UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended: September 30, 2016
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 ☒ 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 ☒ 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 ☒
At November 3, 2016, the registrant had 7,322,320 shares of common stock, $0.01 par value, outstanding.
HOME BANCORP, INC. and SUBSIDIARY
TABLE OF CONTENTS
Item 1.
Financial Statements (unaudited)
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 Disclosures
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 $13,736,492 and $14,120,842, respectively)
Mortgage loans held for sale
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
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
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; 7,321,837 and 7,239,821 shares issued and outstanding, respectively
Additional paid-in capital
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.
1
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Interest Income
Loans, including fees
Investment securities:
Taxable interest
Tax-exempt interest
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 (loss) on sale of properties and equipment, net
Gain on sale of investment securities, net
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
Cash dividends declared per common share
2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Other Comprehensive Income
Unrealized gain (loss) on investment securities
Reclassification adjustment for gains included in net income
Tax effect
Other comprehensive income, net of taxes
Comprehensive Income
3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Balance, December 31, 2014(1)
Net income
Other comprehensive income
Purchase of Company’s common shares at cost, 11,298 shares
Reclassification of treasury stock per Louisiana law
Cash dividends declared, $0.23 per share
Exercise of stock options
Restricted stock vesting
ESOP shares released for allocation
Share-based compensation cost
Balance, September 30, 2015
Balance, December 31, 2015(1)
Purchase of Company’s common shares at cost, 12,091 shares
Cash dividends declared, $0.32 per share
Balance, September 30, 2016
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities, net of effect of acquisition:
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 loans sold, net
Proceeds, including principal payments, from loans held for sale
Originations of loans held for sale
Non-cash compensation
Deferred income tax provision (benefit)
(Increase) 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 effect of acquisition:
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 change in loans
Reimbursement from FDIC for covered assets
Decrease in interest bearing deposits in other banks
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 provided by (used in) investing activities
Cash flows from financing activities, net of effect of acquisition:
(Decrease) increase in deposits
Borrowings on Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Decrease in securities sold under repurchase agreements
Purchase of Company’s common stock
Proceeds from exercise of stock options
Payment of dividends on common stock
Net cash (used in) 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
5
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, 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 three-month and nine-month periods ended September 30, 2016 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, 2015.
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, 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. Recent Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. The ASU amendments include changes related to how certain equity investments are measured, recognize changes in the fair value of certain financial liabilities measured under the fair value option, and disclose and present financial assets and liabilities on the Company’s consolidated financial statements. Additionally, the ASU will also require entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the statement of financial position or in the accompanying notes to the financial statements. Entities will also no longer have to disclose the methods and significant assumptions for financial instruments measured at amortized cost, but will be required to measure such instruments under the “exit price” notion for disclosure purposes. The ASU is effective for annual and interim periods beginning after December 15, 2017. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Conforming Amendments Related to Leases”. This ASU amends the codification regarding leases in order to increase transparency and comparability. The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The ASU is effective for annual and interim periods beginning after December 15, 2018. The adoption of this ASU is not expected to have a material effect on our Consolidated Financial Statements.
6
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The ASU amends the codification to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of financial assets. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that and are not unconditionally cancellable are also within the scope of this amendment. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for fiscal years beginning after December 31, 2019. An entity will apply the amendments in this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently planning for the implementation of this accounting standard. It is too early to assess the impact that this guidance will have on our Consolidated Financial Statements.
3. Investment Securities
Summary information regarding the Company’s investment securities classified as available for sale and held to maturity as of September 30, 2016 and December 31, 2015 is as follows.
(dollars in thousands)
September 30, 2016
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:
7
December 31, 2015
The estimated fair value and amortized cost by contractual maturity of the Company’s investment securities as of September 30, 2016 are shown in the following tables. Securities are classified according to their contractual maturities 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
8
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.
As of September 30, 2016, 26 of the Company’s debt securities had unrealized losses totaling 0.7% of the individual securities’ amortized cost basis and 0.1% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 10 of the 26 securities had been in a continuous loss position for over 12 months. The 10 securities had an aggregate amortized cost basis of $24.3 million and unrealized loss of $83,000 at September 30, 2016. Management has the intent and ability to hold these debt securities until maturity, or until anticipated recovery; hence, no declines in these 10 securities were deemed to be other-than-temporary at September 30, 2016.
