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 $4.9
million in fiscal 2022 compared to net income of $5.4 million in fiscal 2021.
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 the acquisition of deposits and it is our policy to require commercial customers
to have a deposit relationship with us, which primarily consists of NOW accounts or non-interest checking 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. Because of a decrease in our average rate on our interest-bearing assets, partially offset by a decrease in our rate on total interest bearing liabilities, our net interest margin decreased from 3.31% to 3.27%
during fiscal 2022 compared to 2021, and our net interest income increased $416,000 to $17.4 million for fiscal 2022 as compared to $16.9 million for fiscal 2021. We expect to continue to emphasize commercial lending in the future in order to
improve the yield on our portfolio.
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Home Federal Bancorp’s operations and profitability are subject to changes in interest rates, applicable statutes and regulations, and general economic conditions, as well as other factors beyond
our control.
Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Our current business strategy includes:
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Critical Accounting Policies
In reviewing and understanding financial information for Home Federal Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated
financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. Our accounting and financial reporting policies conform to accounting principles generally
accepted in the United States of America and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable based upon
the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following
accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove
inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. We have identified the evaluation of the allowance for loan losses as a critical accounting policy and a critical accounting estimate
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.
The allowance for loan losses is comprised of (i) specific reserves determined in accordance with current authoritative accounting guidance based on probable specific losses (ii) general reserve
determined in accordance with current authoritative accounting guidance that consider historical loss experience, and (iii) qualitative reserves determined in accordance with current authoritative accounting guidance based upon qualitive factors,
which include: 1) changes in lending policies, procedures, and practices; 2) changes in national and local economic trends and conditions; 3) changes in the nature and volume of the portfolio; 4) changes in the experience, ability, and depth of
lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of the Company’s loan
review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations.
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COVID-19
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, 2022, Home Federal Bank has funded 597 SBA PPP loans totaling approximately $68.8 million to 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 $68.4 million of SBA PPP loans that have been forgiven which represents 99.4% of the total amount of loans funded. The provision for loan
losses for the year ended June 30, 2022 was $336,000 compared to $1.8 million for the year ended June 30, 2021. The decrease is mainly due to an improvement in our overall credit quality.
Selected Financial and Other Data
Set forth below is selected consolidated financial and other data of Home Federal Bancorp. The information at or for the years ended June 30, 2022 and 2021 is derived in part from the audited
financial statements that appear in this Form 10-K.
At June 30,
(In thousands)
Selected Financial and Other Data:
Federal Home Loan Bank advances 832 867
As of or for the Year Ended June 30,
(Dollars in thousands, except per share amounts)
Selected Operating Data:
Net interest income after provision for loan losses 17,021 15,141
Income before income tax expense 6,000 6,810
Earnings per share of common stock:
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As of or for the Year Ended June 30,
Selected Operating Ratios(1):
Average yield on interest-earning assets 3.62 % 3.96 %
Average rate on interest-bearing liabilities 0.51 0.89
Average interest rate spread(2) 3.11 3.07
Total non-interest expense to average assets 2.54 2.53
Return on average assets 0.85 0.98
Average equity to average assets 9.22 9.42
Selected Quality Ratios(4):
Non-performing loans as a percent of loans receivable, net 0.62 % 0.30 %
Non-performing assets as a percent of total assets 0.37 0.25
Allowance for loan losses as a percent of total loans receivable 1.13 1.21
Net charge-offs to average loans receivable 0.00 0.48
Allowance for loan losses as a percent of non-performing loans 174.96 406.85
Bank Capital Ratios(4):
Tangible capital ratio 9.65 % 9.57 %
Other Data:
Offices (branch and home) 9 8
Employees (full-time) 70 61
Changes in Financial Condition
At June 30, 2022, the Company reported total assets of $590.5 million, an increase of $24.7 million, or 4.4%, compared to total assets of $565.7 million at June 30, 2021. The increase in assets was comprised primarily of
increases in loans receivable, net of $51.5 million, or 15.3%, from $336.4 million at June 30, 2021 to $387.9 million at June 30, 2022, investment securities of $23.8 million, or 28.2%, from $84.3 million at June 30, 2021 to $108.0 million at June
30, 2022, premises and equipment of $1.3 million, or 8.9%, from $14.9 million at June 30, 2021 to $16.2 million at June 30, 2022, and deferred tax assets of $324,000, or 39.6%, from $819,000 at June 30, 2021 to $1.1 million at June 30, 2022. These
increases were partially offset by decreases in cash and cash equivalents of $40.3 million, or 38.6%, from $104.4 million at June 30, 2021 to $64.1 million at June 30, 2022, loans held-for-sale of $10.4 million, or 72.4%, from $14.4 million at June
30, 2021 to $4.0 million at June 30, 2022, bank owned life insurance of $617,000, or 8.6%, from $7.2 million at June 30, 2021 to $6.6 million at June 30, 2022, real estate owned of $383,000, or 100.0%, from $383,000 at June 30, 2021 to none at June
30, 2022, other assets of $366,000, or 20.9%, from $1.8 million at June 30, 2021 to $1.4 million at June 30, 2022, and accrued interest receivable of $39,000, or 3.4%, from $1.2 million at June 30, 2021 to $1.1 million at June 30, 2022.
