UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2018
or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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 every Interactive Data File required to be submitted 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 such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
At October 31, 2018, the registrant had 9,480,140 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
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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 $10,868 and $13,055, 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
Goodwill and core deposit intangibles
Accrued interest receivable and other assets
Total Assets
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Short-term Federal Home Loan Bank advances
Long-term Federal Home Loan Bank 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; 9,479,611 and 9,395,488 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 loss
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:
Taxable interest
Tax-exempt interest
Other investments and deposits
Total interest income
Interest Expense
Deposits
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
(Loss) gain on sale of assets, 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 (Loss) Income
Unrealized (losses) gains on investment securities
Tax effect
Other comprehensive (loss) income, net of taxes
Comprehensive Income
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Balance, December 31, 2016
Net income
Other comprehensive income
Purchase of Company’s common stock at cost, 1,233 shares
Cash dividends declared, $0.41 per share
Common stock issued under incentive plans, net of shares surrendered in payment, including tax benefit 7,905 shares
Exercise of stock options
RRP shares released for allocation
ESOP shares released for allocation
Share-based compensation cost
Balance, September 30, 2017
Balance, December 31, 2017
Other comprehensive loss
Reclassification of stranded tax effects in accumulated other comprehensive income(1)
Purchase of Company’s common stock at cost, 8,283 shares
Cash dividends declared, $0.51 per share
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 16,898 shares
Balance, September 30, 2018
See Note 2 - Recent Accounting Pronouncements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization and accretion of purchase accounting valuations and intangibles
Net amortization of mortgage servicing asset
Federal Home Loan Bank stock dividends
Net amortization of discount 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 expense (benefit)
(Increase) decrease in accrued 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:
Purchases of securities available for sale
Proceeds from maturities, prepayments and calls on securities available for sale
Proceeds from maturities, prepayments and calls on securities held to maturity
Decrease (increase) in loans, net
Reimbursement from FDIC for covered assets
Decrease in interest-bearing deposits in banks
Proceeds from sale of repossessed assets
Purchases of office properties and equipment
Proceeds from sale of office properties and equipment
Proceeds from redemption of Federal Home Loan Bank stock
Net cash (used in) provided by investing activities
Cash flows from financing activities:
(Decrease) increase in deposits, net
Borrowings on Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Proceeds from exercise of stock options
Issuance of stock under incentive plans
Dividends paid to shareholders
Purchase of Company’s 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 year
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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, 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, 2018 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, 2017.
Critical Accounting Policies and Estimates
There were no material changes or developments during the reporting period with respect to methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017.
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.
2. Recent Accounting Pronouncements
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. Upon implementation, a lessee will 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 Company is currently assessing the amendment but does not anticipate it will have a material impact on our Consolidated Financial Statements. Based on the Company’s preliminary assessment of its current leases, the impact to the Company’s consolidated balance sheet is estimated to be less than a 1% increase in assets and liabilities.
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 collectability 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
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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 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 assessing this accounting standard and the implementation of a new software application during 2018 to assist in determining the impact to our Consolidated Financial Statements. The adoption of this ASU could result in material changes in our accounting for credit losses. The extent of the impact upon adoption will depend on the characteristics of the Company’s loan portfolio and economic conditions on that date as well as forecasted conditions thereafter.
In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other, Simplifying the Test for Goodwill Impairment”. The amendment in this ASU eliminates the requirement to calculate the implied fair value of goodwill in order to measure a goodwill impairment charge. An entity will record an impairment charge based on the excess of the carrying amount over its fair value. This ASU is effective for fiscal and interim testing periods beginning after December 15, 2019. The Company is currently assessing the amendment and does not anticipate it will have a material impact on our Consolidated Financial Statements.
In April 2017, FASB issued ASU No. 2017-08,“Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The accounting for purchased callable debt securities held at a discount does not change under the new guidance. This ASU is effective for fiscal and interim periods beginning after December 15, 2018. The Company is currently assessing the amendment and does not anticipate it will have an impact on our Consolidated Financial Statements.
ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within accumulated other comprehensive income as a result of tax reform. This issue came about from the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017 that changed the Company’s statutory income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company adopted ASU 2018-02 in the first quarter of 2018 and reclassified its stranded tax credit of $206,000 from accumulated other comprehensive income to retained earnings.
In July 2018, the FASB issued ASU No. 2018-11, “Leases – Targeted Improvements” to provide alternative transition methods to reduce the costs and complexities of implementing the new leases standard, ASU No. 2016-02. The amendments in the update allow entities to recognize a cumulative-effect adjustment in the opening balance of retained earnings in the period of adoption of ASU No. 2016-02, which eliminates the need to re-state amounts presented for prior-periods. In addition, under certain conditions, lessors are allowed to account for lease and non-lease components as a single component. The amendments have the same effective date as ASU No. 2016-02 (periods beginning after December 15, 2018). The Company is currently assessing ASU No. 2018-11, but does not anticipate it will have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13,“Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU removes, modifies, and adds certain disclosure requirements for fair value measurements. For example, public entities will no longer be required to disclose the valuation processes for Level 3 fair value measurements, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. In addition, entities may early adopt the modified or eliminated disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company does not believe ASU No. 2018-13 will have a material impact on our Consolidated Financial Statements, as the update only revises disclosure requirements.
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3. Investment Securities
Summary information regarding the Company’s investment securities classified as available for sale and held to maturity as of September 30, 2018 and December 31, 2017 is as follows.
(dollars in thousands)
September 30, 2018
Available for sale:
U.S. agency mortgage-backed
Collateralized mortgage obligations
Municipal bonds
U.S. government agency
Total available for sale
Held to maturity:
Total held to maturity
December 31, 2017
The estimated fair value and amortized cost by contractual maturity of the Company’s investment securities as of September 30, 2018 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.
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Fair Value
Securities available for sale:
Total securities available for sale
Securities held to maturity:
Total securities held to maturity
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 other-than-temporarily impaired, an impairment loss is recognized.
As of September 30, 2018, 184 of the Company’s investment securities had unrealized losses totaling 2.8% of the individual securities’ amortized cost basis and 2.3% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 59 of the 184 securities had been in a continuous loss position for over 12 months. The 59 securities had an aggregate amortized cost basis of $94.1 million and an unrealized loss of $3.8 million at September 30, 2018. Management has the intent and ability to hold these securities until maturity, or until anticipated recovery; hence, no declines in these securities were deemed other-than-temporary at September 30, 2018.
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As of September 30, 2018 and December 31, 2017, the Company had $152,374,000 and $121,984,000, respectively, of securities pledged to secure public deposits.
4. Earnings Per Share
Earnings per common share were computed based on the following:
(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 27,934 and 77,024 shares of common stock were not included in the computation of diluted earnings per share for the three months ended September 30, 2018 and September 30, 2017, respectively, because the effect of these shares was anti-dilutive. Options on 15,850 and 60,849 shares of common stock were not included in the computation of diluted earnings per share for the nine months ended September 30, 2018 and September 30, 2017, 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.
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 business combinations 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.
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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.
Allowance for Loan Losses
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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$11.0 million and $14.2 million in Acquired Loans were deemed to be acquired impaired loans and were accounted for under ASC 310-30 at September 30, 2018 and December 31, 2017, respectively.
A summary of activity in the allowance for loan losses for the nine months ended September 30, 2018 and September 30, 2017 follows.
Originated loans:
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Acquired loans:
Total loans:
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Credit Quality
The following tables present the Company’s loan portfolio by credit quality classification as of the dates indicated.
Total originated loans
Total acquired loans
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The above classifications follow regulatory guidelines and can generally be described as follows:
Pass loans are of satisfactory quality.
Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.
Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial performance. Such loans may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.
Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.
In addition, residential loans are classified using an inter-agency regulatory methodology that incorporates, among other factors, 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.
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Real estate loans:
Total real estate loans
Other loans:
Total other loans
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Excluding Acquired Loans with deteriorated credit quality, the Company did not have any loans greater than 90 days past due and accruing as of September 30, 2018 or December 31, 2017.
