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 $3.9 million in fiscal 2020
compared to net income of $4.7 million in fiscal 2019.
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 3.78% to 3.46% during fiscal 2020 compared to 2019, and our net interest income decreased $132,000 to $15.2 million for fiscal 2020 as compared to $15.3 million for fiscal 2019. We expect to continue to emphasize consumer and
commercial lending in the future in order to improve the yield on our portfolio.
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.
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Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Our current business strategy includes:
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.
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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 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.
COVID-19
In light of the recent 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 been working diligently to help support its customers through the SBA
Paycheck Protection Program (“SBA PPP”), loan modifications and loan deferrals. As of June 30, 2020 Home Federal Bank has funded 374 SBA PPP loans totaling approximately $46.2 million with an average loan balance of $124,000 to existing customers
and key prospects located primarily in our trade area of NW Louisiana. Our commercial lenders and operational support staff have worked tirelessly over the past few weeks 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.
Home Federal Bank is working with customers affected by COVID-19 through payment accommodations on their loans. In accordance with FDIC guidance, borrowers who were current prior to becoming affected by COVID-19, that
received payment accommodations as a result of the pandemic, generally are not reported as past due. Effects of COVID-19 may negatively impact management assumptions and estimates, such as the allowance for loan losses. The Bank is evaluating all
payment accommodations to customers to identify and quantify any impact they may have on the Bank. However, it is difficult to assess or predict how and to what extent COVID-19 will affect the Company in the future. Please see the section titled
“Additional COVID-19 Information” for additional information related to actions taken.
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Changes in Financial Condition
At June 30, 2020, Home Federal Bancorp reported total assets of $518.2 million, an increase of $75.8 million, or 17.1%, compared to total assets of $442.5 million at June 30, 2019. The increase in assets was comprised
primarily of increases in cash and cash equivalents of $36.8 million, or 203.0%, from $18.1 million at June 30, 2019 to $54.9 million at June 30, 2020, loans receivable net of $35.8 million, or 11.0%, from $324.1 million at June 30, 2019 to $359.9
million at June 30, 2020, loans held-for-sale of $6.2 million, or 71.9%, from $8.6 million at June 30, 2019 to $14.8 million at June 30, 2020, accrued interest receivable of $688,000, or 58.7%, from $1.2 million at June 30, 2019 to $1.9 million at
June 30, 2020, and premises and equipment of $558,000, or 4.1%, from $13.6 million at June 30, 2019 to $14.1 million at June 30, 2020. These increases were partially offset by decreases in investment securities of $4.1 million, or 6.1%, from $67.0
million at June 30, 2019 to $62.9 million at June 30, 2020, real estate owned of $416,000, or 30.5%, from $1.4 million at June 30, 2019 to $950,000 at June 30, 2020, and deferred tax assets of $92,000, or 10.8%, from $849,000 at June 30, 2019 to
$757,000 at June 30, 2020. The increase in cash and cash equivalents was primarily due to deposits associated with SBA PPP loans. The decrease in investment securities was primarily due to $17.0 million of principal repayments on mortgage backed
securities and $9.9 million from the sale of mortgage backed securities, partially offset by the purchases of $21.2 million of mortgage-backed securities, a purchase of one municipal bond for $245,000, and an increase of $1.1 million in the market
value adjustments on available for sale securities. The increase in loans held-for-sale resulted primarily from an increase in loans originated for sale during the year ended June 30, 2020. The decrease in real estate owned was due to the sale of
four one-to-four family residences and one residential lot during the year ended June 30, 2020.
Loans receivable, net increased $35.8 million, or 11.0%, from $324.1 million at June 30, 2019 to $359.9 million at June 30, 2020. The increase in loans receivable, net was attributable primarily to increases in
commercial business loans of $45.9 million, commercial real estate loans of $3.7 million, land loans of $2.0 million, multi-family residential loans of $1.3 million, consumer loans of $211,000 and equity and second mortgage loans of $148,000,
partially offset by decreases in one-to-four-family residential of $10.8 million, equity lines of credit of $3.4 million and construction loans of $1.3 million at June 30, 2020, compared to the prior year. At June 30, 2020, the balance of purchased
loans approximated $2.9 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. In recent years, there have been significant loan prepayments due to the heavy volume of loan refinancing, however, the rate of prepayments has been slowing. 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, 2020, Home Federal Bank had $87.1 million of commercial real estate loans, 23.83% of the total loan
portfolio, and $81.9 million of commercial business loans, 22.41% 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 increased $405,000, or 1.0%, from $41.7 million at June 30, 2019 to $42.1 million at June 30, 2020. This increase resulted primarily from purchases of $21.2 million in mortgage-backed
securities and increases in market values of securities of $1.1 million, partially offset by principal repayments of $12.3 million and sales of $9.6 million.
