide a foundational competitive advantage in its core markets.

While the competitive landscape remains challenging, with larger rivals and agile fintechs vying for market share, IROQ's focus on relationship banking and diversified service offerings, including insurance and wealth management, offers a differentiated value proposition. Investors should weigh the company's proven ability to adapt and grow against the inherent risks of increased commercial loan exposure, interest rate sensitivity, and intense competition. The company's solid capital base and proactive risk management, including its sophisticated Information Security Program, position it to continue its trajectory, making IROQ a noteworthy consideration for discerning investors seeking exposure to a resilient regional banking story with a clear strategic direction.