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Loans receivable, net increased $51.5 million, or 15.3%, from $336.4 million at June 30, 2021 to $387.9 million at June 30, 2022. The increase in loans receivable, net was attributable primarily to
increases in commercial real estate loans of $31.4 million, one-to-four family residential loans of $22.4 million, construction loans of $12.5 million, land loans of $5.9 million, equity lines of credit loans of $5.0 million, and equity and second
mortgage loans of $320,000, partially offset by decreases in commercial business loans of $25.4 million, and consumer loans of $210,000. With rising interest rates, 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, 2022, Home Federal Bank had $127.6 million of commercial real estate loans, 32.5% of the
total loan portfolio, and $44.5 million of commercial business loans, 11.3% 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 $1.5 million, or 4.9%, from $29.6 million at June 30, 2021 to $28.1 million at June 30, 2022. This decrease resulted primarily from principal repayments of
$9.5 million and a decrease in market values of securities of $2.5 million, partially offset by purchases of $9.3 million in mortgage-backed securities.
Securities held-to-maturity increased $25.2 million, from $54.7 million at June 30, 2021 to $79.9 million at June 30, 2022. This increase was primarily due to purchases of $34.6 million of
mortgage backed securities and purchases of $14,800 in FHLB stock, partially offset by principal repayments of $9.3 million. We chose to place these securities in held-to-maturity as part of our interest rate risk management strategy.
Cash and cash equivalents decreased $40.3 million, or 38.6%, from $104.4 million at June 30, 2021 to $64.1 million at June 30, 2022. The decrease in cash and cash equivalents
was primarily due to the funding of additional loan growth and purchases of securities with excess liquidity.
Total liabilities increased $25.1 million, or 4.9%, from $513.0 million at June 30, 2021 to $538.1 million at June 30, 2022 primarily due to increases in total deposits of $25.4 million, or 5.0%,
to $532.0 million at June 30, 2022 compared to $506.6 million at June 30, 2021, partially offset by a decrease of $111,000, or 4.1%, in other accrued expenses and liabilities from $2.7 million at June 30, 2021 to $2.6 million at June 30, 2022, a
decrease of $72,000, or 16.9%, in advances from borrowers for taxes and insurance from $426,000 at June 30, 2021 to $354,000 at June 30, 2022, a decrease of $50,000, or 2.1%, in other borrowings from $2.4 million at June 30, 2021 to $2.3 million at
June 30, 2022, and a decrease of $35,000, or 4.0%, in advances from the Federal Home Loan Bank from $867,000 at June 30, 2021 to $832,000 at June 30, 2022. The increase in deposits was primarily due to a $30.1 million, or 23.0%, increase in
non-interest bearing deposits from $131.0 million at June 30, 2021 to $161.1 million at June 30, 2022, a $10.4 million, or 11.8%, increase in money market deposits from $88.2 million at June 30, 2021 to $98.6 million at June 30, 2022, a $9.7
million, or 19.7%, increase in NOW accounts from $49.3 million at June 30, 2021 to $59.0 million at June 30, 2022, and an increase in savings deposits of $3.9 million, or 3.0%, from $129.1 million at June 30, 2021 to $133.0 million at June 30,
2022, partially offset by a decrease of $28.7 million, or 26.4%, in certificates of deposit from $109.0 million at June 30, 2021 to $80.3 million at June 30, 2022. The Company had $6.0 million in brokered deposits at June 30, 2022 compared to $10.7
million at June 30, 2021. The decrease in advances from the Federal Home Loan Bank was primarily due to principal paydowns on amortizing advances. The entire balance in advances from the Federal Home Loan Bank are now short-term due to our only
advance with a balloon maturity in January 2023.
