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HFBL > SEC Filings for HFBL > Form 10-K on 24-Sep-2013All Recent SEC Filings

Show all filings for HOME FEDERAL BANCORP, INC. OF LOUISIANA

Form 10-K for HOME FEDERAL BANCORP, INC. OF LOUISIANA


24-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Our profitability depends primarily on our net interest income, which is the difference between interest and dividend income on interest-earning assets, principally loans, investment securities and interest-earning deposits in other institutions, and interest expense on interest-bearing deposits and borrowings from the Federal Home Loan Bank of Dallas. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. Our profitability also depends, to a lesser extent, on non-interest income, provision for loan losses, non-interest expenses and federal income taxes. Home Federal Bancorp, Inc. of Louisiana had net income of $3.1 million in fiscal 2013 compared to net income of $2.8 million in fiscal 2012.

Historically, our business consisted primarily of originating single-family real estate loans secured by property in our market area. Typically, single-family loans involve a lower degree of risk and carry a lower yield than commercial real estate, construction, commercial business and consumer loans. During fiscal 2009, we hired three commercial loan officers and began to offer commercial real estate loans, commercial business loans and real estate secured lines of credit which typically have higher rates and shorter terms than single-family loans. Although our loans continue to be primarily funded by certificates of deposit, which typically have a higher interest rate than passbook accounts, it is now our policy to require commercial customers to have a deposit relationship with us, which has increased our balance of NOW accounts in recent periods. The combination of these factors has resulted in higher interest rate spreads in fiscal 2013. Due to the continued low interest rate environment, we have sold a substantial amount of our fixed rate single-family residential loan originations in recent periods. We have also sold investment securities available-for-sale to realize gains in the portfolio. Because of a decrease in our cost of funds and the volume increase of interest earning assets, our net interest margin increased from 4.00% to 4.06% during fiscal 2013 compared to 2012 and our net interest income increased to $10.6 million for fiscal 2013 as compared to $9.7 million for fiscal 2012. We expect to continue to emphasize consumer and commercial lending in the future in order to improve the yield on our portfolio. In July, 2009, we began offering security brokerage and advisory services at our agency office through Tipton Wealth Management in our effort to transition to a full service community bank.


Home Federal Bancorp's operations and profitability are subject to changes in interest rates, applicable statutes and regulations and general economic conditions, as well as other factors beyond our control.

Business Strategy

Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Our current business strategy includes:

Continuing to Grow and Diversify Our Loan Portfolio. We intend to grow and continue to diversify of loan portfolio by, among other things, emphasizing the origination of commercial real estate and business loans. At June 30, 2013, our commercial real estate loans amounted to $51.2 million, or 24.5% of the total loan portfolio. Our construction loans at June 30, 2013 amounted to $16.9 million or 8.1% of the total loan portfolio and commercial business loans amounted to $16.8 million or 8.0% of the total loan portfolio. Commercial real estate, commercial business, construction and development and consumer loans all typically have higher yields and are more interest sensitive than long-term single-family residential mortgage loans. We plan to continue to grow and diversify our loan portfolio, and we intend to continue to grow our holdings of commercial real estate and business loans.

Diversify Our Products and Services. We intend to continue to emphasize our commercial business products to provide a full-service banking relationship to our commercial customers. We have introduced mobile and Internet banking and remote deposit capture, to better serve our commercial clients. Additionally, we have developed new deposit products focused on expanding our deposit base to new types of customers.

Managing Our Expenses. We have incurred significant additional expenses related to personnel and infrastructure in recent periods as we implemented our business strategy. Our total non-interest expense increased $513,000, or 6.3%, in fiscal 2013 compared to 2012. Our efficiency ratio for 2013 was 62.0% compared to 62.9% for fiscal 2012.

Enhancing Core Earnings. We expect to continue to emphasize commercial real estate and business loans which generally bear interest rates higher than residential real estate loans and sell a substantial part of our fixed rate residential mortgage loan originations. The average interest rate spread for the year ended June 30, 2013 was 3.80% as compared to 3.62% for the year ended June 30, 2012.