Securities held-to-maturity decreased $4.5 million, from $25.4 million at June 30, 2019 to $20.9 million at June 30, 2020. This decrease was primarily due to normal principal pay downs on these securities. We chose
to place these securities in held-to-maturity as part of our interest rate risk management strategy.
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Cash and cash equivalents increased $36.8 million, or 203.0%, from $18.1 million at June 30, 2019 to $54.9
million at June 30, 2020. The net increase in cash and cash equivalents was primarily attributable to increases in total deposits related to SBA PPP loans funded.
Total liabilities increased $75.6 million, or 19.3%, from $392.1 million at June 30, 2019 to $467.7 million at June 30, 2020 primarily due to an increase in total deposits of $72.6 million that consisted of roughly $46.2
million related to SBA PPP loans funded, or 18.7%, to $460.8 million at June 30, 2020 compared to $388.2 million at June 30, 2019, an increase in other borrowings of $1.9 million, or 411.1%, from $450,000 at June 30, 2019 to $2.3 million at June 30,
2020, and an increase of $1.4 million, or 92.1%, in other liabilities from $1.6 million at June 30, 2019 to $3.0 million at June 30, 2020, partially offset by a decrease of $295,000, or 21.8%, in advances from the Federal Home Loan Bank from $1.4
million at June 30, 2019 to $1.1 million at June 30, 2020 and a decrease of $62,000, or 10.6%, in advances from borrowers for taxes and insurance from $584,000 at June 30, 2019 to $522,000 at June 30, 2020. The increase in deposits was primarily due
to a $44.2 million, or 111.8%, increase in savings deposits from $39.6 million at June 30, 2019 to $83.8 million at June 30, 2020, a $44.0 million, or 74.3%, increase in non-interest bearing deposits from $59.4 million at June 30, 2019 to $103.4
million at June 30, 2020, and a $10.3 million, or 33.2%, increase in NOW accounts from $31.0 million at June 30, 2019 to $41.4 million at June 30, 2020, partially offset by a decrease of $25.7 million, or 14.0%, in certificates of deposit from
$183.3 million at June 30, 2019 to $157.6 million at June 30, 2020, and a decrease in money market deposits of $297,000, or 0.4%, from $74.9 million at June 30, 2019 to $74.6 million at June 30, 2020. The Company had $16.1 million in brokered
deposits at June 30, 2020 compared to $11.2 million at June 30, 2019. The decrease in advances from the Federal Home Loan Bank was primarily principal payments on amortizing advances.
Shareholders’ equity increased $193,000, or 0.4%, to $50.5 million at June 30, 2020 from $50.3 million at June 30, 2019. The primary reasons for the changes in shareholders’ equity from June 30, 2019 were net income of
$3.9 million, the vesting of restricted stock awards, stock options, and the release of employee stock ownership plan shares totaling $667,000, an increase in the Company’s accumulated other comprehensive income of $895,000, and proceeds from the
issuance of common stock from the exercise of stock options of $65,000, partially offset by the acquisition of Company stock of $4.1 million and dividends paid totaling $1.1 million.
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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.
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest-earning assets:
Interest-bearing liabilities:
Non-interest-bearing liabilities:
Net interest margin(4) 3.46 % 3.78 %
__________________
(1) Includes loans held for sale.
(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.
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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.
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
(In thousands)
Interest income:
Interest expense:
Comparison of Operating Results for the Years Ended June 30, 2020 and 2019
General. The decrease in net income for the year ended June 30, 2020 resulted primarily from an increase of $1.3 million, or 11.8%, in non-interest expense, a $1.3 million, or
215.2%, increase in the provision for loan losses, and a decrease of $132,000, or 0.9% in net interest income, partially offset by an increase of $1.5 million, or 63.5%, in non-interest income and a $326,000, or 25.4%, decrease in the provision for
income taxes. The decrease in net interest income for the year was due to a $622,000, or 13.7%, increase in interest expense on borrowings and deposits, partially offset by a $490,000, or 2.5%, increase in total interest income. The Company’s
average interest rate spread was 3.13% for the year ended June 30, 2020 compared to 3.49% for the year ended June 30, 2019. The Company’s net interest margin was 3.46% for the year ended June 30, 2020 compared to 3.78% for the year ended June 30,
2019. The decrease in the average interest rate spread and net interest margin was attributable primarily to a decrease of 26 basis points in average rate on interest earning assets for the year, from 4.90% at June 30, 2019 to 4.64% at June 30,
2020.