The following table summarizes the accretable yield on loans accounted for under ASC 310-30 as of the dates indicated.
Balance at beginning of period
Accretion
Transfers from nonaccretable difference to accretable yield
Balance at end of period
The following table summarizes information pertaining to Originated Loans, which were deemed impaired loans as of the dates indicated.
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With no related allowance recorded:
Total
With an allowance recorded:
Total impaired loans:
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The following table summarizes information pertaining to nonaccrual loans as of dates indicated.
Nonaccrual loans:
Table excludes Acquired Loans which were being accounted for under ASC310-30 because they continue to earn interest from accretable yield regardless of their status as past due or otherwise not in compliance with their contractual terms. Acquired Loans with deteriorated credit quality which were being accounting for under ASC 310-30 and which were 90 days or more past due totaled $2.5 million and $4.3 million as of September 30, 2018 and December 31, 2017, respectively.
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As of September 30, 2018, the Company had no outstanding commitments 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. Loans are considered troubled debt restructurings (“TDR”) when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be 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 either is granted through an agreement with the customer or is imposed by a court or by 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:
a reduction of the stated interest rate for the remaining original life of the debt,
an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,
a reduction of the face amount or maturity amount of the debt, or
a reduction of accrued interest receivable on the debt.
In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:
whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,
whether the customer has declared or is in the process of declaring bankruptcy,
whether there is substantial doubt about the customer’s ability to continue as a going concern,
whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future, and
whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.
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.
21
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The following table summarizes information pertaining to loans modified as of the periods indicated.
Troubled debt restructurings:
Other consumer
None of the performing troubled debt restructurings as of September 30, 2018 had defaulted subsequent to the restructuring through the date the financial statements were available to be issued.
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:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
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.
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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, as well as instances of a significant widening of thebid-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, 2018, 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 measured for fair value on a recurring basis as of September 30, 2018 and December 31, 2017.
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.
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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 third 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 as reflected in the table below.
Impaired loans
Repossessed assets
The following table shows significant unobservable inputs used in the fair value measurement of Level 3 assets.
Valuation Technique
Unobservable
Inputs
As of September 30, 2018:
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As of December 31, 2017:
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, 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- andoff-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.
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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.
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
Short-term FHLB advances
Long-term FHLB advances
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
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December 31, 2017 through September 30, 2018 and on its results of operations for the three and nine months ended September 30, 2018 and September 30, 2017. 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, 2017. 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 2018, the Company earned $8.3 million, an increase of $4.2 million, or 102.0%, compared to the third quarter of 2017. Diluted earnings per share for the third quarter of 2018 were $0.89, an increase of $0.33, or 58.9%, compared to the third quarter of 2017. The increase in earnings is primarily due to the acquisition of St. Martin Bancshares, Inc. (“SMB”). In addition, net income for the third quarter of 2017 included merger expenses related to the acquisition of SMB totaling $225,000, net of taxes. No merger-related expenses were recorded during the third quarter of 2018.
During the nine months ended September 30, 2018, the Company earned $23.5 million, an increase of $9.9 million, or 73.0%, compared to the nine months ended September 30, 2017. Diluted earnings per share for the nine months ended September 30, 2018 were $2.53, an increase of $0.65, or 34.6%, compared to the nine months ended September 30, 2017. The nine months ended September 30, 2018 and September 30, 2017 included merger expenses related to the acquisition of SMB totaling $1.6 million and $225,000, net of taxes, respectively.
Key components of the Company’s performance during the three and nine months ended September 30, 2018 include:
Assets totaled $2.1 billion as of September 30, 2018, a decrease of $87.6 million, or 3.9%, from December 31, 2017.
Loans as of September 30, 2018 were $1.6 billion, a decrease of $24.8 million, or 1.5%, from December 31, 2017.
Investment securities totaled $269.9 million as of September 30, 2018, an increase of $21.9 million, or 8.8%, from December 31, 2017.
Deposits totaled $1.8 billion as of September 30, 2018, a decrease of $94.9 million, or 5.1%, from December 31, 2017.
