HOME FEDERAL BANCORP, INC. OF LOUISIANA 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 theFederal 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. 29
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Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Our current business strategy includes:
• Continuing to Grow and Diversify Our Loan Portfolio. We intend to grow and
continue to diversify our loan portfolio by, among other things, emphasizing
the origination of commercial real estate and business loans. At
2022, our commercial real estate loans amounted to
the total loan portfolio. Our commercial business loans amounted to
million, or 11.3% of the total loan portfolio. Commercial real estate,
commercial business, construction and development, and consumer loans all
typically have higher yields and are more interest sensitive than long-term
single-family residential mortgage loans.
• Diversify Our Products and Services. We intend to continue to emphasize our
commercial business products to provide a full-service banking relationship to
our commercial customers. We have introduced mobile and Internet banking and
remote deposit capture, to better serve our commercial clients. Additionally,
we have developed new deposit products focused on expanding our deposit base to
new types of customers.
• Managing Our Expenses. We have incurred significant additional expenses
related to personnel and infrastructure in recent periods as we implemented our
business strategy. Our efficiency ratio, net interest income plus non-interest
income divided by non-interest expense, for 2022 was 69.59% compared to 61.55%
for fiscal 2021.
• Enhancing Core Earnings. We expect to continue to emphasize commercial real
estate and business loans, which generally bear interest rates higher than
residential real estate loans, and sell a substantial part of our fixed rate
residential mortgage loan originations.
• Expanding Our Franchise in our Market Area and Contiguous Communities.
We
intend to continue to pursue opportunities to expand our market area by opening
additional de novo banking offices and possibly through acquisitions of other
financial institutions and banking related businesses. We expect to focus on
contiguous areas to our current locations in
Parishes. We announced our expansion into
production office in
October 2021 . InDecember 2021 , we opened our ninth full-service branch location inWest Shreveport .
• Maintain Our Asset Quality. At
totaled
real estate owned at
high asset quality, even as we continue to grow our institution and diversify
our loan portfolio.
• Cross-Selling Products and Services and Emphasizing Local Decision Making. We
have promoted cross-selling products and services in our branch offices and
emphasized our local decision making and streamlined loan approval process.
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Critical Accounting Policies
In reviewing and understanding financial information forHome 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 inthe 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, theOffice 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. 31
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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. InMarch 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. OnDecember 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 throughMay 31, 2021 . As ofJune 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 ofNW 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 endedJune 30, 2022 was$336,000 compared to$1.8 million for the year endedJune 30, 2021 . The decrease is mainly due to an improvement in our overall credit quality.
Selected Financial and Other Data
Set forth below is selected consolidated financial and other data ofHome Federal Bancorp . The information at or for the years endedJune 30, 2022 and 2021 is derived in part from the audited financial statements that appear in this Form 10-K. At June 30, 2022 2021 (In thousands) Selected Financial and Other Data: Total assets$ 590,480 $ 565,731 Cash and cash equivalents 64,078 104,405 Securities available for sale 28,099 29,550 Securities held to maturity 79,950 54,706 Loans held-for-sale 3,978 14,427 Loans receivable, net 387,873 336,394 Deposits 531,991 506,596 Federal Home Loan Bank advances 832 867 Total Stockholders' equity 52,347 52,725 As of or for the Year Ended June 30, 2022 2021 (Dollars in thousands, except per share amounts) Selected Operating Data: Total interest income$ 19,234 $ 20,245 Total interest expense 1,877 3,304 Net interest income 17,357 16,941 Provision for loan losses 336 1,800 Net interest income after provision for loan losses 17,021 15,141 Total non-interest income 3,476 5,452 Total non-interest expense 14,497 13,783 Income before income tax expense 6,000 6,810 Income tax expense 1,127 1,445 Net income$ 4,873 $ 5,365 Earnings per share of common stock: Basic$ 1.50 $ 1.66 Diluted$ 1.41 $ 1.57 32
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As of or for the Year
Ended June 30,
2022 2021
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
Net interest margin(2) 3.27
3.31
Average interest-earning assets to average interest-bearing liabilities
143.32 137.46
Net interest income after provision for loan losses to non-interest expense
117.41 109.85
Total non-interest expense to average assets 2.54 2.53 Efficiency ratio(3) 69.59 61.55 Return on average assets 0.85 0.98 Return on average equity 9.24 10.45 Average equity to average assets 9.22 9.42 Dividend payout ratio 28.37 20.91 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 % Core capital ratio 9.65 9.57 Total capital ratio 15.62 17.88 Other Data: Offices (branch and home) 9 8 Employees (full-time) 70 61
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(1) With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods.
