HOME FEDERAL BANCORP OF LOUISIANA: Discussion and analysis of the financial position and the operating result by the management (Form 10-K)
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 Louisianahad net income of $5.4 millionin fiscal 2021 compared to net income of $3.9 millionin fiscal 2020. Our business consists primarily of originating single-family real estate loans secured by property in our market area and to a lesser extent, 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 are primarily funded by certificates of deposit, which typically have a higher interest rate than passbook accounts, it is our policy to require commercial customers to have a deposit relationship with us, which primarily consist of NOW accounts. 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 an increase in our average cost of funds on our interest bearing liabilities, our net interest margin decreased from 3.46% to 3.31% during fiscal 2021 compared to 2020, and our net interest income increased $1.8 millionto $16.9 millionfor fiscal 2021 as compared to $15.2 millionfor fiscal 2020. We expect to continue to emphasize consumer and commercial lending in the future in order to improve the yield on our portfolio.
Our business strategy is designed to operate a growing and profitable community-based financial institution. Our current business strategy includes:
• Further growth and diversification of our loan portfolio. We want to grow and
to further diversify our loan portfolio, including by emphasizing
the granting of commercial real estate and business loans. at
In 2021, our commercial real estate loans amounted to
the entire loan portfolio. Our commercial business loans amounted to
Million or 20.48% of the total loan portfolio. Commercial real estate,
commercial business, construction and development, and consumer credit all
usually have higher returns and are more sensitive to interest rates than long-term ones
Mortgage loan for single family homes.
• Diversification of our products and services. We intend to continue ours
commercial business products to provide a full service banking relationship
our commercial customers. We introduced mobile and internet banking and
Remote deposit capture to better serve our commercial customers. Additionally,
We have developed new deposit products that are geared towards building our deposit base on
new types of customers.
• Managing our expenses. We have incurred considerable additional expenses
in terms of staff and infrastructure in the last few periods than ours
Business strategy. Our efficiency rate, net interest income plus non-interest
Income divided by noninterest expenses, for 2021 61.55% versus 64.9%
for fiscal 2020.
• Improvement of core income. We assume that we will continue to have a commercial focus
Real estate and business loans, which usually earn more interest than
Home loan and sell a significant portion of our fixed rate
Granting of home loans.
• Expansion of our franchise in our market area and neighboring communities. we
intend to continue pursuing opportunities to expand our market area through the opening
additional de novo bank branches and possibly through acquisitions of others
Financial institutions and related companies. We expect us to
areas adjacent to our current locations in
announced our expansion in
• Maintain our asset quality. at
consisting of a commercial property and a one-four-family house
with a book value of
stress maintaining high asset quality, even as we continue to grow our institution and diversify our loan portfolio.
• Cross-sell products and services and emphasize local decision-making. we
have promoted cross-selling products and services in our stores and
emphasized our local decision-making and the 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 Americaand 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. 34
-------------------------------------------------------------------------------- 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 collectibility 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 collectibility 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 Currencyas an integral part of their examination processes periodically reviews our allowance for loan losses. The Office of the Comptroller of the Currencymay 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.
In light of the events surrounding the COVID-19 epidemic, the Company is continually assessing the effects of the pandemic on its employees, customers and communities. In
March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted. The CARES Act contains many provisions related to banking, lending, mortgage forbearance and taxation. The Company has worked diligently to help support its customers through the SBA Paycheck Protection Program ("SBA PPP"), loan modifications and loan deferrals. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") became law. The Economic Aid Act extended the authority to make SBA PPP loans through May 31, 2021. As of June 30, 2021, Home Federal Bankhas funded 597 SBA PPP loans totaling approximately $68.8 millionto existing customers and key prospects located primarily in our trade area of NW Louisiana. Our commercial lenders and operational support staff have worked diligently to accomplish what seemed to be an insurmountable task in providing a lifeline to our small community businesses. We believe the customer interaction during this time provides a real opportunity to broaden and deepen our customer relationships while benefiting our community. We have had $38.6 millionof SBA PPP loans that have been forgiven which represents 56.1% of the total amount of loans funded. The provision for loan losses for the year ended June 30, 2021was $1.8 millioncompared to $1.9 millionfor the year ended June 30, 2020. 35
