UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended: September 30, 2014
or
For the transition period from to
Commission File Number: 001-34190
HOME BANCORP, INC.
(Exact name of Registrant as specified in its charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Registrant’s telephone number, including area code: (337) 237-1960
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
At October 31, 2014, the registrant had 7,114,516 shares of common stock, $0.01 par value, outstanding.
HOME BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Item 1.
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
Item 2.
Managements’ Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosure
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
HOME BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and cash equivalents
Interest-bearing deposits in banks
Investment securities available for sale, at fair value
Investment securities held to maturity (fair values of $11,363,641 and $9,275,158, respectively)
Mortgage loans held for sale
Loans covered by loss sharing agreements
Noncovered loans, net of unearned income
Total loans, net of unearned income
Allowance for loan losses
Total loans, net of unearned income and allowance for loan losses
Office properties and equipment, net
Cash surrender value of bank-owned life insurance
FDIC loss sharing receivable
Accrued interest receivable and other assets
Total Assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term Federal Home Loan Bank (FHLB) advances
Long-term Federal Home Loan Bank (FHLB) advances
Securities sold under repurchase agreements
Accrued interest payable and other liabilities
Total Liabilities
Shareholders’ Equity
Preferred stock, $0.01 par value - 10,000,000 shares authorized; none issued
Common stock, $0.01 par value - 40,000,000 shares authorized; 8,996,745 and 8,958,395 shares issued; 7,114,516 and 7,099,314 shares outstanding, respectively
Additional paid-in capital
Treasury stock at cost - 1,882,229 and 1,859,081 shares, respectively
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)
Recognition and Retention Plan (RRP)
Retained earnings
Accumulated other comprehensive income
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Interest Income
Loans, including fees
Investment securities
Other investments and deposits
Total interest income
Interest Expense
Deposits
Securities sold under repurchase agreement
Short-term FHLB advances
Long-term FHLB advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service fees and charges
Bank card fees
Gain on sale of loans, net
Income from bank-owned life insurance
Gain on sale of securities, net
Accretion of FDIC loss sharing receivable
Other income
Total noninterest income
Noninterest Expense
Compensation and benefits
Occupancy
Marketing and advertising
Data processing and communication
Professional services
Forms, printing and supplies
Franchise and shares tax
Regulatory fees
Foreclosed assets, net
Other expenses
Total noninterest expense
Income before income tax expense
Income tax expense
Net Income
Earnings per share:
Basic
Diluted
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Other Comprehensive (Loss) Income
Unrealized (losses) gains on investment securities
Reclassification adjustment for gains included in net income
Tax effect(1)
Other comprehensive (loss) income, net of taxes
Comprehensive Income
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Balance, December 31, 2012(1)
Comprehensive income:
Net income
Other comprehensive income
Treasury stock acquired at cost, 347,313 shares
Exercise of stock options
RRP shares released for allocation
ESOP shares released for allocation
Share-based compensation cost
Balance, September 30, 2013
Balance, December 31, 2013(1)
Treasury stock acquired at cost, 23,148 shares
Balance, September 30, 2014
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended
September 30,
Cash flows from operating activities, net of effects of acquisition in 2014:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of purchase accounting valuations and intangibles
Net amortization of mortgage servicing asset
Federal Home Loan Bank stock dividends
Net amortization of premium on investments
Gain on sale of investment securities, net
Gain on loans sold, net
Proceeds, including principal payments, from loans held for sale
Originations of loans held for sale
Non-cash compensation
Deferred income tax (benefit) provision
Decrease in interest receivable and other assets
Increase in cash surrender value of bank-owned life insurance
(Decrease) increase in accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities, net of effects of acquisition in 2014:
Purchases of securities available for sale
Purchases of securities held to maturity
Proceeds from maturities, prepayments and calls on securities available for sale
Proceeds from maturities, prepayments and calls on securities held to maturity
Proceeds from sales of securities available for sale
Net increase in loans
Reimbursement from FDIC for covered assets
Decrease in certificates of deposit in other institutions
Proceeds from sale of repossessed assets
Purchases of office properties and equipment
Proceeds from sale of properties and equipment
Net cash disbursed in business combination
Purchases of Federal Home Loan Bank stock
Proceeds from redemption of Federal Home Loan Bank stock
Net cash used in investing activities
Cash flows from financing activities, net of effects of acquisition in 2014:
Increase (decrease) in deposits
(Decrease) increase in Federal Home Loan Bank advances
Decrease in securities sold under repurchase agreements
Purchase of treasury stock
Proceeds from exercise of stock options
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Home Bancorp, Inc. (the “Company”) were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, other comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the nine-month period ended September 30, 2014 are not necessarily indicative of the results which may be expected for the entire fiscal year. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2013.
In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, other comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.
Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.
