Home Federal Bancorp, Inc. of Louisiana — Form 10-Q
Reporting period: Fiscal first quarter ended September 30, 2014. Unaudited consolidated results include Home Federal Bank. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial performance
The company is a Louisiana savings-and-loan holding company serving the Shreveport-Bossier City area. During the quarter, the Bank opened a fifth full-service office in Bossier City.
| Metric | Quarter ended Sep. 30, 2014 | Prior-year quarter | Change |
|---|---|---|---|
| Interest income | $3.555 | $3.331 | +6.7% |
| Net interest income | $2.975 | $2.701 | +10.1% |
| Provision for loan losses | $0.040 | $0.066 | Down $0.026 |
| Non-interest income | $0.629 | $0.604 | +4.1% |
| Non-interest expense | $2.337 | $2.182 | +7.1% |
| Income before taxes | $1.227 | $1.057 | +16.1% |
| Net income | $0.823 | $0.713 | +15.4% |
| Diluted earnings per share | $0.40 | $0.33 | +21.2% |
Net interest margin was 3.83%, compared with 3.91%; average interest-rate spread was 3.63%, versus 3.65%. The effective tax rate was 32.9%, versus 32.5%. Dividends declared were $0.07 per share, up from $0.06.
Financial position, cash flow and liquidity
- Assets and lending: Total assets were $340.5 million at September 30, up 3.3% from June 30. Net loans were $248.3 million, up $8.7 million (3.7%); total loan originations were $71.9 million, versus $54.6 million a year earlier. Loans held for sale were $11.0 million.
- Funding and borrowings: Deposits declined $20.3 million (7.4%) to $252.0 million, while Federal Home Loan Bank advances increased $30.7 million to $43.6 million. The deposit decline was largely related to a $30.6 million short-term deposit that was fully withdrawn. The Bank had $106.4 million of additional FHLB borrowing capacity and a separate $16.3 million federal-funds purchase facility, unused at quarter-end.
- Cash and investments: Cash and cash equivalents fell $8.8 million to $4.8 million. Securities totaled $57.9 million, including $55.5 million available for sale. Management said securities could be sold as needed to fund lending.
- Cash flows: Operating activities used $0.267 million, versus $1.122 million used in the prior-year quarter. Investing activities used $18.271 million, mainly reflecting loan growth, securities purchases and $1.624 million of premises and equipment spending. Financing activities provided $9.699 million, including net FHLB funding, partly offset by deposit outflows. Cash decreased $8.839 million during the quarter.
- Capital and equity: Stockholders’ equity was $42.7 million, down $0.1 million from June 30; book value per share was $19.36. Bank regulatory capital ratios were 12.29% tangible, 12.29% core and 20.83% risk-based; the company reported these were above minimum requirements.
Material changes and asset quality
- Net interest income rose as interest income increased and funding costs declined; the loan portfolio and average interest-earning assets expanded. The lower margin and spread show that margin did not improve alongside net interest income.
- Compensation and benefits expense increased $118,000, with management citing normal increases and hiring additional commercial and residential loan officers. Occupancy and equipment expense also rose, partly associated with the new branch and future branch property.
- The allowance for loan losses was $2.285 million, or 0.91% of total loans, compared with $2.306 million, or 1.10%, at September 30, 2013. The quarter included $151,000 of charge-offs and a $40,000 provision. Management cautioned that the allowance may not cover future losses.
- Non-performing loans were $108,000 at September 30, compared with $178,000 at June 30; the filing reported no other non-performing assets and no troubled-debt restructurings. Management identifies the allowance estimate as a critical accounting judgment.
- Available-for-sale securities had $728,000 of gross unrealized losses and $749,000 of gross unrealized gains at quarter-end. The quarter recorded a $158,000 after-tax unrealized loss in other comprehensive income.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management stated it intends to use liquidity to support lending and may sell available-for-sale securities if needed. It expects a significant portion of certificates of deposit maturing within one year ($58.7 million) to remain, but gave no assurance; renewal costs could rise if interest rates increase.
Key risks discussed include interest-rate and competitive conditions, deposit flows and loan prepayments, credit quality and the judgment involved in estimating loan losses. The company’s lending and deposit activity is concentrated primarily in northwest Louisiana. A material funding change during the quarter was the withdrawal of the temporary $30.6 million deposit, which was funded in part through increased FHLB advances. The filing reports routine legal proceedings considered immaterial, no material change in internal control, and no off-balance-sheet arrangements under SEC rules.
Important facts for investors to verify
- Whether the deposit outflow was temporary and how the higher FHLB borrowing level affects funding costs and liquidity.
- Loan growth and credit trends, including charge-offs, delinquency levels, the doubtful commercial loan and the adequacy of the allowance.
- Whether the lower net interest margin persists as asset yields, deposit costs and interest rates change.
- The effect of branch and staffing investments on future expense and earnings.
- The filing reports 2,203,442 shares outstanding at September 30, while its cover page reports 2,198,442 shares outstanding as of November 7; verify the share-count difference and related repurchases.