Net Interest Income. Net interest income amounted to $15.2 million for fiscal year 2020, a decrease of $132,000, or 0.9%, compared to $15.3 million for fiscal year 2019. The
decrease was due primarily to an increase of $622,000 in interest expense, partially offset by a $490,000 increase in total interest income.
The average interest rate spread decreased from 3.49% for fiscal 2019 to 3.13% for fiscal 2020, while the average balance of interest-earning assets increased from $404.6 million to $438.7million
during the same periods. The percentage of average interest-earning assets to average interest-bearing liabilities increased to 128.57% for fiscal 2020 compared to 125.65% for fiscal 2019. The decrease in the average interest rate spread and net
interest margin was attributable primarily to a decrease of 26 basis points in average rate on interest earning assets for the year, from 4.90% at June 30, 2019 to 4.64% at June 30, 2020. The average rate paid on certificates of deposit increased
from 1.82% for fiscal 2019 to 2.05% for fiscal 2020. Net interest margin decreased to 3.46% for fiscal 2020 compared to 3.78% for fiscal 2019.
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Interest income increased $490,000, or 2.5%, to $20.3million for fiscal 2020 compared to $19.8 million for fiscal 2019, primarily due to an increase in interest income from loans
of $377,000 for fiscal 2020 compared to 2019. The aggregate interest income from investment and mortgage-backed securities increased $151,000 for the same period. 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 10 basis points during fiscal 2020 mainly due to a lower interest rate environment.
Interest expense increased $622,000, or 13.7%, to $5.2 million for fiscal 2020 compared to $4.5 million for fiscal 2019, primarily as a result of increases in the average balance of interest-bearing deposits.
Interest paid on deposits increased during fiscal 2020.
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 $1.9 million was made to the allowance during fiscal 2020, compared to a provision of $600,000 in fiscal 2019. At June 30, 2020, the Company had $7.2 million of non-performing assets (defined as
non-accruing loans, accruing loans 90 days or more past due, and other real estate owned) compared to $5.1 million of non-performing assets at June 30, 2019, consisting of two commercial business loans, three commercial real estate loans, eight
single-family residential loans, one lot loan, one land loan, and two commercial real estate loans in other real estate owned at June 30, 2020, compared to five single-family residential loans, two line of credit loans, two commercial business
loans, one lot loan, one land loan, one residential lot in other real estate owned, and two properties that secured single-family residential loans in other real estate owned at June 30, 2019. The increase in non-performing assets from $5.1
million at June 30, 2019 to $7.2 million at June 30, 2020 was primarily due to a $2.3 million borrower relationship, consisting of six loans to one borrower which include three commercial real estate loans, two non-real estate loans, and one single
family residential loan that were placed on non-accrual status. The six loans had previously been paying interest only payments and were classified as troubled debt restructurings in the fiscal year ended June 30, 2019. At June 30, 2020, the
Company had four single family residential loans, two commercial land and lot development loans, and six loans to one borrower consisting of three commercial real estate loans, two non-real estate loans, and one single family residential loan
classified as substandard compared to four single family residential loans, one line of credit loan, two commercial business loans, two commercial land and lot development loans, and six loans to one borrower consisting of three commercial real
estate loans, two non-real estate loans, and one single family residential loan classified as substandard at June 30, 2019. There were no loans classified as doubtful at June 30, 2020 or June 30, 2019.
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Non-Interest Income. Non-interest income amounted to $3.9 million for the year ended June 30, 2020, an increase of $1.5 million, or 63.5%, compared to non-interest income of
$2.4 million for the year ended June 30, 2019. The $1.5 million increase in non-interest income for the year ended June 30, 2020, compared to the prior year, was primarily due to an increase of $925,000 in gain on sale of loans, combined with
decreases of $345,000 in loss on sale of real estate, an increase of $219,000 in gain on sale of securities and a $44,000 increase in service charges on deposit accounts, partially offset by a decrease of $18,000 in other income, and a decrease
of $1,000 on income from bank owned life insurance.
Non-Interest Expense. Non-interest expense increased $1.3 million, or 11.8%, in fiscal 2020 due to increases of $1.2 million in compensation and benefits expense, $168,000 in
occupancy and equipment expense, $67,000 in franchise and bank shares tax expense, $41,000 in data processing expense, and $27,000 in loan and collection expense. Non-interest expense increases were partially offset by decreases of $72,000 in
advertising expense, $57,000 in audit and examination fees, $49,000 in legal fees, $39,000 in deposit insurance premiums, and $20,000 in other non-interest expense.
