General
Management's discussion and analysis of the financial condition at March 31,
2020 and results of operations for the three months ended March 31, 2020 and
2019 is intended to assist in understanding the financial condition and results
of operations of the Company. The information contained in this section should
be read in conjunction with the unaudited financial statements and the notes
thereto, appearing on Part I, Item 1 of this quarterly report on Form 10Q.
During the quarter ended March 31, 2020, the novel coronavirus ("COVID-19") had
spread world-wide, led to businesses temporarily closing, severe unemployment,
and is impacting individuals, households and businesses in a multitude of
ways. We have been deemed an essential service and exempted from the shutdowns
across the country. In following state and national guidelines for social
distancing, we have temporarily closed our lobbies, but we continue to operate
through our drive-up windows, night drops, and digital channels, as well as
making appointments available for customers to come inside our offices to
conduct business. While COVID-19 has resulted in some of our staff operating
remotely, we believe that our established internal control structure is not
impacted. As we continue to monitor and adapt to the changing environment due to
COVID-19, we will continue to evaluate our internal controls over financial
reporting.
Federal and state governments have enacted various stay at home strategies to
contain the spread of the virus. The result of these containment strategies has
had an enormous impact on the economy and will have a negative impact on
borrowers' ability to make timely loan payments. The Federal Reserve System
along with the other various regulatory agencies have issued joint guidance to
financial institutions who are working with borrowers affected by the
coronavirus. The Company is working with borrowers, instituting a loan
deferment program whereby short-term deferral of payments will be provided. As
of April 30, 2020, we have modified 55 loans aggregating $31.4 million,
primarily consisting of the deferral of principal and/or interest payments. We
will not report these loans as delinquent and will continue to recognize
interest income during the deferral period. These loans will be closely
monitored to determine collectability and accrual and delinquency status will be
updated as deemed appropriate.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed
into law on March 27, 2020, and provides over $2.0 trillion in emergency
economic relief to individuals and businesses impacted by the COVID-19
pandemic. The CARES act authorized the Small Business Administration ("SBA") to
temporarily guarantee loans under a new 7(a) loan program called the Paycheck
Protection Program ("PPP"). Although we were not already a qualified SBA lender,
on April 8, 2020, we enrolled in the PPP by completing the required
documentation. An eligible business can apply for a PPP loan up to the greater
of: (1) 2.5 times its average monthly "payroll costs"; or (2) $10.0 million. PPP
loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to
maturity, and (c) principal and interest payments deferred for six months from
the date of disbursement. The SBA will guarantee 100% of the PPP loans made to
eligible borrowers. The entire principal amount of the borrower's PPP loan,
including any accrued interest, is eligible to be reduced by the loan
forgiveness amount under the PPP so long as employee and compensation levels of
the business are maintained and at least 75% of the loan proceeds are used for
payroll expenses, with the remaining 25% or less of the loan proceeds used for
other qualifying expenses. As of May 8, 2020, we had received approximately, 31
applications for up to $1.4 million of loans under the PPP.
24
Table of Contents
Under Section 4013 of the CARES Act, loans less than 30 days past due as of
December 31, 2019 will be considered current for COVID-19 modifications. A
financial institution can then suspend the requirements under GAAP for loan
modifications related to COVID-19 that would otherwise be categorized as a
troubled debt restructuring ("TDR"), and suspend any determination of a loan
modified as a result of COVID-19 as being a TDR, including the requirement to
determine impairment for accounting purposes. Financial institutions wishing to
utilize this authority must make a policy election, which applies to any
COVID-19 modification made between March 1, 2020 and the earlier of either
December 31, 2020 or the 60th day after the end of the COVID-19 national
emergency. Similarly, the Financial Accounting Standards Board has confirmed
that short-term modifications made on a good-faith basis in response to COVID-19
to loan customers who were current prior to any relief are not TDRs. Lastly,
prior to the enactment of the CARES Act, the banking regulatory agencies
provided guidance as to how certain short-term modifications would not be
considered TDRs, and have subsequently confirmed that such guidance could be
applicable for loans that do not qualify for favorable accounting treatment
under Section 4013 of the CARES Act. Based on this guidance, the Company does
not believe that TDRs will significantly change as a result of the modifications
granted.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements, which can be
identified by the use of words such as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect" and words of similar meaning.
These forward-looking statements include, but are not limited to:
· statements of our goals, intentions and expectations;
· statements regarding our business plans, prospects, growth and operating
strategies;
· statements regarding the quality of our loan and investment portfolios; and
· estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations
of our management and are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that are
subject to change.