Interest income increased $8.4 million, or 47.8%, in the third quarter of 2018 compared to the third quarter of 2017. For the nine months ended September 30, 2018, interest income increased $24.0 million, or 45.7%, compared to the nine months ended September 30, 2017. The increases in 2018 were driven primarily by the addition of the interest-earning assets acquired from SMB.
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Interest expense increased $890,000, or 52.0%, in the third quarter of 2018 compared to the third quarter of 2017. For the nine months ended September 30, 2018, interest expense increased $2.5 million, or 53.2%, compared to the nine months ended September 30, 2017. The increases in 2018 were driven primarily by the addition of the interest-bearing liabilities acquired from SMB.
The provision for loan losses totaled $786,000 for the third quarter of 2018, an increase of $126,000, or 19.1%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, the Company recorded a provision for loan losses of $2.3 million, a $1.2 million, or 108.7%, increase from the provision recorded for the same period in 2017. The Company recorded net loan charge-offs for the third quarter of 2018 of $15,000 and net loan charge-offs for the nine months ended September 30, 2018 of $1.4 million. The Company recorded net loan charge-offs for the third quarter of 2017 of $246,000 and net loan charge-offs for the nine months ended September 30, 2017 of $204,000.
Noninterest income for the third quarter of 2018 increased $1.0 million, or 45.7%, compared to the third quarter of 2017. For the nine months ended September 30, 2018, noninterest income increased $2.9 million, or 39.6%, compared to the nine months ended September 30, 2017. The increase for the comparative quarters resulted primarily from additional service fees and charges, bank card fees, and other income due to the SMB acquisition. The increase in the nine-month comparative periods resulted primarily from additional service fees and charges and bank card fees due to the SMB acquisition, which were partially offset by decreases in gains on the sale of mortgage loans.
Noninterest expense for the third quarter of 2018 increased $4.4 million, or 38.4%, compared to the third quarter of 2017. Noninterest expense for the nine months ended September 30, 2018 increased $14.2 million, or 42.4%, compared to the nine months ended September 30, 2017. Noninterest expense includes merger-related expenses, which totaled $2.0 million (pre-tax) for the nine months ended September 30, 2018 and $247,000 (pre-tax) for the three and nine months ended September 30, 2017. The increases in noninterest expense related primarily to the growth of the Company’s employee base, higher occupancy and data processing costs due to the SMB acquisition.
FINANCIAL CONDITION
Loans, Asset Quality and Allowance for Loan Losses
Loans – Loans outstanding as of September 30, 2018 were $1.6 billion, a decrease of $24.8 million from December 31, 2017. Growth in originated loans of 10.6% (14.2% annualized) during the first nine months of 2018 was offset by reductions in Acquired Loan balances. Organic loan growth resulted primarily from increases in the Company’s commercial real estate loan portfolio.
The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.
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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. Third party property valuations are obtained at the time the asset is repossessed and periodically until the property is liquidated. Repossessed assets are initially recorded at fair value less estimated costs to sell. 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 $250,000 or greater) commercial real estate loans, multi-family residential loans, 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 at the bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans. As of September 30, 2018 and December 31, 2017, loans individually evaluated with impairment, excluding Acquired Loans, amounted to $9.8 million and $3.5 million, respectively. As of September 30, 2018 and December 31, 2017, acquired impaired loans (loans considered to have deteriorated credit quality at the time of acquisition) amounted to $11.0 million and $14.2 million, respectively. As of September 30, 2018 and December 31, 2017, substandard loans, excluding Acquired Loans, amounted to $19.8 million and $27.0 million, respectively. The amount of the allowance for loan losses allocated to substandard loans originated by Home Bank totaled $1.4 million as of September 30, 2018 and $2.0 million as of December 31, 2017. The amount of the allowance for loan losses allocated to Acquired Loans totaled $1.4 million and $504,000, respectively, at such dates. There were no assets classified as doubtful or loss as of September 30, 2018 or December 31, 2017.
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
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“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 analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish 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 performing troubled debt restructurings as of the dates indicated.