Expanding Our Franchise in our Market Area and Contiguous Communities. We intend to pursue opportunities to expand our market area by opening additional de novo banking offices and possibly, through acquisitions of other financial institutions and banking related businesses (although we have no current plans, understandings or agreements with respect to any specific acquisitions). We expect to focus on contiguous areas to our current locations in Caddo and Bossier Parishes.

Maintain Our Asset Quality. At June 30, 2013, our non-performing assets totaled $649,000, or 0.23% of total assets. We had no real estate owned and one troubled debt restructuring at June 30, 2013. We intend to continue to stress maintaining high asset quality even as we continue to grow our institution and diversity our loan portfolio.

Cross-Selling Products and Services and Emphasizing Local Decision Making. We have promoted cross-selling products and services in our branch offices and emphasized our local decision making and streamlined loan approval process.


Critical Accounting Policies

In reviewing and understanding financial information for Home Federal Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. Our accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation. The allowance for loan losses represents management's estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our consolidated balance sheet. It is established through a provision for loan losses charged to earnings. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that management believes will cover known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans, and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impacted loans, value of collateral, estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience. All of these estimates may be susceptible to significant changes as more information becomes available.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. Historically, our estimates of the allowance for loan loss have not required significant adjustments from management's initial estimates. In addition, the Office of the Comptroller of the Currency as an integral part of their examination processes, periodically reviews our allowance for loan losses. The Office of the Comptroller of the Currency may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods.

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. Realizing 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.

Changes in Financial Condition

Home Federal Bancorp's total assets decreased $19.0 million, or 6.4%, to $277.2 million at June 30, 2013 compared to $296.2 million at June 30, 2012. This decrease was primarily due to decreases in investment securities of $20.4 million, loans held-for-sale of $7.7 million, and cash and cash equivalents of $31.2 million, compared to the prior year. These decreases were partially offset by increases in net loans receivable of $37.8 million, premises and equipment of $1.7 million and cash surrender of bank owned life insurance of $186,000.


Loans receivable, net increased $37.8 million, or 22.5%, from $168.3 million at June 30, 2012 to $206.1 million at June 30, 2013. The increase in loans receivable, net was attributable primarily to increases in one-to four-family residential loans of $13.8 million, commercial real estate loans of $11.9 million, multi-family residential loans of $6.7 million, commercial business loans of $4.4 million, and land loans of $3.3 million at June 30, 2013, compared to the prior year period. At June 30, 2013, the balance of purchased loans approximated $8.3 million, which consisted solely of one-to-four family residential loans purchased from a mortgage originator headquartered in Arkansas. We have not purchased any loans since fiscal 2008.

As part of implementing our business strategy, in recent periods we diversified the loan products we offer and increased our efforts to originate higher yielding commercial real estate loans and lines of credit and commercial business loans. In fiscal 2009, we hired three commercial loan officers and began offering commercial real estate loans and lines of credit and commercial business loans which were deemed attractive due to their generally higher yields and shorter anticipated lives compared to single-family residential mortgage loans. As of June 30, 2013, Home Federal Bank had $51.2 million of commercial real estate loans and $16.8 million of commercial business loans. Although commercial loans are generally considered to have greater credit risk than other certain types of loans, we attempt to mitigate such risk by originating such loans in our market area to known borrowers.

Securities available-for-sale decreased $20.5 million, or 29.9%, from $68.4 million at June 30, 2012 to $48.0 million at June 30, 2013. This decrease resulted primarily from the sale of securities, normal principal paydowns, and by market value declines in the portfolio, partially offset by new investment acquisitions of $31.5 million. During the past two years, there have been significant loan prepayments due to the heavy volume of loan refinancing. However, with interest rates at their cyclical lows, management is reluctant to invest in long-term, fixed rate mortgage loans for the portfolio and instead sold the majority of the long-term, fixed rate mortgage loan production. During the quarter ended June 30, 2012, $3.6 million of mortgage-backed securities designated as held-to-maturity were transferred to the investment securities available for sale category as management determined they no longer had the intent to hold the securities to maturity. New investment securities purchased during fiscal 2013 consisted of mortgage-backed securities.