Changes in the financial situation
June 30, 2021, the Company reported total assets of $565.7 million, an increase of $47.5 million, or 9.2%, compared to total assets of $518.2 millionat June 30, 2020. The increase in assets was comprised primarily of increases in cash and cash equivalents of $49.5 million, or 90.3%, from $54.9 millionat June 30, 2020to $104.4 millionat June 30, 2021, investment securities of $21.3 million, or 33.9%, from $62.9 millionat June 30, 2020to $84.3 millionat June 30, 2021, premises and equipment of $1.7 million, or 12.7%, from $13.2 millionat June 30, 2020to $14.9 millionat June 30, 2021, and deferred tax assets of $62,000, or 8.2%, from $757,000at June 30, 2020to $819,000at June 30, 2021. These increases were partially offset by decreases in loans receivable, net of $23.5 million, or 6.5%, from $359.9 millionat June 30, 2020to $336.4 millionat June 30, 2021, accrued interest receivable of $697,000, or 37.5%, from $1.9 millionat June 30, 2020to $1.2 millionat June 30, 2021, real estate owned of $567,000, or 59.7%, from $950,000at June 30, 2020to $383,000at June 30, 2021, and loans held-for-sale of $371,000, or 2.5%, from $14.8 millionat June 30, 2020to $14.4 millionat June 30, 2021. The increase in investment securities was primarily due to security purchases of $52.9 millionoffset by principal repayments on mortgage backed securities of $28.2 millionand a redemption of FHLB stock for $2.4 million. Loans receivable, net decreased $23.5 million, or 6.5%, from $359.9 millionat June 30, 2020to $336.4 millionat June 30, 2021. The decrease in loans receivable, net was attributable primarily to decreases in multi-family residential loans of $16.4 million, commercial business loans of $12.0 million, one-to-four family residential loans of $10.5 million, land loans of $1.8 million, equity and second mortgage loans of $143,000, and consumer loans of $64,000, partially offset by increases in commercial real estate loans of $9.1 million, construction loans of $7.2 million, and equity lines of credit of $536,000. With interest rates continuing at historical lows, management is reluctant to invest in long-term, fixed rate mortgage loans for the portfolio and instead sells the majority of the long-term, fixed rate mortgage loan production. 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 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, 2021, Home Federal Bankhad $96.2 millionof commercial real estate loans, 28.2% of the total loan portfolio, and $69.9 millionof commercial business loans, 20.5% of the total loan portfolio. 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 $12.5 million, or 29.7%, from $42.1 millionat June 30, 2020to $29.6 millionat June 30, 2021. This decrease resulted primarily from principal repayments of $21.7 millionand a decrease in market values of securities of $810,000, partially offset by purchases of $10.1 millionin mortgage-backed securities. Securities held-to-maturity increased $33.8 million, from $20.9 millionat June 30, 2020to $54.7 millionat June 30, 2021. This increase was primarily due to purchases of $41.7 millionof mortgage backed securities and purchases of municipal securities of $1.1 million, partially offset by principal repayments of $6.4 millionand a redemption of FHLB Stock of $2.4 million. We chose to place these securities in held-to-maturity as part of our interest rate risk management strategy. Cash and cash equivalents increased $49.5 million, or 90.3%, from $54.9 millionat June 30, 2020to $104.4 millionat June 30, 2021. The net increase in cash and cash equivalents was primarily attributable to increases in total deposits related to SBA PPP loans funded. 36 -------------------------------------------------------------------------------- Total liabilities increased $45.3 million, or 9.7%, from $467.7 millionat June 30, 2020to $513.0 millionat June 30, 2021primarily due to increases in total deposits of $45.8 million, or 9.9%, to $506.6 millionat June 30, 2021compared to $460.8 millionat June 30, 2020, and in other borrowings of $100,000, or 4.3%, from $2.3 millionat June 30, 2020to $2.4 millionat June 30, 2021, partially offset by a decrease of $276,000, or 9.2% in other liabilities from $3.0 millionat June 30, 2020to $2.7 millionat June 30, 2021, and a decrease of $193,000, or 18.2%, in advances from the Federal Home Loan Bankfrom $1.1 millionat June 30, 2020to $867,000at June 30, 2021. The increase in deposits was primarily due to a $45.3 million, or 54.1%, increase in savings deposits from $83.8 millionat June 30, 