(2) Average interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate paid on
interest-bearing liabilities, and net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Non-GAAP: The efficiency ratio represents the ratio of non-interest expense
divided by the sum of net interest income and non-interest income.
(4) Asset quality ratios and capital ratios are end of period ratios, except for
net charge-offs to average loans receivable.
Changes in Financial Condition
AtJune 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 atJune 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 atJune 30, 2021 to$387.9 million atJune 30, 2022 , investment securities of$23.8 million , or 28.2%, from$84.3 million atJune 30, 2021 to$108.0 million atJune 30, 2022 , premises and equipment of$1.3 million , or 8.9%, from$14.9 million atJune 30, 2021 to$16.2 million atJune 30, 2022 , and deferred tax assets of$324,000 , or 39.6%, from$819,000 atJune 30, 2021 to$1.1 million atJune 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 atJune 30, 2021 to$64.1 million atJune 30, 2022 , loans held-for-sale of$10.4 million , or 72.4%, from$14.4 million atJune 30, 2021 to$4.0 million atJune 30, 2022 , bank owned life insurance of$617,000 , or 8.6%, from$7.2 million atJune 30, 2021 to$6.6 million atJune 30, 2022 , real estate owned of$383,000 , or 100.0%, from$383,000 atJune 30, 2021 to none atJune 30, 2022 , other assets of$366,000 , or 20.9%, from$1.8 million atJune 30, 2021 to$1.4 million atJune 30, 2022 , and accrued interest receivable of$39,000 , or 3.4%, from$1.2 million atJune 30, 2021 to$1.1 million atJune 30, 2022 . 33
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Loans receivable, net increased$51.5 million , or 15.3%, from$336.4 million atJune 30, 2021 to$387.9 million atJune 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 ofJune 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 atJune 30, 2021 to$28.1 million atJune 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 atJune 30, 2021 to$79.9 million atJune 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 atJune 30, 2021 to$64.1 million atJune 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 atJune 30, 2021 to$538.1 million atJune 30, 2022 primarily due to increases in total deposits of$25.4 million , or 5.0%, to$532.0 million atJune 30, 2022 compared to$506.6 million atJune 30, 2021 , partially offset by a decrease of$111,000 , or 4.1%, in other accrued expenses and liabilities from$2.7 million atJune 30, 2021 to$2.6 million atJune 30, 2022 , a decrease of$72,000 , or 16.9%, in advances from borrowers for taxes and insurance from$426,000 atJune 30, 2021 to$354,000 atJune 30, 2022 , a decrease of$50,000 , or 2.1%, in other borrowings from$2.4 million atJune 30, 2021 to$2.3 million atJune 30, 2022 , and a decrease of$35,000 , or 4.0%, in advances from theFederal Home Loan Bank from$867,000 atJune 30, 2021 to$832,000 atJune 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 atJune 30, 2021 to$161.1 million atJune 30, 2022 , a$10.4 million , or 11.8%, increase in money market deposits from$88.2 