ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
The Company’s results of operations are primarily dependent on the results of the Bank, which became a wholly owned subsidiary upon completion of the second-step conversion and reorganization on December 22, 2010. Prior thereto, the Bank was in the mutual holding company form of organization. The Bank’s results of operations depend, to a large extent, on net interest income, which is the difference between the income earned on its loan and investment portfolios and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by provisions for loan losses and loan sale activities. Non-interest expense principally consists of compensation and employee benefits, office occupancy and equipment expense, data processing and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially impact our financial conditions and results of operations.
Critical Accounting Policies
Allowance for Loan Losses.
The Company has identified the calculation of the allowance for loan losses as a critical accounting policy, due to the higher degree of judgment and complexity than its other significant accounting policies. Provisions for loan losses are based upon management’s periodic valuation and assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors in order to maintain the allowance for loan losses at a level believed by management to represent all known and inherent losses in the portfolio that are both probable and reasonably estimable. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change.
Income Taxes.
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. The realization of our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Discussion of Financial Condition Changes from June 30, 2012 to September 30, 2012
At September 30, 2012, total assets amounted to $270.2 million compared to $296.2 million at June 30, 2012, a decrease of approximately $26.0 million, or 8.8%. The decrease in assets was comprised primarily of decreases in investment securities of $2.8 million, or 4.0%, from $69.8 million at June 30, 2012, to $67.0 million at September 30, 2012, loans held-for-sale of $2.0 million, or 17.9%, from $11.2 million at June 30, 2012 to $9.2 million at September 30, 2012, and a decrease in cash and cash equivalents of $28.0 million, from $34.9 million at June 30, 2012 to $6.8 million at September 30, 2012, partially offset by an increase in net loans receivable of $6.6 million, or 3.9%, from $168.3 million at June 30, 2012 to $174.8 million at September 30, 2012. The decrease in investment securities was due to normal principal repayments during the quarter ended September 30, 2012. The decrease in loans held-for-sale primarily reflects a decrease at September 30, 2012 in receivables from financial institutions purchasing the Company’s loans held-for-sale. The $28.0 million decrease in cash and cash equivalents was due to a non-recurring deposit in the fourth quarter of the prior fiscal year which had a balance of $31.7 million at June 30, 2012. This deposit had been fully withdrawn as of September 30, 2012. The increase in net loans receivable was attributable primarily to increases in commercial real estate loans of $5.5 million, land loans of $1.7 million and one- to-four family residential of $824,000, partially offset by a decrease of $960,000 in construction loans compared to June 30, 2012.
HOME FEDERAL BANCORP, INC. OF LOUISIANA
Discussion of Financial Condition Changes from June 30, 2012 to September 30, 2012 (continued)
At September 30, 2012, the Company had no non-performing assets compared to $14,000 at June 30, 2012. Our non-performing assets at June 30, 2012 consisted of a one- to four-family residential loan purchased from a local mortgage originator secured by property in our market area. Following the expansion of the Company’s mortgage lending operations, the Company has not purchased mortgage loans in recent periods.
The Company’s total liabilities amounted to $221.4 million at September 30, 2012, a decrease of approximately $24.9 million, or 10.1%, compared to total liabilities of $246.3 million at June 30, 2012. The primary reasons for the decrease in liabilities was due to a decrease in deposits of $28.3 million, or 12.8%, from $221.4 million at June 30, 2012 to $193.2 million at September 30, 2012, partially offset by an increase in advances from Federal Home Loan Bank of $2.8 million, or 11.9%, to $26.3 million at September 30, 2012, from $23.5 million at June 30. 2012. The decrease in deposits was primarily due to the withdrawal during the quarter ended September 30, 2012 of the non-recurring deposit discussed above which had a balance of approximately $31.7 million at June 30, 2012. Certificates of Deposit decreased $1.4 million, or 1.3%, from $108.6 million at June 30, 2012 to $107.2 million at September 30, 2012. Interest and non-interest bearing NOW accounts increased $5.1 million, or 13.6%, from $37.5 million at June 30, 2012 to $42.6 million at September 30, 2012. The Company utilizes brokered certificates of deposit as a component of its strategy for lowering Home Federal Bank’s overall cost of funds. The brokered certificates of deposit, all of which have maturity dates greater than twelve months, are callable by Home Federal Bank after twelve months pursuant to early redemption provisions. At both September 30, 2012 and June 30, 2012, the Company had $10.4 million in brokered deposits.