Provision for Income Tax Expense. The provision for income taxes amounted to $957,000 and $1.3 million for the fiscal years ended June 30, 2020 and 2019, respectively. Our
effective tax rate was 19.9% for fiscal 2020 and 21.3% for fiscal 2019.
Exposure to Changes in Interest Rates
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, 2020, 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, 2020 and 2019, securities
available-for-sale amounted to $42.0 million and $41.7 million, respectively, or 8.1% and 9.4%, respectively, of total assets at such dates.
Quantitative Analysis. The Office of the Comptroller of the Currency provides 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, 2020:
Basis Points (Rate Shock) Amount $ Change % Change NPV Ratio Change
(Dollars in thousands)
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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 $311.4 million for fiscal 2020 and $232.9 million for fiscal 2019, while loans sold amounted to $111.8 million and $62.2 million during 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 Bancorp is 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 Bancorp writes 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.
Liquidity and Capital Resources
Home Federal Bancorp maintains levels of liquid assets deemed adequate by management. Our liquidity ratio averaged 24.97% for the quarter ended June 30, 2020. We adjust our liquidity levels to fund deposit outflows,
repay our borrowings, and to fund loan commitments. We also adjust liquidity, as appropriate, to meet asset and liability management objectives.
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 Dallas amounted to $19.1 million and $5.9 million at June 30, 2020 and 2019, 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, 2020, we had $1.1 million in advances from the Federal Home Loan Bank of Dallas and had $161.7 million in additional borrowing capacity. Additionally, at June 30, 2020, Home Federal Bank was a party to a Master Purchase
Agreement with First National Bankers Bank, whereby Home Federal Bank may purchase Federal Funds from First National Bankers Bank in an amount not to exceed $19.5 million. There were no amounts purchased under this agreement as of June 30, 2020.
In addition, Home Federal Bancorp had available a $5.0million line of credit agreement at June 30, 2020 with First National Bankers Bank. At June 30, 2020 there was a $2.3 million balance in the credit
line.
At June 30, 2020, the Company had outstanding loan commitments of $53.1 million to originate loans and commitments under unused lines of credit of $8.5 million. At June 30, 2020, certificates of deposit scheduled to
mature in one year or less totaled $88.0 million, or 55.9% 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.
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At June 30, 2020, Home Federal Bank exceeded each of its capital requirements with tangible equity,
common equity Tier 1, core, and total risk-based capital ratios of 10.21%, 16.37%, 10.21%, and 17.63%, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission rules, and have not had any such arrangements during the two years ended June 30, 2020. See Notes9 and 14 to the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein regarding Home Federal Bancorp have 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’s performance 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.
Additional COVID-19 Information
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The effects of COVID-19 did not have a material impact on the financial results of the Company as of June 30, 2020.
For the health of our customers and employees, the Bank closed lobbies to all seven branch offices and our main office through June 15, 2020 but remained fully operational. As an essential business, we continued to provide banking and financial
services to our customers with drive-thru access available at all of our branch locations and in-person services available by appointment. In addition, we continued to provide access to banking and financial services through online banking, ATMs
and by telephone.
In response to the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provided an
estimated $2.2 trillion of economy-wide financial stimulus to combat the pandemic and stimulate the economy in the form of financial aid to individuals, businesses, nonprofits, states, and municipalities through loans, grants, tax changes, and
other types of relief.
The following describes some of our responses to COVID-19 relative to the CARES Act, and other effects of the pandemic on our business.
Paycheck Protection Program. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a
new 7(a) loan program called the Paycheck Protection Program (“PPP”). We took action promptly to qualify as an SBA lender and were authorized to originate PPP loans.
Through June 30, 2020, Home Federal Bank has funded 374 PPP loans with total principal balances of $46.2 million to existing customers and key prospects located primarily in our trade area of NW
Louisiana.
Loan Modifications/Troubled Debt Restructurings. Under the CARES Act, loans less than 30 days past due as of December 31, 2019 will be
considered current for COVID-19 modifications. A financial institution can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”), and
suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes. Financial institutions wishing to utilize this authority must make a policy election,
which applies to any COVID-19 modification made between March 1, 2020 and the earlier of either December 31, 2020 or the 60th day after the end of the COVID-19 national emergency. Home Federal Bank has made that election. Similarly,
the Financial Accounting Standards Board has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief will not be considered TDRs.