2020to $129.1 millionat June 30, 2021, a $27.6 million, or 26.7%, increase in non-interest bearing deposits from $103.4 millionat June 30, 2020to $131.0 millionat June 30, 2021, a $13.5 million, or 18.1%, increase in money market deposits from $74.6 millionat June 30, 2020to $88.2 millionat June 30, 2021, and an increase in NOW accounts of $7.9 million, or 19.1%, from $41.4 millionat June 30, 2020to $49.3 millionat June 30, 2021, partially offset by a decrease of $48.6 million, or 30.8%, in certificates of deposit from $157.6 millionat June 30, 2020to $109.0 millionat June 30, 2021. The Company had $10.7 millionin brokered deposits at June 30, 2021compared to $16.1 millionat June 30, 2020. The decrease in advances from the Federal Home Loan Bankwas primarily due to principal paydowns on amortizing advances. Shareholders' equity increased $2.2 million, or 4.3%, to $52.7 millionat June 30, 2021from $50.5 millionat June 30, 2020. The primary reasons for the changes in shareholders' equity from June 30, 2020were net income of $5.4 million, the vesting of restricted stock awards, stock options, and the release of employee stock ownership plan shares totaling $593,000, and proceeds from the issuance of common stock from the exercise of stock options of $587,000, partially offset by the acquisition of Company stock of $2.6 million, dividends paid totaling $1.1 million, and a decrease in the Company's accumulated other comprehensive income of $640,000. 37
-------------------------------------------------------------------------------- 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, 2021 2020 Average Average Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in thousands) Interest-earning assets: Investment securities
$ 65,721 $ 1,2281.87 % $ 69,073 $ 1,5592.26 % Loans receivable(1) 366,546 18,913 5.16 340,302 18,435 5.42 Interest-earning deposits 79,028 104 0.13 29,326 342 1.17 Total interest-earning assets 511,295 20,245 3.96 % 438,701 20,336 4.64 % Non-interest-earning assets 33,784 27,869 Total assets $ 545,079 $ 466,570Interest-bearing liabilities: Savings accounts 108,592 565 0.52 % 63,719 700 1.10 % NOW accounts 44,655 90 0.20 33,206 176 0.53 Money market accounts 77,198 216 0.28 74,190 727 0.98 Certificate accounts 138,603 2,324 1.68 167,666 3,442 2.05 Total deposits 369,048 3,195 0.87 338,781 5,045 1.49 FHLB advances 923 45 4.88 1,197 57 4.76 Other borrowings 1,991 64 3.21 1,228 52 4.23
Total interest-bearing liabilities 371,962 3,304 0.89 % 341,206 5,154 1.51 %
Non-interest-bearing demand accounts 118,662 73,562 Other liabilities 3,092 2,065 Total liabilities 493,716 416,833 Total stockholders' equity(2) 51,363 49,737 Total liabilities and equity
$ 545,079 $ 466,570Net interest-earning assets $ 139,333 $ 97,495Net interest income; average interest rate spread(3) $ 16,9413.07 % $ 15,1823.13 % Net interest margin(4) 3.31 % 3.46 % Average interest-earning assets to average interest-bearing liabilities 137.46 % 128.57 %
(1) Includes loans held for sale.
(2) Includes retained profits and accumulated other total losses.
(3) The interest spread corresponds to the difference between the weighted average
Return on interest-bearing assets and the weighted average rate on
(4) The net interest margin is the net interest income divided by the net average
38 -------------------------------------------------------------------------------- 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'sinterest 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. 2021 vs. 2020
2020 vs. 2019
Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase Rate Volume (Decrease) Rate Volume (Decrease) (In thousands) Interest income: Investment securities
$ (255 ) $ (76 ) $ (331 ) $ (41 ) $ 140 $ 99Loans receivable, net (944 ) 1,422 478 (358 ) 735 377 Interest-earning deposits (818 ) 580 (238 ) (316 ) 330 14 Total interest-earning assets (2,017 ) 1,926 91 (715 ) 1,205 490 Interest expense: Savings accounts (628 ) 493 (135 ) 349 156 505 NOW accounts (147 ) 61 (86 ) (4 ) 14 10 Money market accounts (540 ) 29 (511 ) (54 ) 20 (34 ) Certificate accounts (521 ) (597 ) (1,118 ) 387 (203 ) 184 Total deposits (1,836 ) (14 ) (1,850 ) 678 (13 ) 665 FHLB advances and other borrowings (22 ) 22 -- 33 (76 ) (43 ) Total interest-bearing liabilities (1,858 ) 8 (1,850 ) 711 (89 ) 622 Increase (Decrease) in net interest income $ (159 ) $ 1,918 $ 1,759 $ (1,426 ) $ 1,294 $ (132 )
Comparison of the operating results of the past years
General. The increase in net income for the year ended