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Stockholders’ equity decreased $378,000, or 0.7%, to $52.3 million at June 30, 2022 from $52.7 million at June 30, 2021. The primary reasons for the changes in stockholders’ equity from June 30, 2021 were the repurchase
of Company stock of $4.5 million, a decrease in the Company’s accumulated other comprehensive income of $2.0 million, and dividends paid totaling $1.4 million, partially offset by net income of $4.9 million, proceeds from the issuance of common stock
from the exercise of stock options of $1.9 million, and the vesting of restricted stock awards, stock options, and the release of employee stock ownership plan shares totaling $671,000.
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.
(Dollars in thousands)
Interest-earning assets:
Interest-bearing liabilities:
Non-interest-bearing liabilities:
Net interest margin(4) 3.27 % 3.31 %
(1) Includes loans held for sale.
(2) Includes retained earnings and accumulated other comprehensive loss.
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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.
Rate Volume (Decrease) Rate Volume (Decrease)
(In thousands)
Interest income:
Interest expense:
FHLB advances and other borrowings 3 (5 ) (2 ) (22 ) 22 --
Comparison of Operating Results for the Years Ended June 30, 2022 and 2021
General.The decrease in net income for the year ended June 30, 2022 resulted primarily from a $2.0 million, or 36.2%,
decrease in non-interest income, and an increase of $714,000, or 5.2%, in non-interest expense, partially offset by a decrease of $1.5 million, or 81.3%, in provision for loan losses, an increase of $416,000, or 2.5%, in net interest income, and a
decrease of $318,000, or 22.0% in provision for income taxes. The decrease in the provision for loan losses is mainly due to an improvement in overall credit quality. The increase in net interest income was primarily due to a $1.4 million, or 43.2%,
decrease in total interest expense, partially offset by a $1.0 million, or 5.0%, decrease in total interest income. The Company’s average interest rate spread was 3.11% for the year ended June 30, 2022 compared to 3.07% for the year ended June 30,
2021. The Company’s net interest margin was 3.27% for the year ended June 30, 2022 compared to 3.31% for the year ended June 30, 2021.
Net Interest Income. Net interest income amounted to $17.4 million for fiscal year 2022, an increase of $416,000, or 2.5%, compared to $16.9 million for fiscal
year 2021. The increase was due primarily to a decrease of $1.4 million in interest expense, partially offset by a $1.0 million decrease in total interest income.
The average interest rate spread increased from 3.07% for fiscal 2021 to 3.11% for fiscal 2022, while the average balance of interest-earning assets increased from $511.3 million to
$531.2million during the same periods. The percentage of average interest-earning assets to average interest-bearing liabilities increased to 143.32% for fiscal 2022 compared to 137.46% for fiscal 2021.The average rate paid on certificates of deposit decreased from 1.68% for fiscal 2021 to 1.37% for fiscal 2022. Net interest margin decreased to 3.27% for fiscal 2022 compared to 3.31% for fiscal 2021.
Interest income decreased $1.0 million, or 5.0%, to $19.2million for fiscal 2022 compared to $20.2 million for fiscal 2021, primarily due to
a decrease in interest income from loans of $1.4 million, partially offset by an increase in interest income from investment and mortgage-backed securities of $282,000, and an increase in interest income on other earning assets of $120,000. 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 12 basis points during fiscal 2022 mainly due to a lower
interest rate environment.
