Home Federal Bancorp, Inc. of Louisiana — Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 31, 2017. Balance-sheet comparisons are to June 30, 2017. Amounts are in millions unless stated otherwise. The company is a bank holding company operating Home Federal Bank primarily in the Shreveport-Bossier City area.
Key financial results
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Interest income | $4.587 | $4.062 | $9.180 | $8.157 |
| Net interest income | $3.731 | $3.405 | $7.473 | $6.862 |
| Provision for loan losses | $0.200 | $0.300 | $0.500 | $0.600 |
| Non-interest income | $0.697 | $0.821 | $1.665 | $1.939 |
| Non-interest expense | $2.755 | $2.846 | $5.586 | $5.621 |
| Income tax expense | $1.112 | $0.317 | $1.683 | $0.815 |
| Net income | $0.361 | $0.763 | $1.369 | $1.765 |
| Diluted EPS | $0.19 | $0.40 | $0.72 | $0.94 |
| Net interest margin | 3.76% | 3.67% | 3.75% | 3.85% |
| Average interest-rate spread | 3.54% | 3.49% | 3.53% | 3.71% |
Financial condition, liquidity and cash flow
- At December 31, total assets were $411.8, down 3.5% from $426.6 at June 30. Net loans were $316.1, up 1.1%; total deposits were $342.2, up 4.0%; and stockholders’ equity was $45.9, down 0.7%.
- Cash and cash equivalents were $9.4, versus $11.9 at June 30. Available-for-sale and held-to-maturity securities totaled $61.6, down from $65.3.
- Federal Home Loan Bank advances declined to $21.8 from $48.9. The filing reports $350,000 of other borrowings at December 31. Total liabilities were $365.9.
- For the six months, operating cash flow was $13.7, investing cash flow was negative $0.5, and financing cash flow was negative $15.7. Cash declined $2.5 to $9.4.
- Liquidity sources included $146.5 of additional FHLB borrowing capacity and an unused $15.5 federal-funds purchase agreement. The bank had $50.5 of loan-originating commitments and $10.6 of unused credit-line commitments. Certificates of deposit totaling $62.1 mature within one year.
- The Bank reported regulatory capital ratios of 11.12% tangible, 16.37% common equity Tier 1, 11.12% core, and 17.56% risk-based, all above minimum requirements.
Material changes and management commentary
- Net interest income increased 9.6% in the quarter and 8.9% year to date, supported by higher interest income and loan growth. Management noted higher deposit and borrowing costs; the year-to-date net interest margin fell to 3.75% from 3.85%.
- Net income declined 52.7% in the quarter and 22.4% year to date. The principal factor was a $642,000 deferred-tax-asset remeasurement charge following enactment of the Tax Cuts and Jobs Act, which lowered the federal corporate tax rate to 21% effective January 1, 2018. The filing states the charge was recognized in income tax expense.
- Non-interest income fell, principally because gains on loan sales were lower. Year-to-date loan-sale gains were $1.035 versus $1.385 a year earlier. Non-interest expenses were slightly lower year to date.
- Loans held for sale fell 79.8% from June to $2.8, which management attributed primarily to lower origination volume. Net loans increased modestly, including growth in one-to-four-family and multifamily residential loans.
- The allowance for loan losses was $3.4, or 1.07% of total loans. Six-month charge-offs were $851,000, compared with $14,000 in the prior-year period; the filing attributes $797,000 to commercial loans. Management considered the allowance adequate but cautioned that future losses could exceed it.
- Non-performing assets were $3.2 at December 31, down from $3.5 at June 30. Substandard loans increased to $7.5 from $3.3; no loans were classified as doubtful. One commercial borrower’s loans remained nonaccrual, with $1.6 outstanding after charge-offs and principal payments. A further $4.7 of commercial loans was classified as TDRs during the quarter; these were current on interest, with no losses expected by management at that time.
- Available-for-sale securities had $951,000 of gross unrealized losses, primarily attributed to interest-rate changes. Management said the agency-guaranteed mortgage-backed securities were not other-than-temporarily impaired and that it had the ability and intent to hold them until recovery.
Outlook, risks and other items
The filing provides no formal earnings or growth guidance. Management said it expected to use available liquidity to support lending and could sell available-for-sale securities if needed. It noted that deposit flows, loan prepayments, competition and interest rates affect liquidity and funding costs; certificates renewing in a rising-rate environment could cost more. Forward-looking statements are subject to risks and assumptions, and the company disclaims an obligation to update them.
The allowance for loan losses and realization of deferred tax assets depend on management estimates and future conditions. The filing reports no material pending legal proceedings beyond routine matters, no off-balance-sheet arrangements as defined by SEC rules, and no applicable risk-factor disclosure in this report. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported earnings trends excluding the $642,000 tax remeasurement are sustainable, and how the lower statutory tax rate affects future effective tax expense.
- Subsequent performance, collateral support and recoveries for the commercial borrower’s nonaccrual loans, and the credit quality of the newly identified $4.7 million TDR exposure.
- The causes and implications of $851,000 in six-month charge-offs, and whether the $3.4 million allowance remains appropriate as substandard loans rise.
- Deposit retention, renewal pricing and liquidity needs, including the $62.1 million of certificates maturing within one year and outstanding loan commitments.
- Whether margin pressure from higher funding costs continues, and whether lower loan-sale volume persists.
- Capital and shareholder-return developments: the company repurchased $1.4 million of stock during the six months and declared dividends of $0.24 per share.