Home Federal Bancorp, Inc. Of Louisiana quarterly report, Q1 FY2013

Business context and reporting period

Home Federal Bancorp, Inc. of Louisiana is the holding company for Home Federal Bank, a community savings and loan serving northwest Louisiana. The filing covers the three months ended September 30, 2012, the first quarter of the company’s fiscal year ending June 30, 2013. The request labels this “2012 Q1,” but the filing’s actual reporting period is September 30, 2012. Financial statement amounts below are in millions unless stated otherwise.

Key financial results

Metric	Quarter ended Sep. 30, 2012	Prior-year quarter
Interest income	$3.340	$2.874
Net interest income	$2.647	$2.076
Provision for loan losses	$0.111	$0.086
Non-interest income	$0.931	$0.944
Non-interest expense	$2.061	$1.853
Net income	$0.939	$0.802
Diluted earnings per share	$0.35	$0.28
Dividend declared per share	$0.06	$0.06

• Net income rose 17.1%. Net interest margin increased to 4.08% from 3.69%, and the average interest-rate spread rose to 3.77% from 3.23%.
• Average interest-earning assets grew to $259.5 million from $224.7 million. Average loan yield declined to 6.16% from 6.72%, while the average cost of interest-bearing liabilities fell to 1.38% from 1.89%.
• Operating cash flow was $3.478 million, compared with cash used of $1.361 million in the prior-year quarter. Investing activities used $3.969 million and financing activities used $27.537 million; cash and cash equivalents fell $28.028 million to $6.835 million.

Financial position, liquidity and credit

• At September 30, total assets were $270.2 million, down 8.8% from June 30; total liabilities were $221.4 million and stockholders’ equity was $48.9 million.
• Net loans increased 3.9% to $174.8 million. Total deposits fell 12.8% to $193.2 million, while FHLB advances increased 11.9% to $26.3 million. Management attributed most of the deposit and cash decline to the withdrawal of a non-recurring $31.7 million deposit held at June 30.
• The allowance for loan losses was $1.809 million, or 1.02% of total loans, versus $0.928 million, or 0.72%, a year earlier. The quarter’s provision was $111,000; no loan charge-offs were reported. There were no non-performing assets or troubled debt restructurings at September 30, and no loans were over 90 days past due.
• The Bank reported regulatory capital ratios of 16.66% tangible, 16.66% core and 30.04% risk-based, above stated minimums of 1.5%, 3.0% and 8.0%, respectively. It had $118.2 million of additional FHLB borrowing capacity and a $17.4 million Federal Funds purchase limit, unused at quarter-end.
• Outstanding commitments to originate loans were $27.8 million. Certificates of deposit totaling $39.4 million were due within one year. Management expected a significant portion to renew, but noted renewals could cost more if rates rise.

Material changes and management commentary

• Management attributed stronger net interest income primarily to higher loan originations following the hiring of additional loan officers and lower funding costs. Compensation and benefits increased 17.6%, mainly from staffing, loan commissions and stock-based compensation; total non-interest expense rose 11.2%.
• Non-interest income edged down 1.4%: loan-sale gains increased to $682,000, while securities-sale gains declined to $95,000 from $203,000.
• Shareholders’ equity declined 2.0%, primarily reflecting $2.3 million of treasury-stock purchases and $172,000 of dividends, partly offset by earnings. The company repurchased 127,309 shares during the quarter at an average $17.19 per share under announced repurchase programs.
• Management stated the Bank was well above regulatory capital requirements and intended to use liquidity to support lending. The filing provides no numerical earnings or operating guidance and cautions that quarterly results are not necessarily indicative of full-year results.

Risks, contingencies and unusual items

• Management identifies the allowance for loan losses as a critical estimate subject to judgment and possible revision; actual losses may exceed the allowance. Deposit flows, loan prepayments, competition and interest-rate changes can affect liquidity and results.
• Most available-for-sale debt securities were mortgage-backed securities with contractual maturities over ten years, exposing portfolio cash flows and values to prepayment and interest-rate effects. Securities and mortgage loans with a carrying value of $87.8 million secured FHLB advances.
• The filing reports no material pending legal proceedings apart from routine matters believed immaterial, no material change in internal controls, and no off-balance-sheet arrangements as defined by SEC rules. Risk Factors and quantitative and qualitative market-risk disclosures are marked not applicable.
• The quarter included the withdrawal of the unusually large deposit and substantial share repurchases. Management’s forward-looking statements are subject to risks and assumptions, and the company states it does not intend to update them.

Important facts for investors to verify

1. Confirm the deposit withdrawal was the non-recurring $31.7 million balance described by management, and assess the resulting deposit mix, liquidity and ongoing funding costs.
2. Review loan growth and underwriting quality, particularly commercial real estate, land and construction exposures, and monitor the allowance as a share of loans and any emergence of delinquencies or non-performing assets.
3. Check the sustainability of net interest margin gains, given lower loan yields, interest-rate sensitivity and the bank’s reliance on deposits and FHLB funding.
4. Reconcile share repurchase activity, treasury-stock balances and shares outstanding: the filing reports 2.778 million shares outstanding at September 30 and 2.751 million at November 9.
5. Verify upcoming certificate maturities, renewal behavior and rates, as well as the availability and terms of contingent borrowing sources.