Nonaccrual loans(2):
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
Table excludes Acquired Loans, which were being accounted for under ASC310-30 because they continue to earn interest from accretable yield regardless of their status as past due or otherwise not in compliance with their contractual terms. Acquired Loans with deteriorated credit quality, which were being accounted for under ASC 310-30 and which were 90 days or more past due, totaled $2.5 million and $4.3 million as of September 30, 2018 and December 31, 2017, respectively.
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Nonaccrual loans include originated restructured loans placed on nonaccrual totaling $9.0 million and $7.5 million at September 30, 2018 and December 31, 2017, respectively. Acquired restructured loans placed on nonaccrual totaled $868,000 and $353,000 at September 30, 2018 and December 31, 2017, respectively.
The Company recorded net loan charge-offs for the third quarter of 2018 of $15,000 and net loan charge-offs for the nine months ended September 30, 2018 of $1.4 million. The Company recorded net loan charge-offs for the third quarter of 2017 of $246,000 and net loan charge-offs for the nine months ended September 30, 2017 of $204,000.
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 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, 2018 and December 31, 2017, $1.4 million and $504,000, respectively, of our allowance for loan losses was allocated to Acquired Loans.
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.
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The following table presents the activity in the allowance for loan losses during the first nine months of 2018.
Provision charged to operations
Loans charged off
Recoveries on charged off loans
At September 30, 2018, the Company’s ratio of the allowance for loan losses to total loans was 0.96%, compared to 0.89% and 1.09% at December 31, 2017 and September 30, 2017, respectively. Excluding Acquired Loans, the ratio of the allowance for loan losses to total loans was 1.38% at September 30, 2018, compared to 1.52% and 1.40% at December 31, 2017 and September 30, 2017, respectively.
The allowance for loan losses attributable to originated direct energy-related loans totaled 2.50% of the outstanding balance of originated energy-related loans at September 30, 2018, compared to 2.49% and 3.13% at December 31, 2017 and September 30, 2017, respectively.
Investment Securities
The Company’s investment securities portfolio totaled $269.9 million as of September 30, 2018, an increase of $21.9 million, or 8.8%, from December 31, 2017. As of September 30, 2018, the Company had a net unrealized loss on its available for sale investment securities portfolio of $5.8 million, compared to a net unrealized loss of $1.5 million as of December 31, 2017.
The following table summarizes activity in the Company’s investment securities portfolio during the first nine months of 2018.
Purchases
Sales
Principal maturities, prepayments and calls
Amortization of premiums and accretion of discounts
Decrease in market value
Funding Sources
Deposits – Deposits totaled $1.8 billion as of September 30, 2018, a decrease of $94.9 million, or 5.1%, compared to December 31, 2017. Core deposits (i.e. checking, savings and money market accounts) totaled $1.4 billion as of September 30, 2018, a decrease of $54.7 million, or 3.7%, compared to December 31, 2017. Certificates of deposit totaled $348.9 million as of September 30, 2018, a decrease of $40.2 million, or 10.3%, compared to December 31, 2017. To reverse the trend in deposit outflows, management has begun to raise interest rates on deposit accounts and is currently offering several special rates to attract new deposits.
The following table sets forth the composition of the Company’s deposits at the dates indicated.
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Demand deposit
Savings
Money market
NOW
Certificates of deposit
Federal Home Loan Bank Advances – Short-term FHLB advances totaled $41,000 as of September 30, 2018, a decrease of $3.6 million, or 98.9%, compared to $3.6 million as of December 31, 2017. Long-term FHLB advances totaled $59.5 million as of September 30, 2018, a decrease of $8.6 million, or 12.7%, compared to $68.2 million as of December 31, 2017. The decreases in FHLB advances are primarily due to pay-downs on maturing obligations.
Shareholders’ Equity – Shareholders’ equity increased $17.8 million, or 6.4%, from $277.9 million as of December 31, 2017 to $295.7 million as of September 30, 2018, primarily due to earnings during the period.
As of September 30, 2018, the Bank had regulatory capital amounts that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2018 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.