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:
· our ability to manage our operations under the economic conditions in our
market area;
· adverse changes in the financial industry, securities, credit and national and
local real estate markets (including real estate values);
· economic and/or policy changes related to the COVID-19 pandemic;
· significant increases in our loan losses, including as a result of our
inability to resolve classified and non-performing assets or reduce risks
associated with our loans, and management's assumptions in determining the
adequacy of the allowance for loan losses;
· credit risks of lending activities, including changes in the level and trend of
loan delinquencies and write-offs and in our allowance for loan losses and
provision for loan losses;
· the use of estimates in determining fair value of certain of our assets, which
may prove to be incorrect and result in significant declines in valuations;
· competition among depository and other financial institutions;
25
Table of Contents
· our success in increasing our one- to four-family residential real estate
lending and commercial real estate lending;
· our ability to attract and maintain deposits and to grow our core deposits, and
our success in introducing new financial products;
· our ability to maintain our asset quality even as we continue to grow our
commercial real estate and commercial business loan portfolios;
· changes in interest rates generally, including changes in the relative
differences between short-term and long-term interest rates and in deposit
interest rates, that may affect our net interest margin and funding sources;
· fluctuations in the demand for loans;
· changes in consumer spending, borrowing and savings habits;
· declines in the yield on our assets resulting from the current low interest
rate environment;
· risks related to a high concentration of loans secured by real estate located
in our market area;
· the results of examinations by our regulators, including the possibility that
our regulators may, among other things, require us to increase our allowance
for loan losses, write down assets, change our regulatory capital position,
limit our ability to borrow funds or maintain or increase deposits, or prohibit
us from paying dividends, which could adversely affect our dividends and
earnings;
· changes in the level of government support of housing finance;
· our ability to enter new markets successfully and capitalize on growth
opportunities;
· changes in laws or government regulations or policies affecting financial
institutions, including the Dodd-Frank Act and the JOBS Act, which could result
in, among other things, increased deposit insurance premiums and assessments,
capital requirements, regulatory fees and compliance costs, particularly the
new capital regulations, and the resources we have available to address such
changes;
· changes in accounting policies and practices, as may be adopted by the bank
regulatory agencies, the Financial Accounting Standards Board, the Securities
and Exchange Commission and the Public Company Accounting Oversight Board;
· changes in our compensation and benefit plans, and our ability to retain key
members of our senior management team and to address staffing needs in response
to product demand or to implement our strategic plans;
· loan delinquencies and changes in the underlying cash flows of our borrowers;
· our ability to control costs and expenses, particularly those associated with
operating as a publicly traded company;
· the failure or security breaches of computer systems on which we depend;
· the ability of key third-party service providers to perform their obligations
to us;
· changes in the financial condition or future prospects of issuers of securities
that we own; and
· other economic, competitive, governmental, regulatory and operational factors
affecting our operations, pricing, products and services.
26
Table of Contents
Because of these and a wide variety of other uncertainties, our actual future
results may be materially different from the results indicated by these
forward-looking statements.
Critical Accounting Policies
There are no material changes to the critical accounting policies disclosed in
Heritage NOLA Bancorp, Inc.'s Annual Report in Form 10K as filed with the
Securities and Exchange Commission on March 27, 2020.
Comparison of Financial Condition at March 31, 2020 and December 31, 2019
Total Assets. Total assets were $135.3 million at March 31, 2020, an increase of
$3.9 million, or 2.9%, compared to $131.4 million at December 31, 2019. The
increase in assets was due to an increase of $3.2 million in total loans, net,
and a $675,000 increase in premises and equipment.
Loans, net. Loans, net increased $3.2 million, or 3.1%, to $105.7 million at
March 31, 2020 from $102.5 million at December 31, 2019. Owner-occupied one- to
four-family residential real estate loans increased $1.9 million, or 3.6%, to
$55.0 million and commercial loans increased $810,000, or 35.2% to $3.1
million. The increase in owner-occupied one- to four-family residential real
estate loans was primarily due to $1.5 million loans that were pending sales to
Freddie Mac. The second half of the quarter saw a large increase in refinances
of single-family residence loans, the majority of which were sold to Freddie
Mac. This trend is due to historically low mortgage loan rates.
Changes in loan balances reflect our strategy to maximize our income by growing
and diversifying our loan portfolio, with an emphasis on increasing our
commercial real estate and commercial business loans, and continually reviewing
our existing portfolio for income, liquidity and interest rate risk mitigation
opportunities consistent with our strategic objectives. Recent loan originations
have been achieved amid strong competition for commercial real estate and
residential real estate loans in our market area in the current low interest
rate environment. Most recent loan purchases have been related to the
opportunity to find quality loans in our local market area. We will continue to
look for quality loan purchase opportunities to augment our portfolio of loans.