45
Prior to the enactment of the CARES Act, the banking regulatory agencies provided guidance as to how certain short-term modifications would not be considered TDRs, and have subsequently confirmed
that such guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act.
The Bank handles loan payment modification requests on a case-by-case basis considering the effects of the COVID-19 pandemic, related economic slow-down and stay-at-home orders on our customer and
their current and projected cash flows through the term of the loan. Through June 30, 2020, we modified 216 loans with principal balances totaling $84.1 million representing 23.0% of our loans outstanding as of June 30, 2020. A majority of
deferrals are three-month payment deferrals of principal and interest, with payments after deferral increased to collect amounts deferred. It is too early to determine if these modified loans will perform in accordance with their modified terms.
Details with respect to actual loan modifications are as follows:
Equity and Second Mortgage -- -- --
Consumer -- -- --
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 Bancorp and 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 Bancorp and 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 Bancorp is 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 Bancorp will be engaged. Home Federal Bancorp undertakes no obligation to update these
forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
46
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
47
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Home Federal Bancorp, Inc.
of Louisiana and Subsidiary
Shreveport, Louisiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Home Federal Bancorp, Inc. of Louisiana, and its subsidiary (the Company) as of June 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income,
changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States of America.
Basis of Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversite Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal
control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
A Professional Accounting Corporation
We have served as the Company’s auditor since 2004
Covington, Louisiana
September 28, 2020
48
HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2020 and 2019
(In Thousands)
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Advances from Borrowers for Taxes and Insurance 522 584
Short-term Federal Home Loan Bank Advances 193 295
Long-term Federal Home Loan Bank Advances 867 1,060
Other Accrued Expenses and Liabilities 2,993 1,558
STOCKHOLDERS’ EQUITY
Unearned ESOP Stock (870 ) (985 )
Unearned RRP Trust Stock -- --
Accumulated Other Comprehensive Income 915 20
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 518,220 $ 442,453
The accompanying notes are an integral part of these consolidated financial statements.
49
HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended June 30, 2020 and 2019
For the Years Ended June 30,
(In Thousands, Except Per Share Data)
INTEREST INCOME
Investment Securities 52 62
Other Interest-Earning Assets 290 328
INTEREST EXPENSE
Federal Home Loan Bank Borrowings 57 143
Other Borrowings 52 9
Net Interest Income after Provision for Loan Losses 13,291 14,714
NON-INTEREST INCOME
Loss on Sale of Real Estate and Fixed Assets -- (345 )
Realized Gain on Sale of Securities 219 --
Income on Bank Owned Life Insurance 139 140
Service Charges on Deposit Accounts 1,019 975
NON-INTEREST EXPENSE
Franchise and Bank Shares Tax 459 392
Audit and Examination Fees 185 242
Loan and Collection Expense 317 290
Deposit Insurance Premiums 49 88
PROVISION FOR INCOME TAX EXPENSE 957 1,283
EARNINGS PER SHARE:
The accompanying notes are an integral part of these consolidated financial statements.
50
HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the Years Ended June 30, 2020 and 2019
For the Years Ended June 30,
(In Thousands)
Other Comprehensive Income, Net of Tax
Investment securities available-for-sale:
Income Tax Effect (284 ) (285 )
Income tax effect 46 --
Other comprehensive income 895 1,066
Total Comprehensive Income $ 4,745 $ 5,809
The accompanying notes are an integral part of these consolidated financial statements.
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HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended June 30, 2020 and 2019
(In Thousands)
Share Awards Earned -- 134 -- -- -- -- 134
ESOP Compensation Earned -- 253 115 -- -- -- 368
Stock Options Exercised -- 325 -- -- -- -- 325
Distribution of RRP Trust Stock -- 2 -- 22 -- -- 24
Dividends Paid -- -- -- -- (1,051 ) -- (1,051 )
Stock Options Vested -- 143 -- -- -- -- 143
Company Stock Purchased -- -- -- -- (2,447 ) -- (2,447 )
Share Awards Earned -- 153 -- -- -- -- 153
ESOP Compensation Earned -- 238 115 -- -- -- 353
Stock Options Exercised -- 65 -- -- -- -- 65
Distribution of RRP Trust Stock -- 24 -- -- -- -- 24
Dividends Paid -- -- -- -- (1,142 ) -- (1,142 )
Stock Options Vested -- 137 -- -- -- -- 137
Company Stock Purchased (1 ) -- -- -- (4,141 ) -- (4,142 )
The accompanying notes are an integral part of these consolidated financial statements.