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Interest expense decreased $1.4 million, or 43.2%, to $1.9 million for fiscal 2022 compared to $3.3 million for fiscal 2021, primarily as a result of decreases in the average rate paid on
interest-bearing deposits.
Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have
occurred in our loan portfolio. Loan losses are charged against the allowance when management believes the 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 $336,000 was made to the allowance during fiscal 2022, compared to a provision of $1.8 million in fiscal 2021. At June 30, 2022, the Company had $2.2 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 $1.4 million of non-performing assets at June 30,
2021, consisting of seven single family residential loans at June 30, 2022, compared to three single-family residential loans, six commercial real estate loans to one borrower, and one commercial real estate property and one single family residence
in other real estate owned at June 30, 2021. The increase in non-performing assets from $1.4 million at June 30, 2021 to $2.5 million at June 30, 2022 was primarily due to a $1.8 million loan relationship with one customer secured by multiple
one-to-four family non-owner occupied homes. At June 30, 2022, the Company had five single family residential loans and two commercial real estate loans classified as substandard compared to one single family residential loan and eight commercial
real estate loans with six of those to one borrower classified as substandard at June 30, 2021. There were no loans classified as doubtful at June 30, 2022 or June 30, 2021.
Non-Interest Income. Non-interest income amounted to $3.5 million for the year ended June 30, 2022, a decrease of $2.0
million, or 36.2%, compared to non-interest income of $5.5 million for the year ended June 30, 2021. The $2.0 million decrease in non-interest income for the year ended June 30, 2022 compared to the prior year period was primarily due to
a decrease of $2.3 million in gain on sale of loans, a $14,000 decrease in income from bank owned life insurance, and an increase of $6,000 in loss on sale of real estate, partially offset by an increase of $225,000 in other non-interest income, and
a $156,000 increase in service charges on deposit accounts. The decrease in gain on sale of loans for the year ended June 30, 2022 was primarily due to a decrease in refinance activity causing a decrease in mortgage loan originations. The Company
sells most of its long-term fixed rate residential mortgage loan originations primarily in order to manage interest rate risk. The increase in other non-interest income for the year ended June 30, 2022 was due to a $228,000 bank-owned life insurance
claim on a retired bank executive officer.
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Non-Interest Expense. Non-interest expense increased $714,000, or 5.2%, in fiscal 2022 compared to the prior year period.
The $714,000 increase in non-interest expense for the year ended June 30, 2022, compared to the prior year period, is primarily attributable to increases of $354,000 in compensation and benefits expense, $299,000 in occupancy and equipment
expense, $139,000 in advertising expense, $128,000 in franchise and bank shares tax expense, $95,000 in audit and examination fees, $70,000 in data processing expense, $52,000 in other non-interest expense, and a $17,000 increase in deposit
insurance premium expense, partially offset by decreases of $200,000 in real estate owned valuation adjustment expense, $146,000 in loan and collection expense, and $94,000 in legal fees.
Provision for Income Tax Expense. The provision for income taxes amounted to $1.1 million and $1.4 million for the fiscal years ended June 30, 2022 and 2021,
respectively. Our effective tax rate was 18.8% for fiscal 2022 and 21.2% for fiscal 2021.
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, 2022, 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, 2022 and 2021, securities
available-for-sale amounted to $28.1 million and $29.6 million, respectively, or 4.8% and 5.2%, 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, 2022:
Basis Points (Rate Shock) Amount $ Change % Change NPV Ratio Change
(Dollars in thousands)
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 $339.6 million for fiscal 2022 and $389.8 million for fiscal 2021, while loans sold amounted to $87.2 million and $198.8 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.
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Liquidity and Capital Resources
Home Federal Bancorp maintains levels of liquid assets deemed adequate by management. Our liquidity ratio averaged 31.7% for the quarter ended June 30, 2022. 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 $11.9 million and $42.0 million at June 30, 2022 and 2021, 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, 2022, we had $832,000 in advances from the Federal Home Loan Bank of Dallas and had $176.7 million in additional borrowing capacity. Additionally, at June 30, 2022, 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 $20.4 million. There were no amounts purchased under this agreement as of
June 30, 2022. In addition, Home Federal Bancorp had available a $10.0million line of credit agreement at June 30, 2022 with First National Bankers Bank. At June 30, 2022 there was a $2.4 million balance
in the credit line.
