Home Federal Bancorp, Inc. of Louisiana — Form 10-Q
Reporting period: Fiscal third quarter ended March 31, 2020; income and cash-flow comparisons cover the three and nine months ended March 31, 2020 versus the same 2019 periods. Balance-sheet comparisons are against June 30, 2019. Amounts are in millions unless noted.
Business context and financial performance
The company is a Louisiana bank holding company operating Home Federal Bank, with seven full-service offices primarily serving the Shreveport–Bossier City area.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net interest income | $3.54 (2019: $3.83) | $11.13 (2019: $11.64) |
| Provision for loan losses | $0.32 (2019: $0.10) | $1.44 (2019: $0.45) |
| Non-interest income | $1.05 (2019: $0.48) | $2.93 (2019: $1.59) |
| Non-interest expense | $3.03 (2019: $2.72) | $9.12 (2019: $8.22) |
| Net income | $0.98 (2019: $1.19) | $2.81 (2019: $3.58) |
| Diluted earnings per share | $0.54 (2019: $0.63) | $1.54 (2019: $1.88) |
Quarterly and nine-month net income declined approximately 18% and 21%, respectively. Net interest margin was 3.30% for the quarter and 3.47% for the nine months, versus 3.86% in each comparable 2019 period. The nine-month effective tax rate was 19.7%.
Financial position, cash flow, and liquidity
- At March 31, total assets were $460.5, up 4.1% from June 30, 2019. Cash and cash equivalents rose to $41.6 from $18.1; net loans declined to $318.7 from $324.1.
- Deposits increased 4.6% to $406.1. Other borrowings were $1.8, versus $0.45 at June 30; FHLB advances totaled $1.1. Stockholders’ equity was $49.7, down from $50.3.
- For the nine months, operating cash flow was $2.9 (prior year: $6.1); investing activities provided $6.2 (prior year used $19.2); financing activities provided $14.4 (prior year: $8.6). Cash increased $23.5.
- Management reported $159.5 of additional FHLB borrowing capacity, a $15.5 federal-funds purchase facility with no balance drawn, and a $5.0 credit line with $1.8 outstanding. The Bank’s regulatory capital ratios exceeded minimum requirements: tangible equity 11.02%, CET1 16.15%, core 11.02%, and total risk-based capital 17.36%.
- Loan commitments were $43.5 and unused lines of credit $7.9. Certificates of deposit totaling $86.7 were scheduled to mature within one year.
Material changes and credit quality
- Net interest income fell as funding costs rose and asset yields declined. The quarterly interest-rate spread narrowed to 2.98% from 3.56%; the nine-month spread was 3.13% versus 3.59%.
- Higher loan-loss provisions reflected increased charge-offs and credit concerns. The allowance was $3.8, or 1.17% of loans, compared with $3.6, or 1.09%, at March 31, 2019. Nine-month charge-offs were $1.12, versus $0.30 a year earlier.
- Non-performing assets rose to $7.3 from $5.1 at June 30, 2019. Management attributed the increase primarily to a $3.8 borrower relationship of six loans placed on non-accrual; these loans had previously been classified as troubled debt restructurings.
- Non-interest income benefited from higher gains on loan sales and a $0.22 gain on securities sales. The company repurchased $3.8 of stock and paid $0.87 in dividends during the nine months.
Outlook, COVID-19, and risks
- The filing states COVID-19 had not materially affected results through March 31, but warns that the pandemic could adversely affect borrowers, credit quality, revenues, asset values, net interest income, and net interest margin. Management said the impact and duration were difficult to predict.
- After quarter-end, through May 8, 2020, the Bank had funded 351 SBA Paycheck Protection Program loans totaling approximately $45.8. Through April 30, it had modified 220 loans with balances of $84.6, or 26.2% of March 31 loans; most were three-month payment deferrals. The filing says it was too early to determine whether borrowers would perform under modified terms.
- The Bank elected CARES Act relief that permits qualifying COVID-related modifications to avoid TDR classification. Payment accommodations and economic uncertainty may affect future estimates of credit losses; the filing cautions that delinquencies, classified loans, and charge-offs could increase.
- Other identified risks include interest-rate and competitive pressures, economic weakness and declining loan demand, operational and cybersecurity risks from remote work, and dependence on third-party vendors. No specific earnings guidance was provided.
Investor verification priorities
- Review subsequent-period credit performance of the $84.6 in modified loans and the $3.8 non-accrual borrower relationship, including delinquencies, restructurings, and charge-offs.
- Track allowance adequacy and the effects of economic forecasts and the transition to expected-credit-loss accounting.
- Assess net interest margin, deposit costs and mix, deposit retention, and maturities of the $86.7 in certificates due within one year.
- Verify PPP loan balances, fee income and forgiveness treatment, and any related credit or operational risks.
- Monitor capital and liquidity after lending commitments, stock repurchases, dividends, and any further deterioration in asset quality.