2. Accounting Developments
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11,Income Taxes (Topic 740), which clarifies the presentation requirements of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014 and should be applied prospectively. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The adoption of ASU No. 2014-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate
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collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In June 2014, the FASB issued ASU 2014-12, “Compensation – Stock Compensation” (Topic 718), which clarifies the recognition of stock compensation over the required service period, if it is probable that the performance condition will be achieved. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and should be applied prospectively. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-14, “Troubled Debt Restructurings by Creditors Classification of Certain Government- Guaranteed Mortgage Loans upon Foreclosure.” ASU 2014-14 addresses the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. Under certain government-sponsored loan guarantee programs, qualifying creditors can extend mortgage loans to borrowers with a guarantee that entitles the creditor to recover all or a portion of the unpaid principal balance from the government if the borrower defaults. The ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. The separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered. The ASU is effective for interim and annual periods after December 15, 2014. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires companies to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. Management will be required to make the evaluation and disclose for both annual and interim reporting periods. The ASU is effective for interim and annual periods after December 15, 2016. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
3. Acquisition Activity
On February 14, 2014, the Company completed the acquisition of Britton & Koontz Capital Corporation (“Britton & Koontz”), the former holding company of Britton & Koontz Bank, N.A. (“Britton & Koontz Bank”) of Natchez, Mississippi. Shareholders of Britton & Koontz received $16.14 per share in cash, yielding an aggregate purchase price of $34,515,000.
The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805,Business Combinations. In accordance with ASC 805, the Company recorded goodwill totaling $258,000 from the acquisition as a result of consideration transferred over net assets acquired. Both the assets acquired and liabilities assumed were recorded at their respective acquisition date fair values. Identifiable intangible assets, including core deposit intangible assets, were recorded at fair value.
The fair value estimates of the Britton & Koontz assets and liabilities recorded are preliminary and subject to refinement as additional information becomes available. Under current accounting principles, the Company’s estimates of fair values may be adjusted for a period of up to one year from the acquisition date.
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The assets acquired and liabilities assumed, as well as the adjustments to record the assets and liabilities at fair value, are presented in the following table as of February 14, 2014.
(dollars in thousands)
Loans
Repossessed assets
Core deposit intangible
Other assets
Total assets acquired
Interest-bearing deposits
Noninterest-bearing deposits
FHLB advances
Other borrowings
Other liabilities
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Cash consideration paid
Total goodwill recorded
The following pro forma information for the nine months ended September 30, 2014 and 2013 reflects the Company’s estimated consolidated results of operations as if the acquisition of Britton & Koontz occurred at January 1, 2013, unadjusted for potential cost savings.
(dollars in thousands except per share information)
Noninterest income
Noninterest expense
Earnings per share – basic
Earnings per share – diluted
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The selected pro forma financial information presented above is for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period.
4. Investment Securities
Summary information regarding the Company’s investment securities classified as available for sale and held to maturity as of September 30, 2014 and December 31, 2013 is as follows.
September 30, 2014
Available for sale:
U.S. agency mortgage-backed
Non-U.S. agency mortgage-backed
Municipal bonds
U.S. government agency
Total available for sale
Held to maturity:
Total held to maturity
December 31, 2013
The estimated fair value and amortized cost by maturity of the Company’s investment securities as of September 30, 2014 are shown in the following tables. Securities are classified according to their contractual maturities
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without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of prepayments or the exercise of call options. Accordingly, actual maturities may differ from contractual maturities.
Fair Value
Securities available for sale:
Securities held to maturity:
Total investment securities
Amortized Cost
Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; and (3) the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.
The Company performs a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. When the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.
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As of September 30, 2014 and December 31, 2013, the Company had $80,934,000 and $43,977,000, respectively, of securities pledged to secure public deposits. As of September 30, 2014, the Company had $21,563,000 of securities pledged to securities sold under repurchase agreements.
As of September 30, 2014, 47 of the Company’s debt securities had unrealized losses totaling 1.9% of the individual securities amortized cost basis and 0.6% of the Company’s total amortized cost basis of the investment securities portfolio. 29 of the 47 securities had been in a continuous loss position for over 12 months at such date. The 29 securities had an aggregate amortized cost basis of $36.8 million and unrealized loss of $1.1 million at September 30, 2014. Management has the intent and ability to hold these debt securities until maturity, or until anticipated recovery; hence, no declines in these 47 securities were deemed to be other-than-temporary.
5. Earnings Per Share
Earnings per common share were computed based on the following:
Three Months Ended
(in thousands, except per share data)
Numerator:
Net income available to common shareholders
Denominator:
Weighted average common shares outstanding
Effect of dilutive securities:
Restricted stock
Stock options
Weighted average common shares outstanding – assuming dilution
Earnings per common share
Earnings per common share – assuming dilution
Options on 9,500 and 54,000 shares of common stock were not included in the computation of diluted earnings per share for the three months ended September 30, 2014 and September 30, 2013, respectively, because the effect of these shares was anti-dilutive. Options on 34,833 and 51,496 shares of common stock were not included in the computation of diluted earnings per share for the nine months ended September 30, 2014 and September 30, 2013, respectively, because the effect of these shares was anti-dilutive.