At June 30, 2022, the Company had outstanding loan commitments of $60.5 million to originate loans and commitments under unused lines of credit of $11.4 million. At June 30, 2022, certificates of
deposit scheduled to mature in one year or less totaled $51.1 million, or 64.6% 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, 2022, Home Federal Bank exceeded each of its capital requirements with tangible equity, common equity Tier 1, core, and total risk-based capital ratios of 9.65%, 14.47%, 9.65%, and
15.62%, 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, 2022. See
Notes 9 and 14 to the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
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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.
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.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and
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, 2021, the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity and cash flows for the year 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, 2021, and the results of its operations and its cash flows for the year 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 audit. 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that : (1)
related to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgement. The communication of the critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for Loan Losses
Description of the Matter
The Company’s loan portfolio totaled $341.3 million as of June 30, 2021, and the associated allowance for loan losses (ALL) was $4.1 million. As discussed in notes 1 and 3 to the consolidated financial statements, the
ALL is established to absorb probable credit losses inherent to the Company’s loan portfolio. Management’s estimate for the probable credit losses is established through quantitative, as well as qualitative, factors. The Company attributes portions
of the allowance to loans that it evaluates individually and determines to be impaired. For non-impaired loans, the allowance for loan losses is estimated based on historical default and/or loss information for pools of loans with similar risk
characteristics and product types. The Company’s methodology for determining the appropriate ALL also considers the imprecision inherent in the estimation process. As a result, management adjusts the ALL for consideration of the potential impact of
qualitative factors, which include: 1) changes in lending policies, procedures, and practices; 2) changes in national and local economic trends and conditions; 3) changes in the nature and volume of the portfolio; 4) changes in the experience,
ability, and depth of lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of
the Company’s loan review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations. In addition and as a
response to the COVID-19 pandemic, the Company also applied a qualitative factor related to this event, which is designed to absorb probable incurred loan losses that are negatively affected by the COVID-19 pandemic.
Auditing management’s estimate of the ALL involved a high degree of subjectivity in evaluating the qualitative factors that management assessed and the measurement of each qualitative factor. Management’s assessment
and measurement of the qualitative factors is highly judgmental and has a significant effect on the ALL.
How We Addressed the Matter in Our Audit
Our audit procedures related to the qualitative factors of the ALL included the following procedures, among others. We gained an understanding of the Company’s process for establishing the ALL, including the
identification and measurement of qualitative factors. We evaluated the design and documented the controls in place that are relevant to that process.
We evaluated the accuracy of management's inputs into the qualitative factor adjustments by comparing the inputs to the Company's historical loan performance data, third-party macroeconomic data and peer bank data.
With respect to the identification of qualitative factors, we evaluated 1) changes, assumptions and adjustments to the models; 2) sufficiency, availability and relevance of historical loss data used in the models; and
3) the risk factors used in the models. Further, we assessed whether the total amount of the qualitative estimate was consistent with the Bank's historical loss information, credit quality statistics, and publicly observable indicators of
macroeconomic financial conditions and whether the total ALL amount was reflective of losses incurred in the loan portfolio as of the consolidated balance sheet date.
A Professional Accounting Corporation
We have served as the Company’s auditor from 2004 through 2021
Covington, Louisiana
September 28, 2021
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Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors Home
Federal Bancorp, Inc. of Louisiana
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Home Federal Bancorp, Inc. of Louisiana (the “Company”) as of June 30, 2022 and the related consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for the period ended June 30, 2022 and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of June 30, 2022 and the results of its operations and its cash flows for the year ended June 30, 2022, in conformity with accounting principles generally accepted in the United States of
America.
Basis for 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 audit.