Cash and cash equivalents decreased $31.2 million, or 89.4%, from $34.9 million at June 30, 2012 to $3.7 million at June 30, 2013.The net decrease in cash and cash equivalents was attributable to a non-recurring deposit during the fourth quarter of fiscal 2012 which had a remaining balance of approximately $31.7 million at June 30, 2012. This short-term deposit was fully withdrawn early in the first quarter of fiscal 2013.

Total liabilities decreased $11.1 million, or 4.5%, from $246.3 million at June 30, 2012 to $235.2 million at June 30, 2013 due primarily to a decrease of $9.5 million, or 4.3%, in deposits, and a decrease in advances from the Federal Home Loan Bank of $1.8 million, or 7.7%. The decrease in deposits was attributable primarily to a decrease of $29.0 million in our money market accounts as the result of the effects of the $31.7 million short-term deposit as of June 30, 2012, described above. Certificates of deposit increased $3.6 million, or 3.3%, from $108.6 million at June 30, 2012 to $112.3 million at June 30, 2013. NOW accounts increased $4.6 million from $16.9 million at June 30, 2012 to $21.5 million at June 30, 2013. Non-interest bearing deposit accounts increased $8.6 million from $20.6 million at June 30, 2012 to $29.2 million at June 30, 2013 and savings accounts increased $2.6 million from $6.9 million at June 30, 2012 to $9.5 million at June 30, 2013. At June 30, 2013, we held $12.7 million in brokered certificates of deposit.

Shareholders' equity decreased $7.9 million, or 15.8%, to $42.0 million at June 30, 2013, from $49.9 million at June 30, 2012. The primary reasons for the decrease in shareholders' equity from June 30, 2012, were the acquisition of treasury stock of $10.5 million, dividends paid of $632,000 and a decrease in the Company's accumulated other comprehensive income of $1.3 million. These decreases in shareholders' equity were partially offset by net income of $3.1 million for the year ended June 30, 2013, proceeds from the issuance of common stock from the exercise of stock options of $769,000 and the vesting of restricted stock awards, stock options and release of employee stock ownership plan shares totaling $617,000. The change in accumulated other comprehensive income was primarily due to the change in net unrealized loss on securities available for sale due to recent declines in interest rates. The net unrealized loss on securities available-for-sale is affected by interest rate fluctuations. Generally, an increase in interest rates will have an adverse impact while a decrease in interest rates will have a positive impact.


Average Balances, Net Interest Income, Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

                                                                                         June 30,
                                                                     2013                                       2012
                                                                                  Average                                     Average
                                                    Average                        Yield/       Average                        Yield/
                                                    Balance        Interest         Rate        Balance        Interest         Rate
                                                                                  (Dollars in thousands)
Interest-earning assets:
   Investment
securities                                         $   58,132    $     1,629         2.80 %    $   76,310     $    2,528         3.31 %
   Loans
receivable(1)                                         197,812         11,513         5.82         156,759         10,182         6.50
Interest-earning
deposits                                                4,750             12         0.24           8,674             12         0.14
     Total interest-earning assets                    260,694         13,154         5.05 %       241,743         12,722         5.26 %
Non-interest-earning assets                            16,129                                      14,254
     Total
assets                                             $  276,823                                  $  255,997
Interest-bearing liabilities:
   Savings
accounts                                                7,724             21         0.27 %         6,600             39         0.59 %
   NOW
accounts                                               20,812            182         0.88          16,854            120         0.71
   Money market
accounts                                               40,539            168         0.42          39,044            214         0.55
   Certificate
accounts                                              109,033          1,873         1.72          97,838          2,088         2.13
     Total
deposits                                              178,108          2,244         1.26         160,336          2,461         1.53
FHLB advances                                          27,529            335         1.22          25,492            589         2.31
     Total interest-bearing liabilities               205,637          2,579         1.25 %       185,828          3,050         1.64 %
Non-interest-bearing liabilities:
   Non-interest bearing demand accounts                24,322                                      18,020
   Other
liabilities                                             1,244                                       1,556
     Total
liabilities                                           231,203                                     205,404
Total stockholders'
equity(2)                                              45,620                                      50,593

     Total liabilities and equity                  $  276,823                                  $  255,997

Net interest-earning
assets                                             $   55,057                                  $   55,915

Net interest income; average interest rate
spread(3)                                                        $    10,575         3.80 %                   $    9,672         3.62 %

Net interest
margin(4)                                                                            4.06 %                                      4.00 %

Average interest-earning assets to average
 interest-bearing
liabilities                                                                        126.77 %                                    130.09 %


(1) Includes loans held for sale for the years ended June 30, 2013 and 2012.