6. Credit Quality and Allowance for Loan Losses
The following briefly describes the distinction between originated, non-covered acquired and covered loans and certain significant accounting policies relevant to each category.
Originated Loans
Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recorded as income as earned. The accrual of interest on an originated loan is discontinued when it is probable the borrower will not be able to meet payment obligations as they become due. The Company maintains an allowance for loan losses on originated loans that represents management’s estimate of probable losses incurred in this portfolio category.
Non-covered Acquired Loans
Non-covered acquired loans are those collectively associated with our acquisitions of GS Financial Corp. (“GSFC”), the former holding company of Guaranty Savings Bank of Metairie, Louisiana, on July 15, 2011 and Britton & Koontz Capital Corporation (“Britton & Koontz”), the former holding company of Britton & Koontz Bank, N.A. (“Britton & Koontz Bank”) of Natchez, Mississippi on February 14, 2014. These loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The non-covered acquired loans were segregated between those considered to be performing (“acquired performing”) and those with
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evidence of credit deterioration (“acquired impaired”), and then further segregated into loan pools designed to facilitate the estimation of expected cash flows. The fair value estimate for each pool of acquired performing and acquired impaired loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at prevailing market interest rates.
The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. Management estimates an allowance for loan losses for acquired performing loans using a methodology similar to that used for originated loans. The allowance determined for each loan pool is compared to the remaining fair value discount for that pool. If the allowance amount calculated under the Company’s methodology is greater than the Company’s remaining discount, the additional amount called for is added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology is less than the Company’s recorded discount, no additional allowance or provision is recognized. Actual losses first reduce any remaining fair value discount for the loan pool. Once the discount is fully depleted, losses are applied against the allowance established for that pool. Acquired performing loans are placed on nonaccrual status and considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio.
The excess of cash flows expected to be collected from an acquired impaired loan pool over the pool’s estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the pool. Each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
Management recasts the estimate of cash flows expected to be collected on each acquired impaired loan pool periodically. If the present value of expected cash flows for a pool is less than its carrying value, an impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into interest income over the remaining life of the loan pool. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans, even if they would otherwise qualify for such treatment.
Covered Loans and the Related Loss Share Receivable
The loans purchased in the Company’s 2010 acquisition of certain assets and liabilities of Statewide Bank (“Statewide”) are covered by loss sharing agreements between the FDIC and the Company that afford the Company significant loss protection. In connection with the transaction, Home Bank entered into loss sharing agreements with the FDIC which cover the acquired loan portfolio (“Covered Loans”) and repossessed assets (collectively referred to as “Covered Assets”). Under the terms of the loss sharing agreements, the FDIC will, subject to the terms and conditions of the agreements, absorb 80% of the first $41,000,000 of losses incurred on Covered Assets and 95% of losses on Covered Assets exceeding $41,000,000 during the periods specified in the loss sharing agreements. These covered loans are accounted for as acquired impaired loans as described above. The loss share receivable is measured separately from the related covered loans as it is not contractually embedded in the loans and is not transferable should the loans be sold. The fair value of the loss share receivable at acquisition was estimated by discounting projected cash flows related to the loss share agreements based on the expected reimbursements for losses using the applicable loss share percentages. The discounted amount is accreted into non-interest income over the remaining life of the covered loan pool or the life of the loss share agreement.
The loss share receivable is reviewed and updated prospectively as loss estimates related to covered loans change. Increases in expected reimbursements under the loss sharing agreements from a covered loan pool will lead to an increase in the loss share receivable. A decrease in expected reimbursements is reflected first as a reversal of any previously recorded increase in the loss share receivable on the covered loan pool with the remainder reflected as a reduction in the loss share receivable’s accretion rate. Increases and decreases in the loss share receivable can result in reductions in or additions to the provision for loan losses, which serve to offset the impact on the provision from impairment recognized on the underlying covered loan pool and reversals of previously recognized impairment. The impact on operations of a reduction in the loss share receivable’s accretion rate is associated with an increase in the accretable yield on the underlying loan pool.
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The allowance for loan losses and recorded investment in loans as of the dates indicated are as follows.
Allowance for loan losses:
One- to four-family first mortgage
Home equity loans and lines
Commercial real estate
Construction and land
Multi-family residential
Commercial and industrial
Consumer
Total allowance for loan losses
Loans:
Total loans
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A summary of activity in the allowance for loan losses during the nine months ended September 30, 2014 and September 30, 2013 is as follows.
Originated loans:
Non-covered acquired loans:
Covered loans:
Total loans:
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15
Credit quality indicators on the Company’s loan portfolio as of the dates indicated are as follows.
Covered:
Total:
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The above classifications follow regulatory guidelines and can generally be described as follows:
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In addition, residential loans are classified using an inter-agency regulatory methodology that incorporates the extent of delinquencies and loan-to-value ratios. These classifications were the most current available as of the dates indicated and were generally updated within the quarter.