We are a public accounting firm registered with the Public Company Accounting Oversight 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 audit 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 audit 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 audit 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
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
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Allowance for Loan Losses – Qualitative Factors
As described in Note 1 and Note 3 to the financial statements, the Company’s allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. The allowance for loan losses was $4.45 million at June 30, 2022, which is comprised of (i) specific reserves determined in accordance with current authoritative accounting
guidance based on probable losses on specific loans (ii) general reserves determined in accordance with current authoritative accounting guidance that consider historical loss experience, and (iii) qualitative reserves. The qualitative reserve
is based upon general economic conditions as well as other qualitative risk factors both internal and external to the Company and requires management to make judgments regarding the impact of qualitative factors on probable inherent losses. Of
the total allowance for loan loss, the historical loss and qualitative reserve represented $4.35 million, and the specific reserve represented $102 thousand.
We identified the Company’s estimate of the qualitative factors in the allowance for loan loss as a critical audit matter. The principal considerations
for that determination included the high degree of subjectivity and judgement in auditing management’s identification and measurement of the factors.
The primary procedures we performed to address this critical audit matter included the following. We performed substantive testing over management’s
qualitative factors by evaluating the relevancy and reliability of the underlying data used to derive the qualitative factors, including comparison to internal, external and/or peer data to ensure movement in a directionally consistent manner.
Based on the underlying data and our evidence gathered, we evaluated the reasonableness of management’s conclusion on the adjustment to the factors. We tested the accuracy of the mathematical application of the qualitative factors to adjust the
historical loss experience.
/s/ FORVIS, LLP (Formerly, Dixon Hughes
Goodman LLP)
We have served as the Company’s auditor since 2021.
Fort Worth, Texas
September 26, 2022
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HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2022 and 2021
(In Thousands)
ASSETS
Real Estate Owned - 383
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Advances from Borrowers for Taxes and Insurance 354 426
Short-term Federal Home Loan Bank Advances 832 35
Long-term Federal Home Loan Bank Advances - 832
Other Accrued Expenses and Liabilities 2,606 2,717
STOCKHOLDERS’ EQUITY
Unearned ESOP Stock (639 ) (754 )
Accumulated Other Comprehensive (Loss) Income (1,699 ) 275
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 590,480 $ 565,731
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 Operations
For the Years Ended June 30, 2022 and 2021
For the Years Ended June 30,
(In Thousands, Except Per Share Data)
INTEREST INCOME
Investment securities 4 5
Other interest-earning assets 224 104
INTEREST EXPENSE
Federal Home Loan Bank borrowings 41 45
Other bank borrowings 66 64
Net Interest Income After Provision For Loan Losses 17,021 15,141
NON-INTEREST INCOME
Loss on sale of real estate and fixed assets (48 ) (42 )
Income on Bank-Owned Life Insurance 113 127
Service charges on deposit accounts 1,147 991
NON-INTEREST EXPENSE
Audit and examination fees 328 233
Franchise and bank shares tax 535 407
Real estate owned valuation adjustment - 200
Deposit insurance premium 154 137
PROVISION FOR INCOME TAX EXPENSE 1,127 1,445
EARNINGS PER SHARE
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 Comprehensive Income
For the Years Ended June 30, 2022 and 2021
For the Years Ended June 30,
(In Thousands)
Other Comprehensive (Loss) Income, Net of Tax
Investment securities available-for-sale:
Net unrealized (losses) gains (2,500 ) (810 )
Other Comprehensive (Loss) Income (1,974 ) (640 )
Total Comprehensive Income $ 2,899 $ 4,725
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, 2022 and 2021
(In Thousands)
Share Awards Earned - 153 - - - 153
Stock Options Exercised - 705 - - - 705
Stock Split 12 (12 ) - - - -
Stock Options Vested - 107 - - - 107
Company Stock Purchased - - - (2,711 ) - (2,711 )
Share Awards Earned - 117 - - - 117
Stock Options Exercised - 1,889 - - - 1,889
Stock Options Vested - 95 - - - 95
Company Stock Purchased - - - (4,484 ) - (4,484 )
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 Cash Flows
For the Years Ended June 30, 2022 and 2021
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
Net Amortization and Accretion on Securities 109 157
Amortization of Deferred Loan Fees (805 ) (1,326 )
Real Estate Owned Valuation Adjustment - 200
