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| HFBL > SEC Filings for HFBL > Form 10-Q on 12-May-2011 | All Recent SEC Filings |
12-May-2011
Quarterly Report
General
The Company was formed by the Bank in connection with the Bank's reorganization into the mutual holding company form of organization and commenced operations on January 18, 2005. The Company completed its conversion from the mutual holding company form of organization to the fully public stock holding company form on December 22, 2010. As a result of the conversion, Home Federal Bancorp, Inc. of Louisiana, a newly formed Louisiana-chartered corporation, became the holding company for Home Federal Bank, and Home Federal Mutual Holding Company and the former Home Federal Bancorp, Inc. of Louisiana ceased to exist. As part of the conversion, all outstanding shares of the former Home Federal Bancorp, Inc. of Louisiana common stock (other than those owned by Home Federal Mutual Holding Company) were converted into the right to receive 0.9110 of a share of the newly formed Home Federal Bancorp, Inc. of Louisiana common stock resulting in 1,100,693 shares issued in the exchange. In addition, a total of 1,828,507 shares of common stock were sold in the subscription, community and syndicated community offerings at the price of $10.00 per share. The completion of the Company's public offering raised approximately $16.9 million in net proceeds.
The Company's results of operations are primarily dependent on the results of the Bank, which became a wholly owned subsidiary upon completion of the reorganization. The Bank's results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses and loan sale activities. Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial conditions and results of operations.
Critical Accounting Policies
Allowance for Loan Losses. The Company has identified the calculation of the allowance for loan losses as a critical accounting policy, due to the higher degree of judgment and complexity than its other significant accounting policies. Provisions for loan losses are based upon management's periodic valuation and assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors in order to maintain the allowance for loan losses at a level believed by management to represent all known and inherent losses in the portfolio that are both probable and reasonably estimable. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. The realization of our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Discussion of Financial Condition Changes from June 30, 2010 to March 31, 2011
At March 31, 2011, total assets amounted to $217.6 million compared to $185.1 million at June 30, 2010, an increase of approximately $32.4 million, or 17.5%. This increase was primarily due to an increase in loans receivable, net, of $21.7 million, or 23.3%, an increase in cash and cash equivalents of $1.8 million or 20.0% and an increase in investment securities of $20.1 million, or 30.5%, partially offset by a decrease in loans available for sale of $12.3 million. Management attributes the decrease in loans held for sale at quarter end to expedited procedures with correspondent banks which resulted in a lower amount of loans held for sale at period end.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2010 to March 31, 2011
(continued)
The increase in loans was primarily due to the origination of new loans by the commercial lending department. The increase in securities was caused by new security acquisitions of $41.2 million, partially offset by normal principal paydowns and sales amounting to $19.8 million and a decrease in the fair value of securities of $1.1 million.
The Company's total liabilities amounted to $167.2 million at March 31, 2011, an increase of approximately $15.4 million, or 10.1%, compared to total liabilities of $151.8 million at June 30, 2010. The primary reason for the increase in liabilities was due to an increase in deposits of $24.4 million, or 20.7%, partially offset by a $7.6 million, or 24.1%, decrease in advances from the Federal Home Loan Bank and a decrease in other liabilities of $1.4 million.
Stockholders' equity increased $17.0 million, or 51.1%, to $50.4 million at March 31, 2011 compared to $33.4 million at June 30, 2010. This increase was primarily the result of the recognition of net income of $1.5 million for the nine months ended March 31, 2011, the distribution of shares associated with the Company's Recognition Plan of $116,000 and proceeds from a common stock issuance of $16.9 million. These increases were offset by dividends of $328,000 paid during the nine months ended March 31, 2011, the acquisition of treasury shares of $46,000, and a decrease of $1.1 million in the Company's accumulated other comprehensive income associated with unrealized gain on securities available for sale.
The Bank is required to meet minimum capital standards promulgated by the Office of Thrift Supervision ("OTS"). At March 31, 2011, Home Federal Bank's regulatory capital was well in excess of the minimum capital requirements.
Comparison of Operating Results for the Three and Nine Month Periods Ended March 31, 2011 and 2010
General
Net income amounted to $313,000 for the three months ended March 31, 2011 compared to a net loss of $292,000 for the same period in 2010, an increase of $605,000. The increase was primarily due to a $321,000, or 22.7%, increase in net interest income for the three months ended March 31, 2011 compared to the same period in 2010, and a $542,000 increase in non-interest income for the 2011 period compared to for the same period in 2010, partially offset by increases of $225,000 in non-interest expense, and $36,000 in the provision for loan losses. The increase in net interest income for the three months ended March 31, 2011 was primarily due to an increase in interest income and fees from higher loan originations as a result of the hiring of additional loan officers since 2010, and a decrease in the Company's cost of funds for the three months ended March 31, 2011, compared to the prior year period. The increase in non-interest expense was primarily due to an increase in compensation and benefits expense and other expenses associated with the Company's growth, including the hiring of officers in connection with the commencement of commercial lending activities and the expansion and improvement of the Company's offices.