Age analysis of past due loans as of the dates indicated are as follows.
Real estate loans:
Total real estate loans
Other loans:
Total other loans
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Excluding non-covered acquired and covered loans (collectively referred to as “Acquired Loans”) with deteriorated credit quality, as of September 30, 2014 and December 31, 2013, the Company did not have any loans greater than 90 days past due and accruing.
The following is a summary of information pertaining to impaired loans excluding Acquired Loans, as of the dates indicated.
With no related allowance recorded:
Total
With an allowance recorded:
Total impaired loans:
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A summary of information pertaining to nonaccrual loans as of dates indicated is as follows.
Nonaccrual loans:
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As of September 30, 2014, the Company was not committed to lend additional funds to any customer whose loan was classified as impaired.
Troubled Debt Restructurings
During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. The Company adopted the provisions of ASU No. 2011-02,Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which provides clarification on the determination of whether loan restructurings are considered troubled debt restructurings (“TDRs”). In accordance with the ASU, in order to be considered a TDR, the Company must conclude that the restructuring of a loan to a borrower who is experiencing financial difficulties constitutes a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession is either granted through an agreement with the customer or is imposed by a court or by a law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:
In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:
If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. For purposes of the determination of an allowance for loan losses on TDRs, such loans are reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined that losses are probable on such TDRs, either because of delinquency or other credit quality indicators, the Company specifically allocates a portion of the allowance for loan losses to these loans.
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Information about the Company’s TDRs is presented in the following tables.
23
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None of the TDRs defaulted subsequent to the restructuring through the date the financial statements were issued. The Company did not restructure any loans as a TDR during the third quarter of 2014.
7. Fair Value Disclosures
The Company groups its financial assets and liabilities measured at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.
Recurring Basis
Investment Securities Available for Sale
Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities bids, offers and other reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values are estimated primarily by the use of pricing models. Level 2 investment securities are primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.
Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels,
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as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of September 30, 2014, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.
The following tables present the balances of assets and liabilities measured for fair value on a recurring basis as of September 30, 2014 and December 31, 2013.
Available for sale securities:
The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.
Nonrecurring Basis
In accordance with the provisions of ASC 310, Receivables, the Company records loans considered impaired at fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from external parties of the collateral less any prior liens and when there is no observable market price. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company classifies repossessed assets as Level 3 assets.
Acquired loans, the FDIC loss sharing receivable, acquired FHLB advances, and acquired interest-bearing deposit liabilities are measured on a nonrecurring basis using significant unobservable inputs (Level 3).
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The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.
Acquired loans with deteriorated credit quality
Acquired loans without deteriorated credit quality
Impaired loans, excluding acquired loans
Deposits acquired through business combinations
FHLB advances acquired through business combinations
ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statements. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.
The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third party pricing services or quoted market prices of securities with similar characteristics.
The carrying value of mortgage loans held for sale approximates their fair value.
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.
The cash surrender value of bank-owned life insurance (“BOLI”) approximates its fair value.
The fair value of the FDIC loss sharing receivable is determined by discounting projected cash flows from loss sharing agreements based on expected reimbursements for losses at the applicable loss sharing percentages based on the terms of the loss sharing agreements.
The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.
The fair value of short-term FHLB advances is the amount payable at maturity. The fair value of long-term FHLB advances is estimated using the rates currently offered for advances of similar maturities.
The carrying value of the securities sold under repurchase agreement is its fair value.
The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.
Financial Assets
Investment securities available for sale
Investment securities held to maturity
Loans, net
Cash surrender value of BOLI
Financial Liabilities
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Home Bancorp, Inc. and its wholly owned subsidiary, Home Bank, from December 31, 2013 through September 30, 2014 and on its results of operations for the three and nine months ended September 30, 2014 and September 30, 2013. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes appearing in Item 1.
Forward-Looking Statements
To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or Bank, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management’s current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as “plan”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions, or by future or conditional terms such as “will”, “would”, “should”, “could”, “may”, “likely”, “probably”, or “possibly”. The Company’s or the Bank’s actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Factors that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, the risk factors described under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the Securities Exchange Commission (“SEC”) for the year ended December 31, 2013. The Company 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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EXECUTIVE OVERVIEW
During the third quarter of 2014, the Company earned $2.9 million, an increase of $394,000, or 15.9%, compared to the third quarter of 2013. Diluted earnings per share for the third quarter of 2014 were $0.41, an increase of $0.04, or 10.8%, compared to the third quarter of 2013. During the nine months ended September 30, 2014, the Company earned $7.1 million, an increase $1.5 million, or 26.4%, compared to the nine months ended September 30, 2013. Diluted earnings per share for the nine months ended September 30, 2014 were $1.02, an increase of $0.22, or 27.5%, compared to the nine months ended September 30, 2013.