Stockholders’ equity decreased $1.0 million, or 2.0%, to $48.9 million at September 30, 2012 compared to $49.9 million at June 30, 2012. The primary reasons for the decrease in stockholders’ equity from June 30, 2012, were the acquisition of treasury stock of $2.3 million, and dividends paid of $172,000. These decreases in shareholders’ equity were partially offset by net income of $939,000 for the three months ended September 30, 2012, proceeds from the issuance of common stock from the exercise of stock options of $386,000, the vesting of restricted stock awards, stock options and release of Employee Stock Ownership Plan shares totaling $99,000 and an increase in the Company’s accumulated other comprehensive income of $45,000. The Company’s book value per share increased from $17.14 at June 30, 2012 to $17.59 at September 30, 2012 based on shares outstanding of 2,877,032 and 2,778,019, respectively.
The Bank is required to meet minimum capital standards promulgated by the Office of the Comptroller of the Currency (“OCC”). At September 30, 2012, Home Federal Bank’s regulatory capital was well in excess of the minimum capital requirements.
Comparison of Operating Results for the Three Month Periods Ended September 30, 2012 and 2011
General
Net income amounted to $939,000 for the three months ended September 30, 2012 compared to $802,000
for the same period in 2011, an increase of $137,000, or 17.1%. The increase was primarily due to a $571,000, or 27.5%, increase in net interest income, partially offset by increases of $208,000, or 11.2%, in non-interest expense, $188,000, or 67.4%, in income taxes, and $25,000, or 29.1% in the provision for loan losses, and a $13,000 or 1.4%, decrease in non-interest income for the 2012 period compared to the same period in 2011. The increase in net interest income for the three months ended September 30, 2012 was primarily due to an increase in interest income and fees from higher loan originations as a result of the hiring of additional loan officers since 2011, and a decrease in the Company’s cost of funds for the three months ended September 30, 2012, compared to the prior year period. The increase in non-interest expense was primarily due to an increase in compensation and benefits expense and other expenses associated with the Company’s growth, including increasing loan volume and related commissions to commercial and residential loan officers and the expansion and improvement of the Company's offices.
HOME FEDERAL BANCORP, INC. OF LOUISIANA
Comparison of Operating Results for the Three Month Periods Ended September 30, 2012 and 2011 (continued)
The Company’s average interest rate spread was 3.77% for the three months ended September 30, 2012, compared to 3.23% for the three months ended September 30, 2011. The Company’s net interest margin was 4.08% for the three months ended September 30, 2012, compared to 3.69% for the three months ended September 30, 2011. The increase in net interest margin and average interest rate spread for the quarterly period is attributable primarily to a higher volume of interest earning assets at relatively stable rates. Net interest income also increased primarily due to the increase in volume of average interest-earning assets. The increases in average interest rate spread and net interest income were also influenced by decreases in the average rates paid on interest bearing liabilities.
Provision for Losses on Loans
Based on an analysis of historical experience, the volume and type of lending conducted by Home Federal Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to Home Federal Bank’s market area and other factors related to the collectability of Home Federal Bank’s loan portfolio, a provision for loan losses of $111,000 was made during the three months ended September 30, 2012, compared to an $86,000 provision made during the three months ended September 30, 2011. The Company’s allowance for loan losses was $1.8 million, or 1.02% of total loans, at September 30, 2012 compared to $928,000, or 0.72%, of total loans at September 30, 2011. At September 30, 2012, the Company had no
non-performing loans and no other non-performing assets or troubled-debt restructurings. At September 30, 2011, the Company had two non-performing loans in the amount of $89,000. There can be no assurance that the loan loss allowance will be sufficient to cover losses on non-performing assets in the future.