Securities. Securities totaled $6.2 million at March 31, 2020, a decrease of
$350,000, or 5.3%, from $6.6 million at December 31, 2019. This decrease
reflects normal repayments and maturities of the mortgage backed and Small
Business Administration securities.
Deposits. Deposits increased $2.4 million, or 2.7%, to $91.4 million at March
31, 2020 from $89.0 million at December 31, 2019. Checking accounts increased
$2.5 million or 11.8%, and savings accounts increased $1.2 million or 9.0%,
while certificates of deposit decreased $1.3 million, or 2.4%.
Borrowings. Borrowings, consisting of Federal Home Loan Bank advances,
increased $1.2 million, or 6.5%, to $19.2 million at March 31, 2020 from $18.0
million at December 31, 2019. Advances are utilized to help fund loan growth.
Total Shareholders' Equity. Total shareholders' equity remained virtually
unchanged due to stock repurchases totaling $169,000, offset by net income of
$66,000, an increase of $65,000 in additional paid-in capital for the equity
incentive plans, and an increase in accumulated other comprehensive income of
$50,000 for the three months ended March 31, 2020.
Comparison of Operating Results for the Three Months Ended March 31, 2020 and
2019
General. Net income for the three months ended March 31, 2020 was $66,000,
compared to $57,000 for the three months ended March 31, 2019, an increase of
$9,000, or 15.8%.
Interest Income. Interest income increased $148,000, or 11.1%, for the
three months ended March 31, 2020 from the three months ended March 31, 2019.
The increase was primarily attributable to a $140,000 increase in interest on
loans receivable. The average balance of loans during the three months ended
March 31, 2020 increased $6.9 million, or 7.1%, to $103.5 million from $96.6
million for the three months ended March 31, 2019, while the average yield on
loans increased 21 basis points to 5.31% for the three months ended March 31,
2020. The average balance of investment securities increased $1.9 million to
$6.5 million from $4.6 million, while the average balance of other
interest-earning
27
Table of Contents
assets increased $2.0 million to $12.3 million for the three months ended March
31, 2020 from $10.3 million for the three months ended March 31, 2019. The
average yield on investment securities decreased 31 basis points and the average
yield on other interest-earning assets decreased 38 basis points for the
three months ended March 31, 2020 compared to the quarter ended March 31, 2019.
Interest Expense. Total interest expense increased $55,000, or 14.3%, to
$440,000 for the three months ended March 31, 2020 from $385,000 for the
three months ended March 31, 2019. Interest expense on deposits increased
$66,000, or 23.6%, to $346,000 for the three months ended March 31, 2020 from
$280,000 for the three months ended March 31, 2019, while interest expense on
borrowed funds decreased $11,000, or 10.5%, to $94,000 for the three months
ended March 31, 2020. The increase in interest expense on deposits was primarily
due to the increase in the average balance of interest-bearing transaction
accounts of $13.7 million to $18.0 million for the three months ended March 31,
2020 compared to $4.3 million for the three months ended March 31, 2019. This
increase was due to a new municipal deposit relationship acquired mid-year in
2019. The average cost of these deposits increased 90 basis points to 1.18% from
0.28%. The average balance of FHLB advances decreased $800,000 for the
three months ended March 31, 2020 compared to the same period ended March 31,
2019, while the average cost of those advances decreased 15 basis points due to
declining rates for new or renewed advances.
Net Interest Income. Net interest income increased $93,000, or 9.9%, to $1.0
million for the three months ended March 31, 2020 compared to $943,000 for the
three months ended March 31, 2019. This increase reflects the increase in the
average balances of interest-earning assets of $10.7 million, and an increase in
the average yield of those assets of seven basis points, offset by the increase
in the average balances of interest-bearing liabilities of $12.4 million for the
2020 quarter compared to the 2019 quarter.
Our net interest margin was 3.39% for the three months ended March 31,
2020 compared to 3.38% for the three months ended March 31, 2019. Net interest
rate spread increased to 3.12% for the 2020 quarter compared to 3.06% for the
2019 quarter reflecting the increase in the total loan portfolio.