The Company’s financial condition and income as of and for the period ended September 30, 2014 was impacted by the acquisition of Britton & Koontz Capital Corporation (“Britton & Koontz”), the holding company for Britton & Koontz Bank, N.A. (“Britton & Koontz Bank”) of Natchez, Mississippi, on February 14, 2014. As a result of the acquisition, five former Britton & Koontz Bank branches in west Mississippi were added to Home Bank’s branch office network. Two former Britton & Koontz Bank locations in Baton Rouge were consolidated into existing Home Bank locations. The Company acquired assets of $298.7 million, which included loans of $162.2 million, and $264.4 million in deposits and other liabilities. Shareholders of Britton and Koontz received $16.14 per share in cash, yielding an aggregate purchase price of $34.5 million. The Company incurred $2.3 million in pre-tax merger-related expenses during the first nine months of 2014. See Note 3 to the Unaudited Consolidated Financial Statements for additional information regarding the acquisition.
Key components of the Company’s performance during the three months and nine months ended September 30, 2014 are summarized below.
The provision for loan losses totaled $892,000 for the third quarter of 2014, an increase of $439,000, or 96.8%, compared to the third quarter of 2013. For the nine months ended September 30, 2014, the provision for loan losses decreased $1.4 million, or 42.6%, from the nine months ended September 30, 2013. At September 30, 2014, the Company’s ratio of allowance for loan losses to total loans was 0.82%, compared to 0.95% at September 30, 2013. Excluding acquired loans, the ratio of the allowance for loan losses to total
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loans was 1.01% at September 30, 2014, compared to 1.09% at September 30, 2013. Net loan charge-offs for the first nine months of 2014 were $1.3 million compared to net loan charge-offs of $2.1 million during the first nine months of 2013.
The discussion and analysis contains financial information other than in accordance with generally accepted accounting principles (“GAAP”). The Company uses these non-GAAP financial measures in their analysis of the Company’s performance. Reconciliation of GAAP to non-GAAP disclosures is included in the table below.
Non-GAAP Reconciliation
Reported noninterest expense
Less: Merger-related expenses
Non-GAAP noninterest expense
Reported net income
Add: Merger-related expenses (after tax)
Non-GAAP net income
Diluted EPS
Add: Merger-related expenses
Non-GAAP EPS
FINANCIAL CONDITION
Loans, Asset Quality and Allowance for Loan Losses
Loans – Loans totaled $907.4 million as of September 30, 2014, an increase of $199.9 million, or 28.3%, from December 31, 2013. Growth in the loan portfolio was primarily driven by the acquisition of Britton & Koontz, which added $162.2 million in loans at acquisition date. During the first nine months of 2014, organic loan growth was related primarily to construction and land (up $19.7 million), one-to four-family first mortgage (up $13.1 million) and commercial real estate (up $4.8 million) loans. Covered Loans totaled $18.5 million as of September 30, 2014, a decrease of $3.2 million, or 14.7%, compared to December 31, 2013.
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The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.
Asset Quality – One of management’s key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as “special mention,” classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.
Repossessed assets which are acquired as a result of foreclosure are classified as repossessed assets until sold. Third party property valuations are obtained at the time the asset is repossessed and periodically until the property is liquidated. Repossessed assets are recorded at the lesser of the balance of the loan or fair value less estimated selling costs, at the date acquired or upon receiving new property valuations. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of repossessed assets are charged to operations, as incurred.
An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger (i.e., loans with balances of $100,000 or greater) commercial real estate, multi-family residential, construction and land loans and commercial and industrial loans are individually evaluated for impairment. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer. The Company typically orders an “as is” valuation for collateral property if the loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans. As of September 30, 2014 and December 31, 2013, loans individually evaluated for impairment, excluding Acquired Loans, amounted to $1.4
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million and $2.6 million, respectively. As of September 30, 2014 and December 31, 2013, substandard loans, excluding Acquired Loans, amounted to $6.1 million and $13.5 million, respectively. The amount of the allowance for loan losses allocated to impaired or substandard loans originated by Home Bank totaled $107,000 as of September 30, 2014 compared to $482,000 as of December 31, 2013. There were no assets classified as doubtful or loss as of September 30, 2014 and December 31, 2013.
Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
A savings institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyzes all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establishes acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable as of each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowance for loan losses may become necessary.
Real estate, or other collateral, which is acquired as a result of foreclosure is classified as a foreclosed asset until sold. Foreclosed assets are recorded at the lesser of the balance of the loan or fair value less estimated selling costs, at the date acquired or upon receiving new property valuations. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred.
The following table sets forth the composition of the Company’s nonperforming assets (“NPAs”) and troubled debt restructurings as of the dates indicated.
Total nonaccrual loans
Accruing loans 90 days or more past due
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
Performing troubled debt restructurings
Total nonperforming assets and troubled debt restructurings
Nonperforming loans to total loans
Nonperforming loans to total assets
Nonperforming assets to total assets
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Net loan charge-offs for the third quarter of 2014 were $1.2 million, compared to net loan charge-offs of $84,000 for the third quarter of 2013. The increase in net loan charge-offs for the third quarter of 2014 resulted primarily from deterioration in a single commercial and industrial loan relationship. Net loan charge-offs for the nine months ended September 30, 2014 were $1.3 million compared to $2.1 million for the nine months ended September 30, 2013.
