Home Federal Bancorp, Inc. Of Louisiana annual report, FY2019

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Home Federal Bancorp, Inc. of Louisiana — FY2019 Form 10-K

Reporting period: Fiscal year ended June 30, 2019. The filing is an annual report, not a standalone 2018 fourth-quarter report. Amounts are U.S. dollars; financial figures are generally in millions unless noted.

Business context

The Company is a holding company for Home Federal Bank, a community savings bank serving the Shreveport–Bossier City area of northwest Louisiana. Its core business is gathering deposits and making loans. The bank operates eight offices; one was temporarily closed for renovation and reopened in September 2019.

Financial performance and condition

  • Profit: Net income was $4.74 million, up 32.9% from $3.57 million. Diluted EPS was $2.50 versus $1.87; basic EPS was $2.68 versus $1.98.
  • Interest earnings: Net interest income rose 2.6% to $15.31 million. Net interest margin edged down to 3.78% from 3.80%, and the interest-rate spread narrowed to 3.49% from 3.58% as funding costs rose.
  • Other income and expenses: Non-interest income fell 20.2% to $2.39 million, including a $345,000 loss on real estate and fixed assets. Non-interest expense was nearly flat at $11.07 million. The efficiency ratio increased to 62.56% from 61.65%.
  • Assets and loans: Total assets increased 4.9% to $442.45 million. Net loans rose 2.1% to $324.13 million; total loans were $327.76 million. Commercial real estate loans reached $83.4 million and commercial business loans $36.0 million, while one-to-four-family residential loans declined to $118.9 million.
  • Deposits and debt: Deposits grew 7.7% to $388.16 million, including $183.3 million of certificates of deposit and $11.2 million of brokered deposits. FHLB advances declined to $1.36 million from $11.64 million. Other borrowings were $450,000.
  • Cash flow: Operating activities provided $4.86 million, down from $13.10 million; investing activities used $17.49 million, versus $0.76 million used; financing activities provided $14.87 million, versus $8.38 million used. Cash and cash equivalents increased $2.24 million to $18.11 million.
  • Capital and liquidity: Stockholders’ equity was $50.34 million. The bank was classified as well capitalized, with a 11.37% leverage/core capital ratio, 16.51% common equity Tier 1 ratio and 17.64% total risk-based capital ratio. The quarterly average liquidity ratio was 18.84%; additional FHLB borrowing capacity was reported at $169.6 million.

Material changes versus FY2018

  • Net income improved, primarily reflecting lower income-tax expense and loan-loss provision, plus higher net interest income. The effective tax rate fell to 21.3% from 38.7%; the prior year included a $642,000 deferred-tax remeasurement charge related to the Tax Act.
  • Interest income rose 7.7% to $19.85 million, but interest expense increased 29.7% to $4.53 million, driven by higher deposit balances and rates. The average rate paid on certificates rose to 1.82% from 1.45%.
  • Non-performing assets increased to $5.11 million from $3.03 million, and non-performing loans rose to $3.74 million from $1.86 million. Non-performing loans were 1.15% of net loans, versus 0.58%.
  • The allowance for loan losses was $3.45 million, or 1.05% of loans, compared with $3.43 million, or 1.07%. The allowance covered 92.3% of non-performing loans, down from 183.6%. The company recorded $600,000 of provision and $586,000 of charge-offs.
  • Deposits increased while FHLB advances fell substantially. The loan portfolio continued shifting toward commercial and multifamily lending; commercial real estate and multifamily balances rose by about $9.0 million and $8.1 million, respectively.

Outlook, risks and unusual items

  • Management intends to grow and diversify commercial real estate and business lending, sell a substantial portion of fixed-rate residential mortgage production, expand digital and commercial services, manage expenses and consider additional branches or acquisitions. No specific earnings or growth guidance was provided.
  • Management identifies interest-rate changes, competition, local and general economic conditions, real-estate values, loan losses, deposit flows, and regulation as factors that could affect results. Higher funding costs may pressure margins; the company also notes that commercial lending generally carries greater credit risk.
  • At year-end, $2.98 million of land loans were non-accrual; $7.41 million of loans were classified substandard. Troubled debt restructurings totaled $3.84 million, excluding those already included in non-performing loans. Other real estate owned was $1.37 million.
  • Certificates of deposit totaling $97.6 million were scheduled to mature within one year. Management expects a significant portion to renew, but gives no assurance; renewal costs could rise. Outstanding loan commitments and unused credit lines totaled $49.56 million.
  • The bank had $15.1 million of cash deposits above insured limits. It also had $27.7 million of FHLB letters of credit securing public deposits, with no associated borrowing outstanding.
  • The Company repurchased $2.45 million of its shares during FY2019. After year-end, it approved a new program authorizing repurchase of up to 90,000 shares. The auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective. The auditor was not engaged to opine on internal-control effectiveness.

Important facts for investors to verify

  1. Review the status, collateral values and subsequent performance of the $2.98 million non-accrual land loans and the broader increase in non-performing assets.
  2. Assess whether the $3.45 million allowance is adequate given the decline in coverage of non-performing loans and the bank’s commercial-loan growth.
  3. Track renewal rates and costs for the $97.6 million of certificates maturing within one year, including brokered and large-denomination deposits.
  4. Confirm subsequent loan growth, credit quality and funding costs, and whether management’s commercial-lending strategy improves returns without worsening asset quality.
  5. Check actual liquidity use against $49.56 million of commitments and the stated borrowing capacity, and monitor share repurchases and dividends against capital needs.