52
HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2020 and 2019
For the Years Ended June 30,
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities
Realized Gain on Sale of Securities (219 ) --
Net Amortization and Accretion on Securities 89 109
Amortization of Deferred Loan Fees (175 ) (188 )
Real Estate Owned Valuation Adjustment -- 75
Depreciation of Premises and Equipment 653 536
Loss on Sale of Real Estate and Fixed Assets -- 345
ESOP Compensation Expense 353 368
Deferred Income Tax Expense (Benefit) 92 (30 )
Federal Home Loan Bank Stock Certificate (53 ) (62 )
Recognition and Retention Plan and Share Awards Expense 151 167
Increase in Cash Surrender Value on Bank Owned Life Insurance (139 ) (140 )
Changes in Assets and Liabilities:
Origination and Purchase of Loans Held-for-Sale (111,824 ) (60,120 )
Sale and Principal Repayments on Loans Held-for-Sale 108,114 59,829
Accrued Interest Receivable (688 ) (26 )
Other Operating Liabilities 1,435 (133 )
Net Cash Provided by Operating Activities 200 4,796
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations and Principal Collections, Net (40,813 ) (7,915 )
Deferred Loan Fees Collected 1,438 99
Acquisition of Premises and Equipment (970 ) (2,611 )
Proceeds from Sale of Real Estate 2,470 540
Improvements to Real Estate Owned Prior to Disposition (36 ) (52 )
Activity in Available-for-Sale Securities:
Principal Payments on Mortgage-Backed Securities 12,269 8,476
Sale of Securities 9,856 --
Activity in Held-to-Maturity Securities:
Purchases of Municipal Bonds (245 ) --
Principal Payments on Mortgage-Backed Securities 4,771 2,530
Net Cash Used in Investing Activities (32,510 ) (17,429 )
The accompanying notes are an integral part of these consolidated financial statements.
53
HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
For the Years Ended June 30, 2020 and 2019
For the Years Ended June 30,
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of Advances from Federal Home Loan Bank (295 ) (10,282 )
Company Stock Purchased (4,142 ) (2,447 )
Proceeds from Other Bank Borrowings 2,300 900
Repayment of Other Bank Borrowings (450 ) (750 )
Proceeds from Stock Options Exercised 65 325
Recognition and Retention Plan Share Distributions 153 134
Net Cash Provided by Financing Activities 69,073 14,874
NET INCREASE IN CASH AND CASH EQUIVALENTS 36,763 2,241
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,108 15,867
CASH AND CASH EQUIVALENTS, END OF YEAR $ 54,871 $ 18,108
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid on Deposits and Borrowed Funds 5,161 4,537
Loan Originations to Finance Sale of Real Estate -- 896
Transfer from Loans to Other Real Estate 950 1,366
Initial recognition of operating leases right of use assets 877 --
Initial recognition of operating leases right of use liabilities 877 --
The accompanying notes are an integral part of these consolidated financial statements.
54
Note 1.Summary of Significant Accounting Policies
Nature of Operations
On December 22, 2010, Home Federal Mutual Holding Company completed its second step conversion from the mutual holding company form of organization to the fully public stock
holding company structure pursuant to a Plan of Conversion and Reorganization. Upon completion of the conversion, Home Federal Bancorp, Inc. of Louisiana, a newly formed Louisiana chartered corporation (the Company), became the holding company
for Home Federal Bank (the Bank), and Home Federal Mutual Holding Company of Louisiana and Home Federal Bancorp, Inc. of Louisiana, a federally chartered corporation, (the Mid-Tier Company) ceased to exist. As part of the conversion, all
outstanding shares of the Mid-Tier Company 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 approximately 1,100,609 shares issued in the exchange and cash in lieu of fractional shares. In addition, a total of 1,945,220 shares of common stock, par value $0.01 per share, of Home Federal Bancorp, Inc. of Louisiana were
sold in subscription, community, and syndicated community offerings to certain depositors and borrowers of the Bank, the Bank’s Employee Stock Ownership Plan, and other investors for $10.00 per share, or $19.5 million in aggregate. Treasury
stock held was cancelled in the conversion. The net proceeds of the offering were approximately $18.0 million after offering expenses.
The Bank is a federally chartered, stock savings and loan association and is subject to federal regulation by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the
Currency (the OCC). The Bank provides financial services to individuals, corporate entities, and other organizations through the origination of loans and the acceptance of deposits in the form of passbook savings, certificates of deposit, and
demand deposit accounts. Services are provided by seven branch offices, five of which are located in Shreveport, Louisiana and two in Bossier City, Louisiana. The Bank’s home office is located in Shreveport, Louisiana.