For the nine months ended March 31, 2011, net income amounted to $1.5 million, compared to $209,000 for the same period in 2010, an increase of $1.3 million. The increase was primarily due to a $1.1 million or 27.5%, increase in net interest income and a $1.8 million increase in non-interest income, partially offset by increases of $1.1 million in non-interest expense, $329,000 in income taxes, and a $259,000 charge to the provision for loan losses. The increase in non-interest expense was primarily attributable to an increase of $677,000, or 28.8%, in compensation and benefits. Similar to the increase for the quarter ended March 31, 2011, the increase in net interest income for the nine month period was primarily due to an increase in interest income and fees from higher loan originations and a decrease in the Company's cost of funds. The $259,000 charge to the provision for loan losses during the nine months ended March 31, 2011, reflects the increase in loan loss allowances deemed necessary by management for risks associated with the increasing volume of non-residential and commercial loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three and Nine Month Periods Ended March 31, 2011 and 2010 (continued)
Net Interest Income
Net interest income for the three months ended March 31, 2011 was $1.7 million, an increase of $321,000, or 22.7%, in comparison to $1.4 million for the three months ended March 31, 2010. This increase was primarily due to an increase of $250,000 in total interest income and a decrease of $71,000 in the Company's cost of funds. The increase in total interest income was primarily due to an increase in interest income generated from loans of $543,000, partially offset by decreases in interest income from mortgage-backed securities of $323,000. The cost of funds from and Federal Home Loan Bank borrowings decreased $82,000 during the period while interest paid on deposits increased $11,000 during the same period.
Net interest income for the nine months ended March 31, 2011, was $5.2 million, an increase of $1.1 million, or 27.5%, in comparison to $4.1 million for the nine months ended March 31, 2010. This increase was primarily due to an increase of $905,000 in total interest income, and a decrease of $214,000 in total interest expense. The increase in total interest income was primarily due to an increase in interest income generated from loans of $2.0 million, partially offset by decreases in interest income generated from mortgage-backed securities of $1.1 million. The cost of funds from Federal Home Loan Bank borrowings decreased $230,000 during this period while interest paid on deposit increased $16,000 during the same period.
The Company's average interest rate spread was 3.00% and 3.25% for the three and nine months ended March 31, 2011, compared to 3.04% and 2.89% for the three and nine months ended March 31, 2010. The Company's net interest margin was 3.40% and 3.60% for the three and nine months ended March 31, 2011, compared to 3.47% and 3.37% for the three and nine months ended March 31, 2010. The increase in net interest margin and average interest rate spread for the nine month period is attributable primarily to the increase in commercial loan volume and related income in conjunction with a decrease in cost associated with deposits and advances from the Federal Home Loan Bank. While the interest rate spread remained relatively stable, net interest income increased primarily due to the increase in volume of average interest-earning assets.
Provision for Losses on Loans
Based on an analysis of historical experience, the volume and type of lending conducted by Home Federal, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to Home Federal's market area and other factors related to the collectability of Home Federal's loan portfolio, a provision for loan losses of $36,000 and $259,000 was made during the three and nine months ended March 31, 2011, respectively, compared to none made during the three and nine months ended March 31, 2010. Home Federal's allowance for loan losses was $748,000, or 0.65% of total loans, at March 31, 2011 compared to $453,000, or 0.57%, of total loans at March 31, 2010. At March 31, 2011, Home Federal had two non-performing loans in the amount of $183,000. At March 31, 2010, Home Federal had one non-performing loan of $15,000 and no other non-performing assets or troubled-debt restructurings. There can be no assurance that the loan loss allowance will be sufficient to cover losses on non-performing assets in the future.
Non-interest Income
Total non-interest income amounted to $431,000 for the three months ended March 31, 2011, an increase of $542,000 compared to a loss of $111,000 for the same period in 2010. The increase was primarily due to an increase of $159,000 in gain on sale of loans, an increase of $64,000 in other income, and a decrease in an impairment loss on securities of $627,000 for the three months ended March 31, 2011, partially offset by a decrease of $308,000 in gain on sale of investments for the same period compared to 2010. The increase in other non-interest income resulted primarily from the reversal of previously accrued bank shares tax expense in the amount of $42,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three and Nine Month Periods Ended March 31, 2011 and 2010 (continued)
Total non-interest income increased $1.8 million to $2.0 million for the nine months ended March 31, 2011, compared to $228,000 for the same period in 2010. The increase was primarily due to an increase in gain on sale of loans of $1.1 million, an increase in other non-interest income of $313,000, and a decrease in an impairment loss on securities of $627,000, partially offset by a decrease in gain on sale of investments of $183,000. The increase in other non-interest income resulted primarily from the reversal of previously accrued bank shares tax expense in the amount of $263,000.