Non-interest Income
Total non-interest income amounted to $931,000 for the three months ended September 30, 2012, a decrease of $13,000, or 1.4%, compared to $944,000 for the same period in 2011. The decrease was primarily due to decreases of $108,000 in gain on sale of securities and $7,000 in income from bank owned life insurance, partially offset by increases of $89,000 in gain on sale of loans and $13,000 in other non-interest income.
Non-interest Expense
Total non-interest expense increased $208,000, or 11.2%, for the three months ended September 30, 2012 compared to the prior year period. The increase in non-interest expense was primarily due to an increase in compensation and benefits expense of $197,000, or 17.6%, over the prior year period and increases of $12,000 in legal fees, $11,000 in data processing and $10,000 in occupancy and equipment expenses.
The increase in compensation and benefits expense was a result of normal compensation increases including stock options and recognition and retention plan expense and commissions for commercial and residential loan officers due to increases in loan volume. The aggregate compensation expense recognized by the Company for its Stock Option, ESOP and Recognition and Retention Plans amounted to $141,000 for the three months ended September 30, 2012 and $42,000 for the three months ended September 30, 2011.
The Louisiana bank shares tax is assessed on the Bank’s equity and earnings. For the three months ended September 30, 2012, the Company recognized franchise and bank shares tax expense of $84,000 compared to $95,000 for the same period in 2011.
Comparison of Operating Results for the Three Month Periods Ended September 30, 2012 and 2011 (continued)
Income Taxes
Income taxes amounted to $467,000 and $279,000 for the three months ended September 30, 2012 and 2011, respectively, resulting in effective tax rates of 33.2% and 25.8%, respectively. Reconciliations of income tax expense at the statutory rate to the Company’s effective rates are as follows:
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Expected Statutory Rate
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34.0
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%
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|
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34.0
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%
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Non-taxable Income
|
|
|
(1.2
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)
|
|
|
(1.8
|
)
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Capital Gains and Losses
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|
|
--
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|
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(6.4
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)
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Other, Net
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|
|
0.4
|
|
|
|
--
|
|
|
|
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33.2
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%
|
|
|
25.8
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%
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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.
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Three months ended September 30,
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Average
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Average
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Average
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Average
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(Dollars in thousands)
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Interest-earning assets:
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|
|
|
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|
|
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Investment securities
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$
|
65,744
|
|
|
$
|
493
|
|
|
|
3.00
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%
|
|
$
|
77,897
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|
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$
|
607
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|
|
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3.12
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%
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Loans receivable
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184,628
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|
|
|
2,841
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|
|
|
6.16
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|
|
|
134,591
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|
|
|
2,262
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|
|
|
6.72
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Interest-earning deposits
|
|
|
9,097
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|
|
6
|
|
|
|
0.27
|
|
|
|
12,232
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|
|
|
5
|
|
|
|
0.16
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|
Total interest-earning assets
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259,469
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|
|
3,340
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|
|
5.15
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|
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224,720
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|
2,874
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|
|
5.12
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Non-interest-earning assets
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15,176
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|
|
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|
|
|
|
|
13,984
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|
|
|
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Total assets
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$
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274,645
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$
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238,704
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|
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Interest-bearing liabilities:
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Savings accounts
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6,793
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|
|
5
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|
|
|
0.28
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|
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7,012
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|
|
7
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|
|
0.40
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NOW accounts
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18,432
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|
|
37
|
|
|
|
0.79
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|
|
|
14,808
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|
|
|
31
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|
|
|
0.84
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|
Money market accounts
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|
|
44,824
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|
|
|
56
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|
|
|
0.50
|
|
|
|
34,193
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|
|
|
65
|
|
|
|
0.76
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|
Certificate accounts
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|
|
107,542
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|
|
|
495
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|
|
|
1.84
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|
|
|
88,917
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|
|
|
518
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|
|
|
2.33