As of September 30, 2016 and December 31, 2015, the Company had $89,360,000 and $94,661,000, respectively, of securities pledged to secure public deposits.
4. Earnings Per Share
Earnings per common share were computed based on the following:
Three Months Ended
September 30,
(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
Basic earnings per common share
Diluted earnings per common share
Options on 91,372 and 52,258 shares of common stock were not included in the computation of diluted earnings per share for the three months ended September 30, 2016 and September 30, 2015, respectively, because the effect of these shares was anti-dilutive. Options on 64,549 and 39,177 shares of common stock were not included in the computation of diluted earnings per share for the nine months ended September 30, 2016 and September 30, 2015, respectively, because the effect of these shares was anti-dilutive.
5. Credit Quality and Allowance for Loan Losses
The following briefly describes the distinction between originated and acquired loans and certain significant accounting policies relevant to each category.
9
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 is 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.
Acquired Loans
Loans that were acquired as a result of our acquisitions of certain assets and liabilities of Statewide Bank (“Statewide”) of Covington, Louisiana, on March 12, 2010, and the acquisitions of GS Financial Corp. (“GSFC”), the former holding company of Guaranty Savings Bank of Metairie, Louisiana, on July 15, 2011, 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, and Louisiana Bancorp, Inc. (“Louisiana Bancorp”), the former holding company of Bank of New Orleans (“BNO”) of Metairie, Louisiana on September 15, 2015 are referred to as “Acquired Loans.”
Acquired Loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with 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 nonaccretable discount for the loan pool. Once the nonaccretable 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.
10
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
Recorded investment in loans:
Total loans
11
A summary of activity in the allowance for loan losses during the nine months ended September 30, 2016 and September 30, 2015 follows.
Originated loans:
Acquired loans:
Total loans:
12
The following tables present the Company’s loan portfolio by credit quality classification as of the dates indicated.
Total originated loans
13
Total acquired loans
Total:
14
The above classifications follow regulatory guidelines and can generally be described as follows:
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
15
16
Excluding Acquired Loans with deteriorated credit quality, as of September 30, 2016 and December 31, 2015, the Company did not have any loans greater than 90 days past due and accruing.
The following is a summary of information pertaining to Originated Loans which were deemed to be impaired loans as of the dates indicated.
With no related allowance recorded:
Total
With an allowance recorded:
Total impaired Originated Loans:
17
A summary of information pertaining to nonaccrual loans as of dates indicated is as follows.
Nonaccrual loans:
As of September 30, 2016, the Company had no outstanding commitments to lend additional funds to any customer whose loan was classified as impaired.
18
Troubled Debt Restructurings
During the course of its lending operations, the Company may periodically grant 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’s loan to alleviate the burden of the customer’s near-term cash requirements. In order to be considered a troubled debt restructuring (“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.
Information about the Company’s TDRs is presented in the following tables.
19
20
None of the above referenced TDRs defaulted subsequent to the restructuring through the date the financial statements were issued. The Company restructured, as a TDR, loans totaling $5.6 million during the third quarter of 2016.
6. Fair Value Measurements and Disclosures
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company groups assets and liabilities measured or disclosed 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 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 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.
21
Recurring Basis
Investment Securities Available for Sale
Fair values of investment securities available for sale are primarily measured using information from a first-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 first-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding first-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, 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, 2016, management did not make adjustments to prices provided by the first-party pricing service as a result of illiquid or inactive markets.
The following tables present the balances of assets measured for fair value on a recurring basis as of September 30, 2016 and December 31, 2015.
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.
22
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.
The Company has segregated all financial assets 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.
Repossessed assets
Impaired loans
The following table shows significant observable inputs used in the fair value measurement of Level 3 assets.
Valuation Technique
Unobservable
Inputs
As of September 30, 2016
As of December 31, 2015
23
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.
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 first 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 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 by discounting the future cash flows using the rates currently offered for advances of similar maturities.
