Home Federal Bancorp, Inc. Of Louisiana quarterly report, Q2 FY2017

Business context and reporting period

Home Federal Bancorp, Inc. of Louisiana is the holding company for Home Federal Bank, a community bank serving the Shreveport-Bossier City area. This Form 10-Q covers the quarter and six months ended December 31, 2016 (the company’s fiscal second quarter). Dollar amounts below are in millions unless stated otherwise.

Financial performance and position

For the quarter, net interest margin was 3.65% versus 3.58% a year earlier; the average interest rate spread was 3.47% versus 3.39%. For the six months, net interest margin was 3.71% versus 3.62%, and spread was 3.53% versus 3.43%.

At December 31, 2016, total assets were $410.3, up 7.5% from June 30, 2016. Net loans were $297.1, deposits $310.7, FHLB advances $53.0, other bank borrowings $0.7, and stockholders’ equity $44.1. Cash and cash equivalents were $13.6. The allowance for loan losses was $3.439, or 1.14% of total loans, compared with $2.845, or 0.97%, at June 30.

Cash provided by operating activities was $3.293 for the six months, versus $9.328 in the prior-year period. Investing activities used $21.706 and financing activities provided $27.303; cash increased $8.890 over the period. The Bank reported regulatory capital ratios of 11.51% tangible, 16.51% common equity Tier 1, 11.51% core, and 17.76% risk-based, all above minimum requirements.

Material changes versus comparable periods

• Quarterly net income rose 12.0%; six-month net income rose 8.8%. Higher net interest income and non-interest income were partly offset by increased loan-loss provisions and operating expenses.
• Quarterly interest income increased 8.3%; six-month interest income increased 7.4%. Loan growth and higher average interest-earning asset volumes contributed, while lower deposit funding costs supported margins.
• Non-interest income increased 32.4% for the quarter and 26.6% for six months, reflecting higher loan-sale gains and deposit service charges; the six-month comparison also included a $0.110 gain on sale of real estate.
• Loans receivable, net, increased $6.3 from June 30, driven particularly by commercial business and commercial real estate lending. Investment securities increased $14.1, mainly after $22.8 of mortgage-backed securities purchases classified as held-to-maturity.
• Deposits rose $22.8 and FHLB advances rose $5.4 from June 30. Non-interest-bearing demand deposits increased $17.8; brokered deposits were $14.4, up from $8.2.
• Available-for-sale securities had $1.128 of gross unrealized losses at December 31, and accumulated other comprehensive income declined $0.625 during the six months.

Outlook, commentary, risks and unusual items

• The filing provides no specific earnings or revenue guidance. Management said it intended to use available liquidity to support lending and could sell available-for-sale securities if additional funding were needed.
• Asset quality weakened: non-performing assets rose to $4.2 from $0.114 at June 30. The filing reports 15 commercial business loans among credits classified as substandard; two borrowers associated with $2.8 of these loans filed for Chapter 11 during the quarter. Management said it considered the allowance adequate and did not then anticipate additional losses on those loans.
• The provision for loan losses increased substantially year over year. Management identifies allowance estimation as a critical accounting policy and notes that estimates are judgmental and subject to revision.
• At December 31, the Bank had $46.7 of loan commitments, $51.6 of certificates of deposit due within one year, $122.0 of additional FHLB borrowing capacity, and a $15.5 federal funds purchase facility with no amount drawn. The filing notes renewal costs on maturing deposits could be higher if rates rise.
• The Bank held $14.4 of brokered deposits; the filing says certain brokered certificates with maturities beyond 12 months are callable by the Bank after 12 months. Securities and mortgage loans with carrying value of $196.6 were pledged to secure FHLB advances.
• The company repurchased 11,280 shares during the quarter at an average $24.65 per share. Management reported effective disclosure controls and no material changes in internal control; legal proceedings were described as routine and immaterial, and risk factors were listed as not applicable.

Important facts for investors to verify

• Developments in the Chapter 11 borrowers’ $2.8 of substandard commercial loans, the status of the $4.2 of non-performing assets, and whether additional reserves or charge-offs become necessary.
• How loan growth, credit quality, and the increased allowance affect future earnings and net interest margin.
• The sustainability and cost of deposit growth, brokered funding, and FHLB borrowing, including the $51.6 of certificates maturing within one year.
• Interest-rate sensitivity and the effect of unrealized securities losses, including the larger held-to-maturity portfolio and securities pledged as collateral.
• Liquidity available after funding commitments and the continued ability to maintain regulatory capital above required levels.