Depreciation of Premises and Equipment 763 665
Net Loss on Sale of Real Estate 48 42
ESOP Compensation Expense 459 333
Stock Options Expense 95 107
Deferred Income Tax (Benefit) Expense (324 ) (61 )
Federal Home Loan Bank Stock Certificate - (5 )
Recognition and Retention Plan and Share Awards Expense 121 126
Changes in Assets and Liabilities:
Origination and Purchase of Loans Held-for-Sale (87,238 ) (194,574 )
Sale and Principal Repayments on Loans Held-for-Sale 99,669 199,264
Accrued Interest Receivable 39 697
Other Operating Assets 366 62
Other Operating Liabilities (111 ) (276 )
Net Cash Provided By Operating Activities 17,059 8,332
CASH FLOWS FROM INVESTING ACTIVITIES
Loan Originations and Principal Collections, Net (51,004 ) 21,841
Deferred Loan Fees Collected 372 634
Acquisition of Premises and Equipment (2,574 ) (2,354 )
Proceeds from Sale of Real Estate 814 883
Improvements to Real Estate Owned Prior to Disposition - (124 )
Activity in Available-for-Sale Securities:
Principal Payments on Mortgage-Backed Securities 8,400 21,712
Activity in Held-to-Maturity Securities:
Purchases of Municipal Bonds - (1,130 )
Purchases of FHLB Stock (15 ) -
Principal Payments on Mortgage-Backed Securities 9,317 6,445
Sale/Redemptions of Securities - 2,437
Net Cash Used in Investing Activities (78,793 ) (1,420 )
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Cash Flows (Continued)
For the Years Ended June 30, 2022 and 2021
For the Years Ended June 30,
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of Advances from Federal Home Loan Bank (35 ) (193 )
Company Stock Purchased (4,484 ) (2,593 )
Net Decrease in Advances from Borrowers for Taxes and Insurance (72 ) (96 )
Proceeds from Other Bank Borrowings 3,150 2,400
Repayment of Other Bank Borrowings (3,200 ) (2,300 )
Proceeds from Stock Options Exercised 1,889 587
Recognition and Retention Plan Share Distributions 117 153
Net Cash Provided by Financing Activities 21,407 42,622
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,327 ) 49,534
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 104,405 54,871
CASH AND CASH EQUIVALENTS, END OF YEAR $ 64,078 $ 104,405
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid on Deposits and Borrowed Funds 1,892 3,331
Transfer from Loans to Other Real Estate - 434
The accompanying notes are an integral part of these consolidated financial statements.
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HOME FEDERAL BANCORP, INC. OF LOUISIANA AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1.Summary of Significant Accounting Policies
Nature of Operations
The consolidated financial statements include the accounts of Home Federal Bancorp, Inc. of Louisiana, a
Louisiana chartered corporation (the “Company” or “Home Federal Bancorp”) and its wholly owned subsidiary, Home Federal Bank, a federally chartered stock savings bank (the “Bank”), along with its wholly owned subsidiary, Metro Financial
Services, Inc.
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 nine
branch offices, six of which are located in Shreveport, Louisiana, two in Bossier City and one in Minden, 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 nine branch offices, six of which
are located in the city of Shreveport, Louisiana, two in Bossier City, Louisiana and one in Minden. The area served by the Bank is primarily the Shreveport-Bossier City-Minden combined statistical area; however, loan and deposit customers are found
dispersed in a wider geographical area covering much of northwest Louisiana.
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Notes to Consolidated Financial Statements
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, 2022 and 2021, cash and cash equivalents consisted of the following:
(In Thousands)
Demand Deposits at Other Institutions 40,758 59,591
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, 2022 and 2021.
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.
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Notes to Consolidated Financial Statements
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.
The allowance for loan losses is comprised of (i) specific reserves determined in accordance with current authoritative accounting guidance based on probable specific losses (ii) general reserve determined in
accordance with current authoritative accounting guidance that consider historical loss experience, and (iii) qualitative reserves determined in accordance with current authoritative accounting guidance based upon qualitive factors, which
include: 1) changes in lending policies, procedures, and practices; 2) changes in national and local economic trends and conditions; 3) changes in the nature and volume of the portfolio; 4) changes in the experience, ability, and depth of
lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of the
Company’s loan review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations.
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.
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Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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