24
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
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. (the “Company”) and its wholly owned subsidiary, Home Bank, N. A. (the “Bank”), from December 31, 2015 through September 30, 2016 and on its results of operations for the three and nine months ended September 30, 2016 and September 30, 2015. 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.
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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, 2015. 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.
EXECUTIVE OVERVIEW
During the third quarter of 2016, the Company earned $4.4 million, an increase of $1.5 million, or 50.4%, compared to the third quarter of 2015. Diluted earnings per share for the third quarter of 2016 were $0.61, an increase of $0.20, or 48.8%, compared to the third quarter of 2015. The third quarter of 2015 included merger-related expenses related to the Louisiana Bancorp, Inc. (“Louisiana Bancorp”) acquisition totaling $593,000 ($527,000, net of taxes). Excluding merger-related expenses, net income for the third quarter of 2016 increased 27.3% compared to the third quarter of 2015 (see the “Non-GAAP Reconciliation” on page 28). Excluding merger-related expenses, diluted earnings per share for the third quarter of 2016 increased 24.5% compared to the third quarter of 2015.
During the nine months ended September 30, 2016, the Company earned $11.7 million, an increase of $3.1 million, or 36.6%, compared to the nine months ended September 30, 2015. Diluted earnings per share for the nine months ended September 30, 2016 were $1.65, an increase of $0.42, or 34.1%, compared to the nine months ended September 30, 2015. The nine months ended September 30, 2016 and 2015 included merger-related expenses related to the Louisiana Bancorp acquisition totaling $856,000 and $848,000, respectively ($560,000 and $759,000, respectively, net of taxes). The nine months ended September 30, 2016 included a $641,000 gain on the sale of a banking center in the New Orleans market following the Louisiana Bancorp systems conversion. The nine months ended September 30, 2015 included a $492,000 loss on the sale of a banking center. Excluding merger-related expenses and the banking center gain and loss, net income for the nine months ended September 30, 2016 increased 22.8% compared to the nine months ended September 30, 2015. Excluding merger-related expenses and the banking center gain, diluted earnings per share for the nine months ended September 30, 2016 increased 20.1% compared to the nine months ended September 30, 2015.
Key components of the Company’s performance during the three and nine months ended September 30, 2016 include:
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This discussion and analysis contains financial information prepared other than in accordance with generally accepted accounting principles (“GAAP”). The Company uses these non-GAAP financial measures in its analysis of the Company’s performance. Management believes that the non-GAAP information provides useful data in understanding the Company’s operations and in comparing the Company’s results of operation to peers. This non-GAAP information should be considered in addition to the Company’s financial information prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. 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 noninterest income
Less: (Gain) loss on sale of banking centers
Non-GAAP noninterest income
Reported net income
Less: (Gain) loss on sale of banking centers, net of tax
Add: Merger-related expenses, net of tax
Non-GAAP net income
Diluted EPS
Less: (Gain) loss on sale of banking center
Add: Merger-related expenses
Non-GAAP diluted EPS
FINANCIAL CONDITION
Loans, Asset Quality and Allowance for Loan Losses
Loans – Loans outstanding as of September 30, 2016 were $1.2 billion, an increase of $9.0 million, or 0.7%, from December 31, 2015. Growth in originated loans of 8.1% was partially offset by paydowns in acquired loans.
The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.
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The aggregate outstanding balance of loans to borrowers in the energy sector totaled $34.8 million, or 2.8% of outstanding loans, at September 30, 2016. We also had unfunded loan commitments to borrowers in the energy sector amounting to $8.4 million at such date. At September 30, 2016, 92% of the balance of our energy-related loans were performing in accordance with their original loan agreements. Of the remaining 8%, or $2.1 million, had been restructured and were paying in accordance with the restructured terms at such date. The Company holds no shared national credits.
The following table illustrates the composition of the Company’s direct energy-related loans at September 30, 2016.
Commercial and industrial:
Equipment
Marine vessels
Accounts receivable
Unsecured
Other
Total commercial and industrial loans
Total energy-related loans
In addition to our energy exposure on direct energy related loans, given the effect of the energy sector on the overall economy in several of our markets, we also have indirect exposure in making loans to borrowers who are not themselves in the energy sector but whose customers include energy sector entities.