(2) Includes retained earnings and accumulated other comprehensive loss.

(3) Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.

(4) Net interest margin is net interest income divided by net average interest-earning assets.


Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Home Federal Bancorp's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by current year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

                                                  2013 vs. 2012                                     2012 vs. 2011
                                       Increase (Decrease)            Total              Increase (Decrease)             Total
                                             Due to                  Increase                  Due to                   Increase
                                      Rate            Volume        (Decrease)         Rate              Volume        (Decrease)
                                                                           (In thousands)
Interest income:
Investment securities              $      (297 )    $     (602 )   $       (899 )   $      (463 )      $      364     $        (99 )
Loans receivable,
net                                     (1,336 )         2,667            1,331            (196 )           2,731            2,535
Interest-earning deposits                    4              (5 )             (1 )            (1 )             (10 )            (11 )

Total interest-earning
assets                                  (1,628 )         2,059              431            (660 )           3,085            2,425

Interest expense:
Savings accounts                           (25 )             7              (18 )            12                 2               14
NOW accounts                                33              29               62              14                41               55
Money market accounts                      (53 )             7              (46 )          (154 )             108              (46 )
Certificate accounts                      (453 )           238             (215 )          (301 )             460              159

Total
deposits                                  (490 )           273             (217 )          (429 )             611              182
FHLB advances                             (301 )            47             (254 )          (279 )             (39 )           (318 )
Total interest-bearing
liabilities                               (791 )           320             (471 )          (708 )             572             (136 )

Increase (Decrease) in net
interest income                    $      (837 )    $    1,739     $        902     $        48        $    2,513     $      2,561

Comparison of Operating Results for the Years Ended June 30, 2013 and 2012

General. Net income amounted to $3.1 million for the year ended June 30, 2013, reflecting an increase of $287,000 compared to net income of $2.8 million for the year ended June 30, 2012. This increase was due to a $1.2 million increase in net interest income after provision for loan losses and a $100,000 increase in non-interest income, offset by an increase of $513,000 in non-interest expense and an increase of $501,000 in the provision for income taxes.

Net Interest Income. Net interest income amounted to $10.6 million for fiscal year 2013, an increase of $903,000, or 9.3%, compared to $9.7 million for fiscal year 2012. The increase was due primarily to an increase of $432,000 in total interest income, and a $471,000 decrease in interest expense.

The average interest rate spread increased from 3.62% for fiscal 2012 to 3.80% for fiscal 2013 while the average balance of net interest-earning assets increased from $241.7 million to $260.7 million during the same periods. The percentage of average interest-earning assets to average interest-bearing liabilities decreased slightly to 126.77% for fiscal 2013 compared to 130.09% for fiscal 2012. The increase in the average interest rate spread reflects the decline in interest rates paid on interest bearing liabilities. Home Federal Bancorp's average cost of funds decreased 39 basis points in fiscal 2013 compared to fiscal 2012. Lower certificate of deposit interest rates in our market area led us to decrease the average rates paid on certificates of deposit 41 basis points in fiscal 2013 compared to fiscal 2012. Net interest margin increased to 4.06% in fiscal 2013 compared to 4.00% for fiscal 2012.

Interest income increased $432,000, or 3.4%, to $13.2 million for fiscal 2013 compared to $12.7 million for fiscal 2012. Such increase was primarily due to an increase in the average balance of loans receivable. A decrease in average yields on interest earning assets primarily resulted from the decrease in the average balance of investment securities due to security sales and normal principal payments. The increase in the average balance of loans receivable was primarily due to new loans originated by our commercial lending activities. The average yield of the loan portfolio decreased 68 basis points during fiscal 2013.


Interest expense decreased $471,000, or 15.4%, to $2.6 million for fiscal 2013 compared to fiscal 2012 primarily as a result of decreases in the average rates paid on interest-bearing liabilities, partially offset by increases in the average balance of interest-bearing deposits.

Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of the underlying collateral and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are . . .

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