June 30, 2021resulted primarily from a $1.8 million, or 11.6%, increase in net interest income, an increase of $1.6 million, or 39.8%, in non-interest income, a $91,000, or 4.8%, decrease in provision for loan losses, partially offset by an increase of $1.4 million, or 11.3%, in non-interest expense, and an increase of $488,000, or 51.0%, in provision for income taxes. The increase in net interest income for the year was primarily due to a $1.9 million, or 35.9%, decrease in total interest expense, partially offset by $91,000, or 0.4%, decrease in total interest income. The Company's average interest rate spread was 3.07% for the year ended June 30, 2021compared to 3.13% for the year ended June 30, 2020. Net Interest Income. Net interest income amounted to $16.9 millionfor fiscal year 2021, an increase of $1.8 million, or 11.6%, compared to $15.2 millionfor fiscal year 2020. The increase was due primarily to a decrease of $1.9 millionin interest expense, partially offset by a $91,000decrease in both total interest income and provision for loan losses. The average interest rate spread decreased from 3.13% for fiscal 2020 to 3.07% for fiscal 2021, while the average balance of interest-earning assets increased from $438.7 millionto $511.3 millionduring the same periods. The percentage of average interest-earning assets to average interest-bearing liabilities increased to 137.46% for fiscal 2021 compared to 128.57% for fiscal 2020. The decrease in the average interest rate spread and net interest margin was attributable primarily to a decrease of 68 basis points in average rate on interest earning assets for the year, from 4.64% at June 30, 2020to 3.96% at June 30, 2021. The average rate paid on certificates of deposit decreased from 2.05% for fiscal 2020 to 1.68% for fiscal 2021. Net interest margin decreased to 3.31% for fiscal 2021 compared to 3.46% for fiscal 2020. Interest income decreased $91,000, or 0.4%, to $20.2 millionfor fiscal 2021 compared to $20.3 millionfor fiscal 2020, primarily due to an aggregate decrease in interest income from investment and mortgage-backed securities of $383,000and a decrease in interest income on other earning assets of $186,000, partially offset by an increase in interest income from loans of $478,000for fiscal 2021 compared to 2020. The increase in the average balance of loans receivable was primarily due to new loans originated by our commercial lending division. The average yield of the loan portfolio decreased by 26 basis points during fiscal 2021 mainly due to a lower interest rate environment. 39 --------------------------------------------------------------------------------
Interest expense decreased
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 collectability 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 susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information or events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. When a loan is impaired, the measurement of such impairment is based upon the fair value of the collateral of the loan. If the fair value of the collateral is less than the recorded investment in the loan, we will recognize the impairment by creating a valuation allowance with a corresponding charge against earnings. An allowance is also established for uncollectible interest on loans classified as substandard. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received. When, in management's judgment, the borrower's ability to make interest and principal payments is back to normal, the loan is returned to accrual status. A provision of
$1.8 millionwas made to the allowance during fiscal 2021, compared to a provision of $1.9 millionin fiscal 2020. At June 30, 2021, the Company had $1.4 millionof non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due, and other real estate owned) compared to $7.2 millionof non-performing assets at June 30, 2020, consisting of six commercial real estate loans to one borrower, three single-family residential loans, and one commercial real estate property and one single family residence in other real estate owned at June 30, 2021, compared to five single-family residential loans, five commercial real estate loans to one borrower, one lot loan, one land loan and two commercial real estate properties in other real estate owned at June 30, 2020. The decrease in non-performing assets from $7.2 millionat June 30, 2020to $1.4 millionat June 30, 2021was primarily due to a payoff of $2.0 millionon one lot loan and one land loan to the same borrower, a write-down of $907,000on a lot loan, a write-down of $1.0 millionon a commercial real estate loan, and the paydown of a portion of the collateral on the same commercial real estate loan totaling $449,000. At June 30, 2021, the Company had one single family residential loans and eight commercial real estate loans to one borrower classified as substandard compared to four single family residential loans, two commercial land and lot development loans, and six commercial real estate loans to one borrower classified as substandard at June 30, 2020. There were no loans classified as doubtful at June 30, 2021or June 30, 2020. Non-Interest Income. Non-interest income amounted to $5.5 millionfor the year ended June 30, 2021, an increase of $1.6 million, or 39.8%, compared to non-interest income of $3.9 millionfor the year ended June 30, 2020. The $1.6 millionincrease in non-interest income for the year ended June 30, 2021compared to the prior year was primarily due to an increase of $1.8 millionin gain on sale of loans, and an increase of $15,000in other non-interest income, partially offset by a $219,000decrease in gain on sale of securities, a $42,000loss on sale of real estate, a $28,000decrease in service charges on deposit accounts, and a $12,000decrease in income from bank owned life insurance. The Company