million atJune 30, 2021 to$98.6 million atJune 30, 2022 , a$9.7 million , or 19.7%, increase in NOW accounts from$49.3 million atJune 30, 2021 to$59.0 million atJune 30, 2022 , and an increase in savings deposits of$3.9 million , or 3.0%, from$129.1 million atJune 30, 2021 to$133.0 million atJune 30, 2022 , partially offset by a decrease of$28.7 million , or 26.4%, in certificates of deposit from$109.0 million atJune 30, 2021 to$80.3 million atJune 30, 2022 . The Company had$6.0 million in brokered deposits atJune 30, 2022 compared to$10.7 million atJune 30, 2021 . The decrease in advances from theFederal Home Loan Bank was primarily due to principal paydowns on amortizing advances. The entire balance in advances from theFederal Home Loan Bank are now short-term due to our only advance with a balloon maturity inJanuary 2023 . 34
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Stockholders' equity decreased$378,000 , or 0.7%, to$52.3 million atJune 30, 2022 from$52.7 million atJune 30, 2021 . The primary reasons for the changes in stockholders' equity fromJune 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$671,000 . Average Balances, Net Interest Income Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. June 30, 2022 2021 Average Average Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (Dollars in thousands) Interest-earning assets: Loans receivable(1)$ 360,774 $ 17,501 4.85 %$ 366,546 $ 18,913 5.16 % Investment securities 98,229 1,509 1.53 65,721 1,228 1.87 Interest-earning deposits 72,189 224 0.32 79,028 104 0.13 Total interest-earning assets 531,192 19,234 3.62 % 511,295 20,245 3.96 % Non-interest-earning assets 40,426 33,784 Total assets$ 571,618 $ 545,079 Interest-bearing liabilities: Savings accounts 136,139 393 0.29 % 108,592 565 0.52 % NOW accounts 51,412 57 0.11 44,655 90 0.20 Money market accounts 91,862 108 0.12 77,198 216 0.28 Certificates of deposit accounts 88,450 1,212 1.37 138,603 2,324 1.68 Total interest-bearing deposits 367,863 1,770 0.48 369,048 3,195 0.87 FHLB advances 848 41 4.83 923 45 4.88 Other bank borrowings 1,921 66 3.44 1,991 64 3.21 Total interest-bearing liabilities 370,632 1,877 0.51 % 371,962 3,304 0.89 % Non-interest-bearing liabilities: Non-interest-bearing demand accounts 145,522 118,662 Other liabilities 2,741 3,092 Total liabilities 518,895 493,716 Total stockholders' equity(2) 52,723 51,368 Total liabilities and equity$ 571,618 $ 545,079 Net interest-earning assets$ 160,560 $ 139,333 Net interest income; average interest rate spread(3)$ 17,357 3.11 %$ 16,941 3.07 % Net interest margin(4) 3.27 % 3.31 % Average interest-earning assets to average interest-bearing liabilities 143.32 % 137.46 %
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(1) Includes loans held for sale.
(2) Includes retained earnings and accumulated other comprehensive loss.
(3) Interest rate spread represents the difference between the weighted-average
yield on interest-earning assets and the weighted-average rate on
interest-bearing liabilities.
(4) Net interest margin is net interest income divided by net average
interest-earning assets.