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 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 their 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. First 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 loans, multi-family residential loans, construction
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and land loans and commercial and industrial loans are individually evaluated for impairment. First 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, 2016 and December 31, 2015, loans individually evaluated for impairment, excluding acquired loans, amounted to $4.2 million and $966,000, respectively. As of September 30, 2016 and December 31, 2015, acquired impaired loans, loans considered to have deteriorated credit quality at the time of acquisition, amounted to $15.9 million and $20.0 million, respectively. As of September 30, 2016 and December 31, 2015, substandard loans, excluding acquired loans, amounted to $25.2 million and $7.7 million, respectively. The amount of the allowance for loan losses allocated to impaired or substandard loans originated by Home Bank totaled $640,000 as of September 30, 2016 and $153,000 as of December 31, 2015. The amount of allowance for loan losses allocated to acquired loans totaled $371,000 and $373,000, respectively, at such dates. There were no assets classified as doubtful or loss as of September 30, 2016 or December 31, 2015.
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 bank’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.
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The following table sets forth the composition of the Company’s nonperforming assets (“NPAs”) and performing 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
The Company recorded $54,000 net loan charge-offs during the quarter and nine months ended September 30, 2016. Net loan charge-offs for the quarter and nine months ended September 30, 2015 were $103,000 and $229,000, respectively.
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.
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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 5 to the Unaudited Consolidated Financial Statements for additional information concerning our allowance for acquired loans.
Acquired loans were recorded at their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses. 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. As of September 30, 2016 and December 31, 2015, $100,000 and $128,000, respectively, 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 2016.
Balance, December 31, 2015
Provision charged to operations
Loans charged off
Recoveries on charged off loans
At September 30, 2016, the Company’s ratio of allowance for loan losses to total loans was 0.99%, compared to 0.78% and 0.74% at December 31, 2015 and September 30, 2015, respectively. Excluding acquired loans, the ratio of allowance for loan losses to total loans was 1.36% at September 30, 2016, compared to 1.15% and 1.12% at December 31, 2015 and September 30, 2015, respectively, due primarily to the potential direct and indirect impact of continuing low energy prices.
The allowance for loan losses to loans ratio directly attributable to energy loans totaled 3.29% at September 30, 2016. Over the past nine months, the Company has increased its overall allowance for loan losses to loans ratio on originated loans from 1.15% at December 31, 2015 to 1.36% at September 30, 2016 due primarily to the potential direct and indirect adverse effect that low energy prices may have on the ability of our borrowers to repay their loans.
Investment Securities
The Company’s investment securities portfolio totaled $184.4 million as of September 30, 2016, a decrease of $6.2 million, or 3.3%, from December 31, 2015. As of September 30, 2016, the Company had a net unrealized gain on its available for sale investment securities portfolio of $2.5 million, compared to $1.3 million as of December 31, 2015. The investment securities portfolio had a modified duration of 3.0 and 3.3 years at September 30, 2016 and December 31, 2015, respectively.
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The following table summarizes activity in the Company’s investment securities portfolio during the first nine months of 2016.
Purchases
Sales
Principal payments and calls
Accretion of discounts and amortization of premiums, net
Increase in market value
Funding Sources
Deposits – Deposits totaled $1.2 billion as of September 30, 2016 and December 31, 2015. Core deposits totaled $957.0 million as of September 30, 2016, a decrease of $10.4 million, or 1.1%, compared to December 31, 2015.
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 increased $19.3 million, or 48.2%, from $40.0 million as of December 31, 2015 to $59.2 million as of September 30, 2016. Long-term FHLB advances totaled $79.6 million as of September 30, 2016, a decrease of $5.6 million, or 6.6%, compared December 31, 2015.
Shareholders’ Equity – Shareholders’ equity increased $12.3 million, or 7.5%, from $165.0 million as of December 31, 2015 to $177.4 million as of September 30, 2016.