sells most of its long-term fixed rate residential mortgage loan originations primarily in order to manage interest rate risk. 40 -------------------------------------------------------------------------------- Non-Interest Expense. Non-interest expense increased $1.4 million, or 11.3%, in fiscal 2021 compared to the prior year period. The $1.4 millionincrease in non-interest expense for the year ended June 30, 2021, compared to the prior year, is primarily attributable to increases of $978,000in compensation and benefits expense, $200,000in real estate owned valuation adjustment expense, $176,000in data processing expense, $88,000in deposit insurance premium expense, $69,000in other non-interest expenses, $49,000in loan and collection expense, and $48,000in audit and examination fees expense, partially offset by decreases of $100,000in advertising expense, $52,000in franchise and bank shares tax expense, $43,000in legal fees, and $13,000in occupancy and equipment expense. Provision for Income Tax Expense. The provision for income taxes amounted to $1.4 millionand $957,000for the fiscal years ended June 30, 2021and 2020, respectively. Our effective tax rate was 21.2% for fiscal 2021 and 19.9% for fiscal 2020.
Interest rate risk
Our ability to maintain net interest income depends upon our ability to earn a higher yield on interest-earning assets than the rates we pay on deposits and borrowings. Our interest-earning assets consist primarily of securities available-for-sale and long-term residential and commercial mortgage loans, which have fixed rates of interest. Consequently, our ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise. Although long-term, fixed-rate mortgage loans made up a significant portion of our interest-earning assets at
June 30, 2021, we sold a substantial amount of our one-to-four family residential loans we originated and maintained a significant portfolio of available-for-sale securities during the past few years in order to better position the Company for a rising interest rate environment in the long term. At June 30, 2021and 2020, securities available-for-sale amounted to $29.6 millionand $42.1 million, respectively, or 5.2% and 8.1%, respectively, of total assets at such dates. Quantitative Analysis. The Office of the Comptroller of the Currencyprovides a quarterly report on the potential impact of interest rate changes upon the market value of portfolio equity. Management reviews the quarterly reports from the Office of the Comptroller of the Currency, which show the impact of changing interest rates on net portfolio value. Net portfolio value is the difference between incoming and outgoing discounted cash flows from assets, liabilities, and off-balance sheet contracts. Net Portfolio Value. Our interest rate sensitivity is monitored by management through the use of a model which internally generates estimates of the change in our net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of June 30, 2021: Change in Interest Rates NPV as % of Portfolio in Net Portfolio Value Value of Assets Basis Points Amount $ Change % Change NPV Ratio Change (Rate Shock) (Dollars in thousands) 300 $ 68,231 $ 5,7819.25 % 12.98 % 1.86 % 200 62,551 101 0.16 11.57 0.45 100 66,348 3,898 6.24 12.03 0.91 Static 62,450 -- -- 11.12 -- (100) 55,969 (6,481 ) (10.38 ) 9.82 (1.30 ) (200) 47,996 (14,454 ) (23.14 ) 8.34 (2.78 ) Qualitative Analysis. Our ability to maintain a positive "spread" between the interest earned on assets and the interest paid on deposits and borrowings is affected by changes in interest rates. Our fixed-rate loans generally are profitable, if interest rates are stable or declining since these loans have yields that exceed our cost of funds. If interest rates increase, however, we would have to pay more on our deposits and new borrowings, which would adversely affect our interest rate spread. In order to counter the potential effects of dramatic increases in market rates of interest, we have underwritten our mortgage loans to allow for their sale in the secondary market. Total loan originations amounted to $389.8 millionfor fiscal 2021 and $311.4 millionfor fiscal 2020, while loans sold amounted to $198.8 millionand $111.8 millionduring the same respective periods. We have invested excess funds from loan payments and prepayments and loan sales in investment securities classified as available-for-sale. As a result, Home Federal Bancorpis not as susceptible to rising interest rates as it would be if its interest-earning assets were primarily comprised of long-term fixed rate mortgage loans. With respect to its floating or adjustable rate loans, Home Federal Bancorpwrites interest rate floors and caps into such loan documents. Interest rate floors limit our interest rate risk by limiting potential decreases in the interest yield on an adjustable rate loan to a certain level. As a result, we receive a minimum yield even if rates decline farther, and the interest rate on the particular loan would otherwise adjust to a lower amount. Conversely, interest rate ceilings limit the amount by which the yield on an adjustable rate loan may increase to no more than six percentage points over the rate at the time of origination. Finally, we intend to place a greater emphasis on shorter-term consumer loans and commercial business loans in the future. 41