Allowance for Loan Losses – The allowance for loan losses is established through provisions for loan losses. The Company maintains the allowance at a level believed, to the best of management’s knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses at least quarterly in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process includes, among other things, an analysis of delinquency trends, nonperforming loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of loans, the value of collateral securing loans, the borrower’s ability to repay and repayment performance, the number of loans requiring heightened management oversight, economic conditions and industry experience. Based on this evaluation, management assigns risk ratings to segments of the loan portfolio. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. These efforts are supplemented by reviews and validations performed by independent loan reviewers. The results of the reviews are reported to the Audit Committee of the Board of Directors. The establishment of the allowance for loan losses is significantly affected by management judgment. There is likelihood that different amounts would be reported under different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require management to make additional provisions for estimated loan losses based upon judgments different from those of management.
With respect to acquired loans, the Company follows the reserve standard set forth in ASC 310, Receivables. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration in credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each loan pool meeting the criteria above, and determines the excess of the loan pool’s scheduled contractual principal and interest payments in excess of cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the fair value, is accreted into interest income over the remaining life of the pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their estimated fair values. As a result, acquired loans subject to ASC 310 are excluded from the calculation of the allowance for loan losses as of the acquisition date. See Note 6 to the Unaudited Consolidated Financial Statements for additional information concerning our allowance for Acquired loans.
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Acquired loans were recorded as of their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses. Under current accounting principles, if the Company determines that losses arose after the acquisition date, the additional losses will be reflected as a provision to the allowance for loan losses. As of September 30, 2014, $435,000 of our allowance for loan losses was allocated to acquired loans with deteriorated credit quality.
We will continue to monitor and modify our allowance for loan losses as conditions warrant. No assurance can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the conditions used by management to determine the current level of the allowance for loan losses.
The following table presents the activity in the allowance for loan losses during the first nine months of 2014.
Balance, December 31, 2013
Provision charged to operations
Loans charged off
Recoveries on charged off loans
At September 30, 2014, the Company’s ratio of allowance for loan losses to total loans was 0.82%, compared to 0.98% and 0.95% at December 31, 2013 and September 30, 2013, respectively. Excluding acquired loans, the ratio of allowance for loan losses to total loans was 1.01% at September 30, 2014, compared to 1.12% and 1.09% at December 31, 2013 and September 30, 2013, respectively.
Investment Securities
The Company’s investment securities portfolio totaled $192.5 million as of September 30, 2014, an increase of $33.4 million, or 21.0%, from December 31, 2013. The increase resulted primarily from securities acquired from Britton & Koontz. The Company acquired $98.0 million at the acquisition date, and subsequently sold $65.1 million of the acquired investments during the first quarter. As of September 30, 2014, the Company had a net unrealized gain on its available for sale investment securities portfolio of $1.4 million, compared to $300,000 as of December 31, 2013. The investment securities portfolio had a modified duration of 3.8 and 4.2 years at September 30, 2014 and December 31, 2013, respectively.
The following table summarizes activity in the Company’s investment securities portfolio during the first nine months of 2014.
Purchases
Sales
Principal payments and calls
Acquired from Britton & Koontz, at fair value
Accretion of discounts and amortization of premiums, net
Increase in market value
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Funding Sources
Deposits – Deposits totaled $983.4 million as of September 30, 2014, an increase of $242.1 million, or 32.7%, compared to December 31, 2013. The acquisition of Britton & Koontz added $216.6 million in deposits. Core deposits totaled $759.1 million as of September 30, 2014, an increase of $210.2 million, or 38.3%, compared to December 31, 2013. Core deposits acquired from Britton & Koontz totaled $151.9 million at the acquisition date.
The following table sets forth the composition of the Company’s deposits at the dates indicated.
Demand deposit
Savings
Money market
NOW
Certificates of deposit
Federal Home Loan Bank Advances – Short-term FHLB advances totaled $78.5 million as of September 30, 2014, compared to $87.0 million as of December 31, 2013. Long-term FHLB advances totaled $16.5 million as of September 30, 2014 compared to $10.0 million as of December 31, 2013.
Securities Sold Under Repurchase Agreement – The acquisition of Britton & Koontz added $20.5 million as of September 30, 2014 in securities sold under repurchase agreement with a July 2015 maturity date and an effective interest rate of 0.36%. Britton & Koontz sold various investment securities with an agreement to repurchase those securities at various times. The underlying securities are U.S. Government obligations and obligations of other U.S. Government agencies. At September 30, 2014, these securities had coupon rates ranging from 1.25% to 3.75% and maturity dates ranging from 2016 to 2028.