Bank:
Common equity Tier 1 capital (to risk-weighted assets)
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
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, 2018, cash and cash equivalents totaled $61.7 million. At such date, investment securities available for sale totaled $258.9 million.
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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, 2018, certificates of deposit maturing within the next 12 months totaled $207.5 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, 2018, the average balance of outstanding FHLB advances was $64.2 million. As of September 30, 2018, the Company had $59.6 million in total outstanding FHLB advances and had $730.9 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. 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, 2018.
Shift in Interest Rates
(in bps)
% Change in Projected
Net Interest Income
+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 repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads, and the level of success of asset/liability management strategies.
Off-BalanceSheet 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 foron-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, 2018 and December 31, 2017.
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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 2018, the Company earned $8.3 million, an increase of $4.2 million, or 102.0%, compared to the third quarter of 2017. Diluted earnings per share for the third quarter of 2018 were $0.89, an increase of $0.33, or 58.9%, compared to the third quarter of 2017. The increase in earnings is primarily due to the acquisition of SMB. In addition, net income for the third quarter of 2017 included merger expenses related to the acquisition of SMB totaling $225,000, net of taxes. No merger-related expenses were recorded during the third quarter of 2018.
During the nine months ended September 30, 2018, the Company earned $23.5 million, an increase of $9.9 million, or 73.0%, compared to the nine months ended September 30, 2017. Diluted earnings per share for the nine months ended September 30, 2018 were $2.53, an increase of $0.65, or 34.6%, compared to the nine months ended September 30, 2017. The nine months ended September 30, 2018 and September 30, 2017 include merger expenses related to the acquisition of SMB totaling $1.6 million, net of taxes, and $225,000, net of taxes, respectively. The nine months ended September 30, 2017 also includes a net loss totaling $45,000, net of taxes, resulting from a write down on a banking center in the second quarter of 2017 and a gain on the sale of a banking center in the first quarter of 2017.
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 4.13% for the three months ended September 30, 2018 and September 30, 2017, respectively, and 4.46% and 4.20% for the nine months ended September 30, 2018 and September 30, 2017, respectively. The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.74% and 4.29% for the three months ended September 30, 2018 and September 30, 2017, respectively, and was 4.64% and 4.35% for the nine months ended September 30, 2018 and September 30, 2017, respectively.
Net interest income totaled $23.5 million for the three months ended September 30, 2018, an increase of $7.6 million, or 47.3%, compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, net interest income totaled $69.4 million, an increase of $21.5 million, or 45.0%, compared to the nine months ended September 30, 2017. The addition of SMB’s interest-earning assets accounted for the vast majority of the increase in both the three and nine-month periods ended September 30, 2018 over the prior comparable periods.
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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 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 21% for 2018 and 35% for 2017.
Interest-earning assets:
Loans receivable(1)
Originated loans
Acquired loans
Total loans receivable(1)
Investment securities
Taxable
Tax-exempt (TE)
Total investment securities
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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Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process. Acquired Loans were recorded at fair value upon acquisition and accrete interest income over the remaining lives of the respective loans.
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).
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Interest income:
Loans receivable
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, 2018, the Company recorded a provision for loan losses of $786,000, which was 19.1% higher than the $660,000 recorded for the same period in 2017. For the nine months ended September 30, 2018, the provision for loan losses totaled $2.3 million, which was 108.7% higher than the $1.1 million recorded for the same period in 2017. The increase in provision for the nine-month period ended September 30, 2018 over the comparable period in the prior year resulted primarily due to growth in the organic loan portfolio and a $1.2 million increase in net loan charge-offs during the 2018 period, which was primarily driven by two commercial and industrial loan relationships.
The Company recorded net loan charge-offs of $15,000 during the third quarter of 2018, compared to $246,000 of net loan charge-offs in the third quarter of 2017. The Company recorded net loan charge-offs of $1.4 million during the nine months ended September 30, 2018 and net loan charge-offs of $204,000 for the nine months ended September 30, 2017. The increase in net loan charge-offs for the nine months ended September 30, 2018 resulted primarily from two loan relationships identified as problem credits in prior periods.