Non-interest Expense
Total non-interest expense increased $225,000, or 15.7%, for the three months ended March 31, 2011 compared to the prior year period. The increase in non-interest expense was primarily due to an increase in compensation and benefits expense of $105,000, or 11.4%, over the prior year period, as well as increases of $38,000 in occupancy and equipment expenses, $36,000 in franchise and bank taxes, $26,000 in data processing costs and $43,000 in miscellaneous non-interest expenses attributable to office overhead expense increase.
Total non-interest expense increased $1.1 million, or 30.0%, for the nine months ended March 31, 2011 compared to the prior year period. The increase was primarily due to an increase of $677,000 or 28.8%, in compensation and benefits expense and an increase all in other operating expenses of $420,000. The increase in all non-interest expense categories for the three and nine month periods ended March 31, 2011 are primarily attributable to the hiring of new personnel and operating costs of new and expanding commercial loan activities.
The increase in compensation and benefits expense was a result of normal compensation increases including stock options and recognition and retention plan expense and the hiring of additional commercial loan officers. The aggregate compensation expense recognized by the Company for its Stock Option and Recognition and Retention Plans amounted to $4,000 and $14,000, respectively, for the three months ended March 31, 2011 and 2010, and $32,000 and $43,000, respectively, for the nine months ended March 31, 2011 and 2010.
Effective January 1, 2006, the Company, through its subsidiary Home Federal Bank, became subject to the Louisiana bank shares tax. This tax is assessed on the Bank's equity and earnings. For the three and nine months ended March 31, 2011, the Company recognized franchise and bank shares tax expense of $74,000 and $159,000 respectively.
Income Taxes
Income taxes amounted to $161,000 and $164,000 for the three months ended March 31, 2011 and 2010, respectively, resulting in effective tax rates of 34.0% and 128.1%, respectively. Income taxes amounted to $751,000 and $422,000 for the nine months ended March 31, 2011 and 2010, respectively, resulting in an effective tax rate of 34.0% and 66.9%, respectively. Effective income tax rates for the three and nine months ended March 31, 2010, reflect management's position that a full tax benefit from the investment impairment loss of $627,000 recognized during the quarter ended March 31, 2010, may ultimately not be realized. A deferred tax benefit valuation allowance of $205,000 was recorded to recognize the estimated tax benefit that may be lost in the event that this loss is not fully deductible for tax purposes. Income tax expense for the March 31, 2010 quarter increased $205,000 as a result of the valuation allowance.
Liquidity and Capital Resources
Home Federal Bank maintains levels of liquid assets deemed adequate by management. The Bank adjusts its liquidity levels to fund deposit outflows, repay its borrowings and to fund loan commitments. Home Federal Bank also adjusts liquidity as appropriate to meet asset and liability management objectives.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
Home Federal Bank's primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, loan sales and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, Home Federal Bank invests excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements. Home Federal Bank's deposit accounts with the Federal Home Loan Bank of Dallas amounted to $4.7 million at March 31, 2011.
A significant portion of Home Federal Bank's liquidity consists of securities classified as available-for-sale and cash and cash equivalents. Home Federal Bank's primary sources of cash are net income, principal repayments on loans and mortgage-backed securities and increases in deposit accounts. If Home Federal Bank requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Dallas which provides an additional source of funds. At March 31, 2011, Home Federal Bank had $23.9 million in advances from the Federal Home Loan Bank of Dallas.
At March 31, 2011, Home Federal Bank had outstanding loan commitments of $14.7 million to originate loans. At March 31, 2011, certificates of deposit scheduled to mature in less than one year, totaled $34.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In addition, the cost of such deposits could be significantly higher upon renewal, in a rising interest rate environment. Home Federal Bank intends to utilize its high levels of liquidity to fund its lending activities. If additional funds are required to fund lending activities, Home Federal Bank intends to sell its securities classified as available-for-sale as needed.
Home Federal Bank is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of at least 1.5%, 3.0% and 8.0%, respectively. At March 31, 2011, Home Federal Bank exceeded each of its capital requirements with ratios of 19.26%, 19.26% and 40.82%, respectively.
Off-Balance Sheet Arrangements
At March 31, 2011, the Company did not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission rules.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have been prepared in accordance with instructions to Form 10-Q, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation.
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "except," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.
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