As of September 30, 2016, the Company and the Bank had regulatory capital that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2016 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
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Company:
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
Bank:
Common equity Tier 1 capital (to risk-weighted assets)
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, 2016, cash and cash equivalents totaled $24.0 million. At such date, investment securities available for sale totaled $171.0 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, 2016, certificates of deposit maturing within the next 12 months totaled $161.5 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, 2016, the average balance of outstanding FHLB advances was $128.0 million. As of September 30, 2016, the Company had $138.8 million in total outstanding FHLB advances and had $464.8 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. 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.
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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, 2016.
Shift in Interest Rates
(in bps)
+300
+200
+100
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.
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, 2016 and December 31, 2015.
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.
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RESULTS OF OPERATIONS
During the third quarter of 2016, the Company earned $4.4 million, an increase of $1.5 million, or 50.4%, compared to the third quarter of 2015. Diluted earnings per share for the third quarter of 2016 were $0.61, an increase of $0.20, or 48.8%, compared to the third quarter of 2015. The third quarter of 2015 included merger-related expenses related to the Louisiana Bancorp acquisition totaling $593,000 ($527,000, net of taxes). Excluding merger-related expenses, net income for the third quarter of 2016 increased 27.3% compared to the third quarter of 2015 (see the “Non-GAAP Reconciliation” on page 27). Excluding merger-related expenses, diluted earnings per share for the third quarter of 2016 increased 24.5% compared to the third quarter of 2015.
During the nine months ended September 30, 2016, the Company earned $11.7 million, an increase of $3.1 million, or 36.6%, compared to the nine months ended September 30, 2015. Diluted earnings per share for the nine months ended September 30, 2016 were $1.65, an increase of $0.42, or 34.1%, compared to the nine months ended September 30, 2015. The nine months ended September 30, 2016 and 2015 include merger-related expenses, related to the Louisiana Bancorp acquisition totaling $856,000 and $848,000, respectively ($560,000 and $759,000, respectively, net of taxes). The nine months ended September 30, 2016 included a $641,000 gain on the sale of a banking center in the New Orleans market following the Louisiana Bancorp system conversion. The nine months ended September 30, 2015 included a $492,000 loss on the sale of a banking center. Excluding merger-related expenses and the banking center gain and loss, net income for the nine months ended September 30, 2016 increased 22.8% compared to the nine months ended September 30, 2015. Excluding merger-related expenses and the banking center gain, diluted earnings per share for the nine months ended September 30, 2016 increased 20.1% compared to the nine months ended September 30, 2015.
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 4.19% and 4.43% for the three months ended September 30, 2016 and September 30, 2015, respectively, and 4.23% and 4.39% for the nine months ended September 30, 2016 and September 30, 2015, respectively. The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.32% and 4.55% for the three months ended September 30, 2016 and September 30, 2015, respectively, and 4.35% and 4.51% for the nine months ended September 30, 2016 and September 30, 2015, respectively. The decrease in the net interest spread and net interest margin in the 2016 periods related primarily to a decrease in the average yield on loans.
Net interest income totaled $15.5 million for the three months ended September 30, 2016, an increase of $2.0 million, or 14.8%, compared to the three months ended September 30, 2015. For the nine months ended September 30, 2016, net interest income totaled $46.8 million, an increase of $8.0 million, or 20.7%, compared to the nine months ended September 30, 2015.
Interest income increased $2.4 million, or 16.8%, in the third quarter of 2016 compared to the third quarter of 2015. For the nine months ended September 30, 2016, interest income increased $9.4 million, or 22.9%, compared to the nine months ended September 30, 2015. Increases in the average balance of loans receivable from the Louisiana Bancorp acquisition were partially offset by decreases of 35 basis points and 29 basis points, respectively, in the average yield on loans during the quarter and nine months ended September 30, 2016 from the prior comparable period.
Interest expense increased $414,000, or 46.3%, in the third quarter of 2016 compared to the third quarter of 2015. For the nine months ended September 30, 2016, interest expense increased $1.4 million, or 56.0%, compared to the nine months ended September 30, 2015. During the quarter and nine months ended September 30, 2016, the average volume of deposits increased due to the Louisiana Bancorp acquisition.
