Home Federal Bancorp, Inc. of Louisiana — FY2018 Form 10-K
Period clarification: The filing is an annual report for the fiscal year ended June 30, 2018, not a report for calendar 2017 Q4. Comparisons below are primarily with the fiscal year ended June 30, 2017.
Business context and reporting period
The Company is a bank holding company whose principal activity is owning Home Federal Bank, a community savings bank serving the Shreveport-Bossier City area of northwest Louisiana. The Bank gathers deposits and uses them mainly to originate loans. It operated six full-service branches and its home office during the year.
Financial performance and condition
| Metric | FY2018 / June 30, 2018 | Prior comparable period |
|---|---|---|
| Total assets | $421.7 million | $426.6 million |
| Net interest income | $14.9 million | $14.1 million |
| Non-interest income | $3.0 million | $3.9 million |
| Provision for loan losses | $1.05 million | $0.90 million |
| Non-interest expense | $11.0 million | $11.7 million |
| Income before taxes | $5.82 million | $5.41 million |
| Income tax expense | $2.25 million | $1.76 million |
| Net income | $3.57 million | $3.65 million |
| Diluted EPS | $1.87 | $1.91 |
| Net interest margin | 3.80% | 3.85% |
| Return on average assets / equity | 0.85% / 7.61% | 0.91% / 8.14% |
| Efficiency ratio | 61.65% | 64.91% |
Total loans, before allowance and deferred fees, were $321.2 million; net loans were $317.5 million, about 75% of assets. The portfolio remained concentrated in real estate lending: one-to-four-family residential loans were 37.8% of total loans, commercial real estate 23.2%, and commercial business 11.0%.
Deposits rose 9.5% to $360.3 million, while FHLB advances fell to $11.6 million from $48.9 million. Stockholders’ equity was $47.0 million. Cash and cash equivalents were $15.9 million. Management reported an average liquidity ratio of 18.73% for the quarter ended June 30, 2018, and $157.2 million of additional FHLB borrowing capacity.
Operating cash flow was $13.1 million; investing cash flow was negative $0.8 million and financing cash flow negative $8.4 million. Cash increased $4.0 million to $15.9 million. The Bank’s regulatory capital ratios included a 11.36% leverage/tangible capital ratio and 17.84% total risk-based capital ratio; it was classified as well capitalized.
Material changes versus FY2017
- Net interest income increased 6.0%, supported by growth in average interest-earning assets and higher loan interest income. Higher deposit costs lifted interest expense 24.7%; the average interest-rate spread narrowed to 3.58% from 3.71% and margin fell to 3.80% from 3.85%.
- Net income declined $84,000 despite higher pretax income. A one-time, non-cash $642,000 deferred-tax remeasurement charge related to the Tax Cuts and Jobs Act reduced diluted EPS by approximately $0.35.
- Non-interest income fell $905,000, mainly because gain on loan sales declined about $1.0 million. Loan sales were $82.0 million versus $111.2 million; related gains were $1.8 million versus $2.8 million.
- Non-interest expense decreased $626,000, primarily from lower compensation and advertising costs. The efficiency ratio improved by about 3.3 percentage points.
- Net loans grew 1.5%. Multi-family loans increased $16.8 million, while one-to-four-family residential, commercial real estate, land, and equity-line balances decreased. Total loan originations were $280.1 million versus $304.7 million.
- Deposits grew $31.2 million, notably through money-market accounts, while FHLB advances declined $37.3 million. The available-for-sale securities balance fell to $29.3 million from $36.9 million.
- Non-performing assets decreased to $3.0 million, or 0.72% of assets, from $3.5 million, or 0.83%. However, classified substandard loans increased to approximately $6.0 million from $3.3 million, and troubled debt restructurings were reported in FY2018.
Outlook, commentary, risks and unusual items
- Management plans to emphasize commercial real estate, commercial business and consumer lending, while continuing to sell a substantial portion of long-term fixed-rate residential originations to manage interest-rate risk. Commercial and construction lending can carry greater credit risk than residential lending.
- The Company anticipated opening a seventh branch in Shreveport in February 2019 and said it may pursue further branch expansion or acquisitions in contiguous markets. No earnings or growth guidance was provided.
- Management cited sensitivity to interest rates, local economic and competitive conditions, deposit pricing and flows, loan losses, real-estate values, and regulatory changes. Its interest-rate model showed net portfolio value down 4.06% under a +300-basis-point shock and down 6.71% under a -200-basis-point shock.
- At June 30, 2018, non-performing assets included $1.2 million of foreclosed property. The allowance for loan losses was $3.4 million, or 1.07% of loans; FY2018 charge-offs were $1.38 million. Management considered the allowance adequate but noted that estimates could change and affect future earnings.
- A commercial borrower’s bankruptcy-related exposure was reduced through charge-offs, payments and equipment-sale proceeds; one $416,000 commercial loan remained substandard and on non-accrual. Management said it anticipated no additional losses on those loans, while continuing to monitor the credit.
- The filing reports $43.6 million in commitments to grant loans and $11.1 million in unused line-of-credit commitments. Certificates of deposit totaling $71.9 million were scheduled to mature within one year; renewal costs could rise if rates increase.
- The Company repurchased $2.0 million of stock during FY2018 and paid $924,000 in dividends. Quarterly dividends were $0.12 per share in FY2018, up from $0.09 in FY2017.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not opine on internal control over financial reporting; management stated its controls were effective. The filing describes no material pending litigation.
Most important facts for investors to verify
- Confirm the correct reporting period: this is FY2018, despite the request metadata referring to 2017 Q4.
- Reconcile the filing’s TDR disclosures: MD&A cites approximately $6.9 million, while the note’s listed FY2018 commercial-business and residential TDR balances sum to approximately $7.3 million.
- Review the quality and performance of substandard loans, including the $416,000 non-accrual commercial credit, and assess whether the allowance remains adequate as the commercial portfolio grows.
- Assess deposit repricing and retention risk, particularly the $71.9 million of CDs maturing within a year, the increase in average deposit costs, and the use of brokered deposits.
- Evaluate the sustainability of earnings excluding the $642,000 tax remeasurement and the lower loan-sale gains, as well as the effects of continued rate changes on margins and securities values.