The Bank is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those
regulatory authorities.
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Home Federal Bank. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP), management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses and deferred taxes.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are provided to customers of the Bank by seven branch offices, five of which are located in the city of Shreveport, Louisiana and two in Bossier
City, Louisiana. The area served by the Bank is primarily the Shreveport-Bossier City metropolitan area; however, loan and deposit customers are found dispersed in a wider geographical area covering much of northwest Louisiana.
55
Note 1.Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which have an
original maturity date of ninety days or less.
At June 30, 2020 and 2019, cash and cash equivalents consisted of the following:
(In Thousands)
Demand Deposits at Other Institutions 35,591 14,329
Securities
Securities are being accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320's, Investments whichrequires the classification of securities into one of three categories: Trading, Available-for-Sale, or Held-to-Maturity. Management determines the appropriate
classification of debt securities at the time of purchase and re-evaluates this classification periodically.
Investments in non-marketable equity securities and debt securities, in which the Company has the positive intent and ability to hold to maturity, are classified as held-to-maturity and carried
at cost, adjusted for amortization of the related premiums, and accretion of discounts, using the interest method. Investments in debt securities that are not classified as held-to-maturity and marketable equity securities that have readily
determinable fair values are classified as either trading or available-for-sale securities.
Securities that are acquired and held principally for the purpose of selling in the near term are classified as trading securities. Investments in securities not classified as trading or
held-to-maturity are classified as available-for-sale. Trading account and available-for-sale securities are carried at fair value. Unrealized holding gains and losses on trading securities are included in earnings, while net unrealized holding
gains and losses on available-for-sale debt securities are excluded from earnings and reported in other comprehensive income.
The Company held no trading securities as of June 30, 2020 and 2019.
Purchase premiums and discounts are recognized in interest income using the interest method over the term of the securities. Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Loans Held-for-Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to income.
56
Note 1.Summary of Significant Accounting Policies (Continued)
Loans Receivable
Loans receivable are stated at unpaid principal balances, less allowances for loan losses and unamortized deferred loan fees. Net non-refundable fees (loan origination fees,
commitment fees, discount points) and costs associated with lending activities are being deferred and subsequently amortized into income as an adjustment of yield on the related interest earning assets using the interest method. Interest income
on contractual loans receivable is recognized on the accrual method. Unearned discounts are deferred and amortized on the interest method over the life of the loan.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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 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 the Bank 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, the Bank will recognize the impairment by creating a valuation allowance with a corresponding charge against earnings. A loan is considered a troubled debt restructuring (“TDR”) if the Company, for economic or legal
reasons related to a debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Concessions granted under a TDR typically involve a temporary or permanent reduction in payments or interest rate or an
extension of a loan’s stated maturity date at less than a current market rate of interest. Loans identified as TDRs are designated as impaired.
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 periodic interest and principal payments is back to normal, the loan is
returned to accrual status.
It should be understood that estimates of future loan losses involve an exercise of judgment. While it is possible that in particular periods the Company may sustain losses,
which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses reflected in the accompanying statements of condition is adequate to absorb known and inherent losses in the
existing loan portfolio both probable and reasonable to estimate.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Bank has entered into commitments to extend credit. Such financial instruments are recorded when they are funded.
57
Note 1. Summary of Significant Accounting Policies (Continued)
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and are carried at the lower of cost or current fair value minus estimated cost to sell as of the date
of foreclosure. Cost is defined as the lower of the fair value of the property or the recorded investment in the loan. Subsequent to foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of
carrying amount or fair value less cost to sell.
Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives of the
assets. Estimated useful lives are as follows:
Buildings and Improvements 10 - 40 Years
Furniture and Equipment 3 - 10 Years
Bank Owned Life Insurance
The Company has purchased life insurance contracts on the lives of certain key employees. The Bank is the beneficiary of these policies. These contracts are reported at their cash surrender
value and changes in the cash surrender value are included in non-interest income.
Income Taxes
The Company and its wholly-owned subsidiary file a consolidated federal income tax return on a fiscal year basis. Each entity will pay its pro-rata share of income taxes in
accordance with a written tax-sharing agreement.
The Company accounts for income taxes on the asset and liability method. Deferred tax assets and liabilities are recorded based on the difference between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization
of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Current taxes are measured by applying the provisions of enacted tax laws to taxable income to
determine the amount of taxes receivable or payable.
The Company follows the provisions of the Income Taxes Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
740. ASC 740 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters
such as derecognition, interest, penalties, and disclosures required. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
While the Bank is exempt from Louisiana income tax, it is subject to the Louisiana Ad Valorem Tax, commonly referred to as the Louisiana Shares Tax, which is based on
stockholders’ equity and net income.