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Total deposits
|
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177,591
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|
|
|
593
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|
|
|
1.34
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|
|
|
144,930
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|
|
621
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|
|
|
1.71
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|
FHLB advances
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|
|
23,167
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|
|
|
100
|
|
|
|
1.73
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|
|
|
24,271
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|
|
|
177
|
|
|
|
2.92
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|
Total interest-bearing liabilities
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|
|
200,758
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|
|
693
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|
|
|
1.38
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%
|
|
|
169,201
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|
|
|
798
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|
|
|
1.89
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%
|
Non-interest-bearing liabilities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand accounts
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|
|
22,718
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|
|
|
|
|
|
|
|
|
|
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17,360
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|
|
|
|
|
|
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Other liabilities
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|
2,006
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|
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|
|
|
|
|
1,702
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|
|
|
|
|
|
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Total liabilities
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225,482
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|
|
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|
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|
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188,263
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|
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|
|
|
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Total Stockholders’ Equity(1)
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49,163
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50,441
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|
|
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Total liabilities and equity
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|
$
|
274,645
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|
|
|
|
|
|
|
|
|
|
$
|
238,704
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|
|
|
|
|
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|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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Net interest-earning assets
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|
$
|
58,711
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|
|
|
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|
|
|
|
|
|
$
|
55,519
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|
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|
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|
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|
|
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Net interest income; average interest rate
spread(2)
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|
|
|
|
|
$
|
2,647
|
|
|
|
3.77
|
%
|
|
|
|
|
|
$
|
2,076
|
|
|
|
3.23
|
%
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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Net interest margin(3)
|
|
|
|
|
|
|
|
|
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
|
|
|
|
|
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|
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|
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|
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|
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|
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Average interest-earning assets to average
interest-bearing liabilities
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|
|
|
|
|
|
|
|
|
|
1.29
|
%
|
|
|
|
|
|
|
|
|
|
|
1.33
|
%
|
__________________
(1)
|
Includes retained earnings and accumulated other comprehensive loss.
|
(2)
|
Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average rate on interest-bearing liabilities.
|
(3)
|
Net interest margin is net interest income divided by net average interest-earning assets.
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HOME FEDERAL BANCORP, INC. OF LOUISIANA
Liquidity and Capital Resources
Home Federal Bank maintains levels of liquid assets deemed adequate by management. The Bank adjusts its liquidity levels to fund deposit outflows, repay its borrowings and to fund loan commitments. Home Federal Bank also adjusts liquidity as appropriate to meet asset and liability management objectives.
Home Federal Bank’s primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, loan sales and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, Home Federal Bank invests excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements. Home Federal Bank’s deposit accounts with the Federal Home Loan Bank of Dallas amounted to $773,000 at September 30, 2012.
A significant portion of Home Federal Bank’s liquidity consists of securities classified as available-for-sale and cash and cash equivalents. Home Federal Bank’s primary sources of cash are net income, principal repayments on loans and mortgage-backed securities and increases in deposit accounts. If Home Federal Bank requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Dallas which provides an additional source of funds. At September 30, 2012, Home Federal Bank had $26.3 million in advances from the Federal Home Loan Bank of Dallas and had $118.2 million in additional borrowing capacity. Additionally, at September 30, 2012, 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 $17.4 million. There were no amounts purchased under this agreement as of September 30, 2012.
At September 30, 2012, Home Federal Bank had outstanding loan commitments of $27.8 million to originate loans. At September 30, 2012, certificates of deposit scheduled to mature in less than one year totaled $39.4 million.
Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In addition, the cost of such deposits could be significantly higher upon renewal, in a rising interest rate environment. Home Federal Bank intends to utilize its high levels of liquidity to fund its lending activities. If additional funds are required to fund lending activities, Home Federal Bank intends to sell its securities classified as available-for-sale as needed.
Home Federal Bank is required to maintain regulatory capital sufficient to meet tangible, core and risk-based capital ratios of at least 1.5%, 3.0% and 8.0%, respectively. At September 30, 2012, Home Federal Bank exceeded each of its capital requirements with ratios of 16.66%, 16.66% and 30.04%, respectively.
Off-Balance Sheet Arrangements
At September 30, 2012, the Company did not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission rules.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have been prepared in accordance with instructions to Form 10-Q, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.
HOME FEDERAL BANCORP, INC. OF LOUISIANA
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words “anticipate,” “believe,” “estimate,” “except,” “intend,” “should” and similar expressions, or the negative thereof, as they relate to the Company or the Company’s management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.