Shareholders’ Equity – Shareholders’ equity provides a source of permanent funding that allows for future growth and provides the Company with a cushion to withstand unforeseen adverse developments. Shareholders’ equity increased $9.2 million, or 6.5%, from $141.9 million as of December 31, 2013 to $151.1 million as of September 30, 2014. The increase was primarily the result of retained earnings (up $7.1 million) and other comprehensive income (up $741,000).
As of September 30, 2014, the Bank had regulatory capital that was well in excess of regulatory requirements. The following table details the Bank’s actual levels and current regulatory capital requirements as of September 30, 2014.
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
Tangible capital
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LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity Management
Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring adequate cash flow exists to meet the Company’s needs, including operating, strategic and capital. The Company develops its liquidity management strategies as part of its overall asset/liability management process. Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity. As of September 30, 2014, cash and cash equivalents totaled $54.6 million. At such date, investment securities available for sale totaled $181.2 million.
The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. As of September 30, 2014, certificates of deposit maturing within the next 12 months totaled $144.0 million. Based upon historical experience, the Company anticipates that a significant portion of the maturing certificates of deposit will be redeposited with us. For the three months ended September 30, 2014, the average balance of our outstanding FHLB advances was $92.3 million. As of September 30, 2014, the Company had $95.0 million in outstanding FHLB advances and had $369.4 million in additional FHLB advances available.
In addition to cash flow from loan and securities payments and prepayments as well as from sales of securities available for sale, the Company has significant borrowing capacity available to fund liquidity needs. In recent years, the Company has utilized borrowings as a cost efficient addition to deposits as a source of funds. Our borrowings consist of advances from the FHLB of Dallas, of which the Company is a member. Under terms of the collateral agreement with the FHLB, the Company pledges residential mortgage loans and investment securities as well as the Company’s stock in the FHLB as collateral for such advances.
Asset/Liability Management
The objective of asset/liability management is to implement strategies for the funding and deployment of the Company’s financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations.
Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company’s interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of September 30, 2014.
The actual impact of changes in interest rates will depend on many factors. These factors include the Company’s ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of asset and liability repricings, the magnitude of interest rate changes and corresponding movement in interest rate spreads, and the level of success of asset/liability management strategies.
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Off-Balance Sheet Activities
To meet the financing needs of its customers, the Bank issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. The Company’s exposure to credit losses from these financial instruments is represented by their contractual amounts.
The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans as of September 30, 2014 and December 31, 2013.
Standby letters of credit
Available portion of lines of credit
Undisbursed portion of loans in process
Commitments to originate loans
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company.
RESULTS OF OPERATIONS
During the third quarter of 2014, the Company earned $2.9 million, an increase of $394,000, or 15.9%, compared to the third quarter of 2013. Diluted earnings per share for the third quarter of 2014 were $0.41, an increase of $0.04, or 10.8%, compared to the third quarter of 2013.
For the nine months ended September 30, 2014, the Company’s net income was $7.1 million, an increase of $1.5 million, or 26.4%, compared to the nine months ended September 30, 2013. The nine-month period ended September 30, 2014 includes $2.3 million of pre-tax merger expenses related to the acquisition of Britton & Koontz. Excluding merger-related expenses, net income for the nine-months ended September 30, 2014 was $8.6 million, an increase of 53.3% compared to nine months ended September 30, 2013. Diluted earnings per share for the nine months ended September 30, 2014 were $1.02, an increase of $0.22, or 27.5%, compared to the nine months ended September 30, 2013. Excluding merger-related expenses, diluted earnings per share were $1.24 for the nine months ended September 30, 2014, an increase of 55.0% compared to the nine months ended September 30, 2013.
Net Interest Income – Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Company’s net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s tax-equivalent net interest spread was 4.53% and 4.66% for the three months
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ended September 30, 2014 and September 30, 2013, respectively, and 4.56% and 4.53% for the nine months ended September 30, 2014 and September 30, 2013, respectively. The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.63% and 4.79% for the three months ended September 30, 2014 and September 30, 2013, respectively, and 4.66% and 4.67% for the nine months ended September 30, 2014 and September 30, 2013, respectively. The increase in the net interest spread and net interest margin related primarily to the addition of Britton & Koontz’s interest-earning assets and interest-bearing liabilities.
Net interest income totaled $13.2 million for the three months ended September 30, 2014, an increase of $2.8 million, or 27.0%, compared to the three months ended September 30, 2013. For the nine months ended September 30, 2014, net interest income totaled $38.1 million, an increase of $7.9 million, or 26.3%, compared to the nine months ended September 30, 2013. The addition of Britton & Koontz’s earning assets accounted for the vast majority of the increase.
Interest income increased $2.8 million, or 25.3%, in the third quarter of 2014, compared to the third quarter of 2013. For the nine months ended September 30, 2014, interest income increased $7.6 million, or 23.1%, compared to the nine months ended September 30, 2013. Higher interest income in the 2014 periods was due largely to the addition of Britton & Koontz’s interest-earning assets.