The following tables set 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
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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
Taxable
Tax-exempt (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
Long term FHLB advances
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
Investment securities (TE)
Interest expense:
Savings, checking and money market accounts
FHLB advances
Increase (decrease) in net interest income
Provision for Loan Losses – For the quarter ended September 30, 2016, the Company recorded a provision for loan losses of $800,000, which was 40.7% higher than the $569,000 recorded for the same period in 2015. Net loan charge-offs amounted to $54,000 and $103,000 during the third quarters of 2016 and 2015, respectively. For the nine months ended September 30, 2016, the provision for loan losses totaled $2.7 million, which was 92.7% higher than the $1.3 million recorded for the same period in 2015. The higher levels of provision expense in 2016 are primarily the result originated loan growth and the increase in the Company’s total nonperforming loans as well as our assessment of the potential direct and indirect impact of continuing low energy prices on the abilities of certain borrowers to repay their loans in accordance with their terms. Net loan charge-offs amounted to $54,000 and $229,000, respectively, during the nine months ended September 30, 2016 and September 30, 2015, respectively.
As of September 30, 2016, the Company’s ratio of allowance for loan losses to total loans was 0.99%, compared to 0.78% and 0.74% at December 31, 2015 and September 30, 2015, respectively. Excluding acquired loans, the ratio of allowance for loan losses to total loans was 1.36% at September 30, 2016, compared to 1.15% and 1.12% at December 31, 2015 and September 30, 2015, respectively. The ratio of non-performing loans to total assets was 1.20% at September 30, 2016, compared to 0.53% at December 31, 2015.
Noninterest Income –The Company’s noninterest income was $2.5 million for the quarter ended September 30, 2016, $318,000, or 14.5%, more than the $2.2 million earned for the same period in 2015. Noninterest income was $8.5 million for the nine months ended September 30, 2016, $2.2 million, or 35.1%, higher than the $6.3 million earned for the same period of 2015. The increase in noninterest income in the third quarter of 2016 compared to the third quarter of 2015 resulted primarily from the absence of a $359,000 net loss from the sale of assets recorded in the comparable prior year period. The nine months ended September 30, 2016 included a gain on the sale of a banking center totaling $641,000, pre-tax. Excluding the net gains (losses) on sale of assets, noninterest income increased 7.2% and 15.9% in the quarterly and nine-month comparisons primarily from increased service fees and charges and bank card fees.
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Noninterest Expense – The Company’s noninterest expense was $10.6 million for the three months ended September 30, 2016, $121,000, or 1.1%, higher than the $10.5 million recorded for the same period in 2015. Noninterest expense was $34.8 million for the nine months ended September 30, 2016, $4.4 million, or 14.3% higher than the $30.5 million for the same period of 2015. Noninterest expense includes merger-related expenses related to the acquisition of Louisiana Bancorp totaling $593,000 for the third quarter of 2015, and $856,000 and $848,000 for the nine months ended September, 30, 2016 and September 30, 2015, respectively. Excluding merger-related expenses, noninterest expense increased $714,000, or 7.2%, for the third quarter of 2016 compared to the third quarter of 2015. Excluding merger-related expenses, noninterest expense increased $4.4 million, or 14.7%, for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increases in noninterest expense relate primarily to the growth of the Company due to the addition of Louisiana Bancorp branches and employees in the third quarter of 2015. The increases were partially offset by lower expenses on foreclosed assets (down $780,000 resulting from a $560,000 net gain on the sale of foreclosed assets and lower foreclosed asset expenses in the third quarter of 2016).
Income Taxes – For the quarters ended September 30, 2016 and September 30, 2015, the Company incurred income tax expense of $2.3 million and $1.7 million, respectively. The Company’s effective tax rate was 34.0% and 37.5% during the third quarters of 2016 and 2015, respectively. For the nine months ended September 30, 2016 and September 30, 2015, the Company incurred income tax expense of $6.1 million and $4.6 million, respectively. The Company’s effective tax rate amounted to 34.1% and 35.1% during the nine months ended September 30, 2016 and September 30, 2015, 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, merger-related expenses, 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, 2015, 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, 2016 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 2016 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.
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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, 2015 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 plans and are set forth in the following table.
Period
July 1 – July 31, 2016
August 1 – August 31, 2016
September 1 – September 30, 2016
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
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
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