Provision for Loan Losses. We made a $10,000 provision for loan losses for the
three months ended March 31, 2020 compared to none for the three months ended
March 31, 2019. The allowance for loan losses was $778,000, or 0.71% of total
loans, at March 31, 2020, compared to $769,000, or 0.73% of total loans, at
December 31, 2019. Total nonperforming loans were $924,000 at March 31, 2020,
compared to $828,000 at December 31, 2019. Classified (substandard, doubtful and
loss) loans remained at $1.1 million at March 31, 2020, and at December 31,
2019.
The allowance for loan losses reflects the estimate we believe to be appropriate
to cover incurred probable losses which were inherent in the loan portfolio at
the applicable balance sheet date. While we believe the estimates and
assumptions used in our determination of the adequacy of the allowance are
reasonable, the actual amount of future provisions may exceed the amount of past
provisions, and the increase in future provisions that may be required may
adversely impact our financial condition and results of operations.
Noninterest Income. Noninterest income increased $19,000, or 19.4%, to
$117,000 for the three months ended March 31, 2020 from $98,000 for the
three months ended March 31, 2019. The increase was due to an increase of
$12,000 in gain on sale of loans, and an increase of $7,000 in other income for
the three months ended March 31, 2020, compared to the same three-month period
in 2019. With home mortgage rates trending down in the first quarter of 2020,
the number of mortgages refinanced into loans to be sold to Freddie Mac have
increased.
Noninterest Expense. Noninterest expense increased $102,000, or 10.5%, to $1.1
million for the three months ended March 31, 2020 compared to $967,000 for the
three months ended March 31, 2019. The increase was due primarily to an $80,000
increase in salaries and employee benefits, and a $46,000 increase in occupancy
and equipment. The increase in salaries and employee benefits is due to an
increase in the number of employees, and the incentive compensation for loan
officer's production.
Income Tax Expense. We recorded a net income tax expense of $8,000 for the
three months ended March 31, 2020 compared to $17,000 for the three months ended
March 31, 2019. The decrease was due to taxes being under accrued for the
quarter ended March 31, 2020 due to timing differences on deferred assets.
28
Table of Contents
Liquidity and Capital Resources. Liquidity describes our ability to meet the
financial obligations that arise in the ordinary course of business. Liquidity
is primarily needed to meet the borrowing and deposit withdrawal requirements of
our customers and to fund current and planned expenditures. Our primary sources
of funds are deposits, principal and interest payments on loans and securities,
proceeds from the sale of loans, and borrowings. We have the ability to borrow
from the FHLB-Dallas. At March 31, 2020, we had $19.2 million outstanding in
advances from the FHLB-Dallas, and had the capacity to borrow approximately an
additional $17.1 million more from the FHLB-Dallas, and an additional $6.4
million on a line of credit with First National Bankers' Bank, Baton Rouge,
Louisiana at this date.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. Our
most liquid assets are cash and short-term investments including
interest-bearing demand deposits. The levels of these assets are dependent on
our operating, financing, lending, and investing activities during any given
period.
Our cash flows are comprised of three primary classifications: cash flows from
operating activities, investing activities, and financing activities. Net cash
provided by (used in) operating activities was ($948,000) and $710,000 for the
three months ended March 31, 2020 and 2019, respectively. Net cash resulting
from investing activities, which consists primarily of net change in loans
receivable and net change in investment securities, was ($1.9 million) and
($539,000) for the three months ended March 31, 2020 and 2019, respectively. Net
cash provided by financing activities, consisting primarily of the activity in
deposit accounts and Federal Home Loan Bank advances, was $3.6 million and $1.8
million for the three months ended March 31, 2020 and 2019, respectively.
We are committed to maintaining a strong liquidity position. We monitor our
liquidity position on a daily basis. We anticipate that we will have sufficient
funds to meet our current funding commitments. Based on our deposit retention
experience and current pricing strategy, we anticipate that a significant
portion of maturing time deposits will be retained.
At March 31, 2020, Heritage Bank of St. Tammany exceeded all regulatory capital
requirements with a Tier 1 leverage capital level of $19.2 million, or 14.46% of
adjusted average total assets, which is above the well-capitalized required
level of $6.6 million, or 5.0%; and total risk-based capital of $20.0 million,
or 23.56% of risk-weighted assets, which is above the well-capitalized required
level of $8.5 million, or 10.0%; and common equity Tier 1 capital of $19.2
million or 22.64% of risk weighted assets, which is above the well-capitalized
required level of $5.5 million, or 6.5% of risk weighted assets. Accordingly,
Heritage Bank of St. Tammany was categorized as well capitalized at March 31,
2020. Management is not aware of any conditions or events since the most recent
notification that would change our category.
© Edgar Online, source Glimpses
HERITAGE NOLA BANCORP, INC. 