Interest expense increased $33,000, or 4.0%, in the third quarter of 2014 compared to the third quarter of 2013. For the nine months ended September 30, 2014, interest expense decreased $320,000, or 11.6%, compared to the nine months ended September 30, 2013. The decrease in the nine month comparison was due largely to the addition of Britton and Koontz’s customer deposits and changes in our funding mix over the past year.
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent (“TE”) yields are calculated using a marginal tax rate of 35%.
Interest-earning assets:
Loans receivable(1)
Investment securities (TE)
Other interest-earning assets
Total interest-earning assets (TE)
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Savings, checking and money market
Total interest-bearing deposits
Total interest-bearing liabilities
Noninterest-bearing liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest-earning assets
Net interest spread (TE)
Net interest margin (TE)
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(The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).
Interest income:
Loans receivable
Interest expense:
Savings, checking and money market accounts
Increase (decrease) in net interest income
Provision for Loan Losses – For the quarter ended September 30, 2014, the Company recorded a provision for loan losses of $892,000, $439,000 or 96.8% higher than the $453,000 recorded for the same period in 2013. For the nine months ended September 30, 2014, the provision for loan losses totaled $1.8 million, a decrease of $1.4 million, or 42.6%, compared to the nine months ended September 30, 2013. The provision for loan losses for the third quarter of 2014 relates primarily to the deterioration of a single commercial and industrial loan relationship.
As of September 30, 2014, the Company’s ratio of allowance for loan losses to total loans was 0.82%, compared to 0.98% and 0.95% at December 31, 2013 and September 30, 2013, respectively. Excluding acquired loans, the ratio of the allowance for loan losses to total loans was 1.01% at September 30, 2014, compared to 1.12% at December 31, 2013 and 1.09% at September 30, 2013, respectively.
Noninterest Income – The Company’s noninterest income was $2.2 million for the three months ended September 30, 2014, $380,000, or 21.4%, higher than the $1.8 million earned for the same period in 2013. Noninterest income was $6.1 million for the nine months ended September 30, 2014, $196,000, or 3.3%, higher than the $5.9 million earned for the same period of 2013.
The increase in noninterest income in the third quarter of 2014 compared to the third quarter of 2013 resulted primarily from increases in service fees and charges (up $266,000) and bank card fees (up $130,000) due to the impact of the Britton & Koontz acquisition and increased customer transactions.
The increase in noninterest income for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 resulted primarily from increases in service fees and charges (up $797,000) and bank card fees (up $287,000) due to the impact of the Britton & Koontz acquisition and increased customer transactions, which were partially offset by lower gains on the sale of securities (down $426,000) and the sale of mortgage loans (down $380,000).
Noninterest Expense – The Company’s noninterest expense was $10.0 million for the three months ended September 30, 2014, $2.0 million, or 24.5%, higher than the $8.0 million recorded for the same period in 2013. Noninterest expense was $31.6 million for the nine months ended September 30, 2014, $7.2 million, or 29.3% higher than the $24.4 million for the same period of 2013. For the nine months ended September 30, 2014, noninterest expense includes $2.3 million of merger expenses related to the acquisition of Britton & Koontz. Such merger-related expenses include professional fees, data conversion costs, contract cancellation cost included in other expenses and severance and other employee costs associated with the merger and related systems conversion. Excluding merger-related expenses, noninterest expense for the nine months ended September 30, 2014 totaled $29.3 million, an increase of $4.9 million, or 20.0%, compared to the same period of 2013. The increases primarily relate to the growth of the Company due to the addition of Britton & Koontz branches and employees.
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Income Taxes – For the quarters ended September 30, 2014 and September 30, 2013, the Company incurred income tax expense of $1.6 million and $1.2 million, respectively. The Company’s effective tax rate was 36.3% and 33.4% during the third quarters of 2014 and 2013, respectively. For the nine months ended September 30, 2014 and September 30, 2013, the Company incurred income tax expense of $3.7 million and $2.8 million, respectively. The Company’s effective tax rate amounted to 34.3% and 33.5% during the nine months ended September 30, 2014 and September 30, 2013, respectively. Differences between the effective tax rate and the statutory tax rate primarily relate to variances in items that are non-taxable or non-deductible (e.g., state tax, tax-exempt income, tax credits, etc.).
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative disclosures about market risk are presented in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2013, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/ Liability Management and Market Risk”. Additional information at September 30, 2014 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management”.
Item 4. Controls and Procedures.
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the third quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for December 31, 2013 filed with the Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and the Use of Proceeds.
The Company’s purchases of its common stock made during the quarter consisted of stock repurchases under the Company’s approved plan and are set forth in the following table.
Period
July 1 – July 30, 2014
August 1 – August 31, 2014
September 1 – September 30, 2014
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Item 5. Other Information.
Item 6. Exhibits and Financial Statement Schedules.
No.
Description
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ John W. Bordelon
/s/ Joseph B. Zanco
/s/ Mary H. Hopkins
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