Liquidity and capital resources
Our 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. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements. Our deposit accounts with the
Federal Home Loan Bank of Dallasamounted to $42.0 millionand $19.1 millionat June 30, 2021and 2020, respectively. A significant portion of our liquidity consists of securities classified as available-for-sale and cash and cash equivalents. Our primary sources of cash are net income, principal repayments on loans and mortgage-backed securities, and increases in deposit accounts. If we require funds beyond our ability to generate them internally, we have borrowing agreements with the Federal Home Loan Bank of Dallas, which provide an additional source of funds. At June 30, 2021, we had $867,000in advances from the Federal Home Loan Bank of Dallasand had $173.5 millionin additional borrowing capacity. Additionally, at June 30, 2021, Home Federal Bankwas a party to a Master Purchase Agreement with First National Bankers Bank, whereby Home Federal Bankmay purchase Federal Funds from First National Bankers Bankin an amount not to exceed $20.4 million. There were no amounts purchased under this agreement as of June 30, 2021. In addition, Home Federal Bancorphad available a $5.0 millionline of credit agreement at June 30, 2021with First National Bankers Bank. At June 30, 2021there was a $2.4 millionbalance in the credit line. At June 30, 2021, the Company had outstanding loan commitments of $59.1 millionto originate loans and commitments under unused lines of credit of $9.7 million. At June 30, 2021, certificates of deposit scheduled to mature in one year or less totaled $64.7 million, or 59.4% of total certificates of deposit. 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. We intend to utilize our high levels of liquidity to fund our lending activities. If additional funds are required to fund lending activities, we intend to sell our securities classified as available-for-sale, as needed. At June 30, 2021, Home Federal Bankexceeded each of its capital requirements with tangible equity, common equity Tier 1, core, and total risk-based capital ratios of 9.57%, 16.63%, 9.57%, and 17.88%, respectively. 42
Off-balance sheet agreements
We do not have any off-balance sheet arrangements, as defined by
Securities and Exchange Commissionrules, and have not had any such arrangements during the two years ended June 30, 2021. See Notes 9 and 14 to the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Effects of inflation and price changes
The consolidated financial statements and related financial data presented herein regarding
Home Federal Bancorphave been prepared in accordance with accounting principles generally accepted in the United States of America, which generally 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 our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on Home Federal Bancorp'sperformance than does the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. Forward-Looking Statements This Annual Report on Form 10-K contains certain forward-looking statements (as defined in the Securities Exchange Act of 1934 and the regulations thereunder). Forward-looking statements are not historical facts but instead represent only the beliefs, expectations or opinions of Home Federal Bancorpand its management regarding future events, many of which, by their nature, are inherently uncertain. Forward-looking statements may be identified by the use of such words as: "believe", "expect", "anticipate", "intend", "plan", "estimate", or words of similar meaning, or future or conditional terms such as "will", "would", "should", "could", "may", "likely", "probably", or "possibly." Forward-looking statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks, uncertainties and assumption, many of which are difficult to predict and generally are beyond the control of Home Federal Bancorpand its management, that could cause actual results to differ materially from those expressed in, or implied or projected by, forward-looking statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) economic and competitive conditions which could affect the volume of loan originations, deposit flows and real estate values; (2) the levels of non-interest income and expense and the amount of loan losses; (3) competitive pressure among depository institutions increasing significantly; (4) changes in the interest rate environment causing reduced interest margins; (5) general economic conditions, either nationally or in the markets in which Home Federal Bancorpis or will be doing business, being less favorable than expected (6) political and social unrest including acts of war or terrorism; (7) the impact of the current outbreak of the novel coronavirus (COVID-19) or (8) legislation or changes in regulatory requirements adversely affecting the business in which Home Federal Bancorpwill be engaged. Home Federal Bancorpundertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
© Edgar Online, source