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Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affectedHome 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. 2022 vs. 2021 2021 vs. 2020 Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase Rate Volume (Decrease) Rate Volume (Decrease) (In thousands) Interest income: Investment securities$ (327 ) $ 608 $ 281 $ (255 ) $ (76 ) $ (331 ) Loans receivable, net (1,114 ) (298 ) (1,412 ) (944 ) 1,422 478 Interest-earning deposits 129 (9 ) 120 (818 ) 580 (238 ) Total interest-earning assets (1,312 ) 301 (1,011 ) (2,017 ) 1,926 91 Interest expense: Savings accounts (315 ) 143 (172 ) (628 ) 493 (135 ) NOW accounts (48 ) 14 (34 ) (147 ) 61 (86 ) Money market accounts (148 ) 41 (107 ) (540 ) 29 (511 ) Certificate accounts (271 ) (841 ) (1,112 ) (521 ) (597 ) (1,118 ) Total deposits (782 ) (643 ) (1,425 ) (1,836 ) (14 ) (1,850 ) FHLB advances and other borrowings 3 (5 ) (2 ) (22 ) 22 -- Total interest-bearing liabilities (779 ) (648 ) (1,427 ) (1,858 ) 8 (1,850 ) Increase (Decrease) in net interest income$ (533 ) $ 949 $ 416 $ (159 ) $ 1,918 $ 1,759
Comparison of Operating Results for the Years Ended
General. The decrease in net income for the year endedJune 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 endedJune 30, 2022 compared to 3.07% for the year endedJune 30, 2021 . The Company's net interest margin was 3.27% for the year endedJune 30, 2022 compared to 3.31% for the year endedJune 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$531.2 million 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$19.2 million 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. 36
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Interest expense decreased
Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio. Loan losses are charged against the allowance when management believes the collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of the underlying collateral, and prevailing economic conditions. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information or events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. When a loan is impaired, the measurement of such impairment is based upon the fair value of the collateral of the loan. If the fair value of the collateral is less than the recorded investment in the loan, we will recognize the impairment by creating a valuation allowance with a corresponding charge against earnings. An allowance is also established for uncollectible interest on loans classified as substandard. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received. When, in management's judgment, the borrower's ability to make interest and principal payments is back to normal, the loan is returned to accrual status. A provision of$336,000 was made to the allowance during fiscal 2022, compared to a provision of$1.8 million in fiscal 2021. AtJune 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 atJune 30, 2021 , consisting of seven single family residential loans atJune 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 atJune 30, 2021 . The increase in non-performing assets from$1.4 million atJune 30, 2021 to$2.5 million atJune 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. AtJune 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 atJune 30, 2021 . There were no loans classified as doubtful atJune 30, 2022 orJune 30, 2021 . Non-Interest Income. Non-interest income amounted to$3.5 million for the year endedJune 30, 2022 , a decrease of$2.0 million , or 36.2%, compared to non-interest income of$5.5 million for the year endedJune 30, 2021 . The$2.0 million decrease in non-interest income for the year endedJune 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 endedJune 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
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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 endedJune 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 endedJune 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 atJune 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. AtJune 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 theOffice 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 ofJune 30, 2022 : NPV as % of Portfolio Change in Interest Rates in Net Portfolio Value Value of Assets Basis Points (Rate Shock) Amount $ Change % Change NPV Ratio Change (Dollars in thousands) 300$ 50,261 $ (10,624 ) (17.45 )% 9.76 % (1.36 )% 200 58,751 (2,134 ) (3.50 ) 11.21 0.09 100 64,489 3,604 5.92 12.03 0.91 Static 60,885 -- -- 11.12 -- (100) 66,700 5,815 9.55 11.79 (0.67 ) (200) 62,259 1,374 2.26 10.71 (0.41 ) 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. 38
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Liquidity and Capital Resources
Our primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, loan sales and earnings, and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements. Our deposit accounts with theFederal Home Loan Bank of Dallas amounted to$11.9 million and$42.0 million atJune 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 theFederal Home Loan Bank of Dallas , which provide an additional source of funds. AtJune 30, 2022 , we had$832,000 in advances from theFederal Home Loan Bank of Dallas and had$176.7 million in additional borrowing capacity. Additionally, atJune 30, 2022 ,Home Federal Bank was a party to a Master Purchase Agreement withFirst National Bankers Bank , wherebyHome Federal Bank may purchase Federal Funds fromFirst National Bankers Bank in an amount not to exceed$20.4 million . There were no amounts purchased under this agreement as ofJune 30, 2022 . In addition,Home Federal Bancorp had available a$10.0 million line of credit agreement atJune 30, 2022 withFirst National Bankers Bank . AtJune 30, 2022 there was a$2.4 million balance in the credit line. AtJune 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 . AtJune 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. AtJune 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 bySecurities and Exchange Commission rules, and have not had any such arrangements during the two years endedJune 30, 2022 . See Notes 9 and 14 to the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K. 39
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Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented herein regardingHome Federal Bancorp have been prepared in accordance with accounting principles generally accepted inthe 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 onHome 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 ofHome 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 ofHome 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 whichHome 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 whichHome 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.
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