As of September 30, 2018, the Company’s ratio of allowance for loan losses to total loans was 0.96%, compared to 0.89% and 1.09% at December 31, 2017 and September 30, 2017, respectively. Excluding Acquired Loans, the ratio of the allowance for loan losses to total loans was 1.38% at September 30, 2018, compared to 1.52% and 1.40% at December 31, 2017 and September 30, 2017, respectively. The ratio of nonperforming loans to total assets was 0.98% at September 30, 2018, compared to 1.12% at both December 31, 2017 and September 30, 2017.
Noninterest Income – The Company’s noninterest income was $3.3 million for the quarter ended September 30, 2018, $1.0 million, or 45.7%, higher than the $2.3 million earned for the same period in 2017. The increase for the comparative quarters resulted primarily from additional service fees and charges and bank card fees due to the SMB acquisition (up $582,000 and $392,000, respectively) and an increase of $151,000 in other income, driven primarily by recoveries on the Company’s acquired loan portfolio.
Noninterest income was $10.2 million for the nine months ended September 30, 2018, $2.9 million, or 39.6%, higher than the $7.3 million earned for the same period of 2017. The nine months ended September 30, 2017
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included a net loss of $69,000 resulting from a $449,000 (pre-tax) write down on a closed banking center in Vicksburg, Mississippi and a $380,000 (pre-tax) gain on the sale of a banking center. The increase for the comparative nine-month periods resulted primarily from additional service fees and charges and bank card fees due primarily to the SMB acquisition (up $1.8 million and $1.2 million, respectively), which were partially offset by decreases in gains on the sale of mortgage loans (down $305,000).
Noninterest Expense – The Company’s noninterest expense was $15.7 million for the three months ended September 30, 2018, $4.4 million, or 38.4%, higher than the $11.3 million recorded for the same period in 2017. The increase in noninterest expense is related primarily to the growth of the Company’s employee base, higher occupancy and data processing costs due to the SMB acquisition.
Noninterest expense was $47.6 million for the nine months ended September 30, 2018, $14.2 million, or 42.4%, higher than the $33.4 million for the same period of 2017. As described above, the increase is related primarily to the growth of the Company’s employee base, higher occupancy and data processing costs due to the SMB acquisition. Noninterest expense includes merger-related expenses totaling $2.0 million (pre-tax) for the nine months ended September 30, 2018. In comparison, noninterest expense for the nine months ended September 30, 2017 includes $247,000 (pre-tax) in merger related expenses.
Income Taxes –For the quarters ended September 30, 2018 and September 30, 2017, the Company incurred income tax expense of $2.1 million and $2.2 million, respectively. The Company’s effective tax rate was 20.3% and 34.5% during the third quarters of 2018 and 2017, respectively. For the nine months ended September 30, 2018 and September 30, 2017, the Company incurred income tax expense of $6.1 million and $7.0 million, respectively. The lower effective tax rate recorded in 2018 was the result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act reduced the federal corporate statutory tax rate from 35% to 21%. 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.).
Quantitative and Qualitative Disclosures About Market Risk.
Quantitative and qualitative disclosures about market risk are presented in the Company’s Annual Report on Form10-K filed with the SEC for the year ended December 31, 2017, 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, 2018 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management”.
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 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Legal Proceedings.
Not applicable.
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Risk Factors.
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form10-K for December 31, 2017 filed with the Securities and Exchange Commission.
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, 2018
August 1 – August 31, 2018
September 1 – September 30, 2018
On June 7, 2013, the Company announced the commencement of a stock repurchase program. Under the 2013 plan, the Company was able to repurchase 370,000 shares, or approximately 5% of its common stock outstanding, through open market or privately negotiated transactions. On April 26, 2016, the Company announced a new stock repurchase program. Under the 2016 plan, the Company can repurchase up to 365,000 shares, or approximately 5% of its common stock outstanding at the time of adoption, through open market or privately negotiated transactions.
Defaults Upon Senior Securities.
None.
Mine Safety Disclosures.
Other Information.
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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