Earnings per Share
Earnings per share are computed based upon the weighted average number of common shares outstanding during the year.
58
Note 1. Summary of Significant Accounting Policies (Continued)
Non-Direct Response Advertising
The Company expenses all advertising costs, except for direct-response advertising, as incurred. Non-direct response advertising costs were $290,000 and $362,000 for the years
ended June 30, 2020 and 2019, respectively.
In the event the Company incurs expense for material direct-response advertising, it will be amortized over the estimated benefit period. Direct-response advertising consists of advertising
whose primary purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising and results in probable future benefits. For the years ended June 30, 2020 and 2019, the Company did not incur any amount
of direct-response advertising.
Stock-Based Compensation
GAAP requires all share-based payments to employees, including grants of employee stock options and recognition and retention share awards, to be recognized as expense in the
statement of operations based on their fair values. The amount of compensation is measured at the fair value of the options or recognition and retention share awards when granted, and this cost is expensed over the required service period, which
is normally the vesting period of the options or recognition and retention awards. This guidance applies to awards granted or modified after January 1, 2006, or any unvested awards outstanding prior to that date.
Reclassification
Certain financial statement balances included in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale debt securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
(In Thousands)
Net Unrealized Gain on Debt Securities Available-for-Sale $ 1,158 $ 26
Tax Effect (243 ) (6 )
Net-of-Tax Amount $ 915 $ 20
59
Note 1.Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Financial Instruments. The amendments in this Update supersede the guidance to classify equity securities with readily determinable fair values into
different categories and require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be
remeasured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The amendments in this Update also simplify the impairment assessment of equity investments without readily determinable fair
values by requiring assessment for impairment qualitatively at each reporting period. In addition, the amendments in this Update exempt all entities that are not public business entities from disclosing fair value information for financial
instruments measured at amortized cost. In addition, for public business entities, the amendments supersede the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments required
to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this Update require public business entities that are required to disclose fair value of financial instruments measured at amortized
cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments –
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update include items brought to the FASB Board’s attention regarding ASU 2016-01.
The provisions within this Update require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in
the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. This amendment excludes from net income gains or losses that the entity may not realize because
those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this Update require separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements.
For public business entities, the amendments in ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of
this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record ROU asset and a
lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting pattern of expense recognition in the income statement for a lessee.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available. The adoption of
this guidance did not have a material effect on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this Update replace the
incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public
business entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, including interim periods with those fiscal years. The extent of the impact upon adoption is not known and
will depend on the characteristics of the Company’s loan portfolio and economic conditions on that date as well as forecasted conditions thereafter.
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Note 1.Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), for fiscal years beginning after December 15, 2018. This Update was issued in
response to diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. As such, these amendments reduce the
amortization period for certain callable debt securities carried at a premium and require the premium to be amortized over the period not to exceed the earliest call date. These amendments do not apply to securities carried at a discount. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this ASU provide guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification accounting in FASB ASC 718. The effective date of this Update is for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim
period. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In November 2017, the FASB issued ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic
606) (SEC Update). This Update adds, amends, and supersedes SEC paragraphs of the ASC pursuant to Staff Accounting Bulletin No. 116 and SEC Release 33-10403. This ASU was effective upon issuance.
In May 2018, the FASB issued ASU 2018-06, Codification Improvements to Topic 942, Financial Services – Depository and Lending. The amendments in this Update supersede the guidance in Subtopic
942-740, Financial Services – Depository and Lending – Income Taxes, that is related to Circular 202 because that guidance has been rescinded by the Office of the Comptroller of the Currency (OCC) and is no longer relevant. This ASU was
effective upon issuance. Adoption of this ASU did not have a material effect on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Topic 718 improves several areas of
nonemployee share-basedpayment accounting. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that
fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption on Topic 606. Adoption of this ASU did not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU removes, modifies, and adds certain
disclosure requirements for fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. In addition, entities may early adopt the modified or eliminated disclosure
requirements and delay adoption of the additional disclosure requirements until effective date. ASU No. 2018-13 did not impact our consolidated financial statements, as the update only revises disclosure requirements.
In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)." The amendments in this ASU simplified the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The amendments also improved the consistent application of and simplified GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in the ASU are
effective for fiscal years and interim periods beginning after December 15, 2020. The Company does not expect the adoption of this ASU to impact the consolidated financial statements.
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Note 1.Summary of Significant Accounting Policies (Continued)