Hometrust Bancshares, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2014, HomeTrust’s fiscal third quarter. The request metadata says “2013 Q3,” but the filing itself is for 2014 Q3. Dollar amounts below are in millions unless noted.
Business context and financial results
HomeTrust is a community bank headquartered in Asheville, North Carolina, serving western and central North Carolina and Greenville, South Carolina. Its principal activities are deposit-taking and lending, including residential and commercial real estate loans and municipal leases. The July 2013 acquisition of BankGreenville contributed to reported balance-sheet growth.
| Metric | Three months ended Mar. 31, 2014 | Three months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2013 |
|---|---|---|---|---|
| Net interest income | $13.1 | $13.0 | $40.3 | $40.1 |
| Provision for (recovery of) loan losses | ($1.8) | $0.5 | ($4.8) | $2.3 |
| Non-interest income | $2.0 | $2.6 | $6.5 | $7.8 |
| Non-interest expense | $13.4 | $12.1 | $38.6 | $38.8 |
| Net income | $2.6 | $2.6 | $8.8 | $6.0 |
| Diluted earnings per share | $0.14 | $0.13 | $0.46 | $0.30 |
| Tax-equivalent net interest margin | 3.75% | 3.78% | 3.79% | 3.83% |
At March 31, 2014, total assets were $1.63 billion, net loans $1.14 billion, deposits $1.21 billion, stockholders’ equity $358.4 million, and other borrowings $2.2 million. The allowance for loan losses was $25.3 million, or 2.16% of loans. Net charge-offs were $2.0 million for the nine-month period, down from $4.4 million a year earlier.
Operating cash flow was $21.0 million for the nine months. Cash and cash equivalents fell $42.3 million to $83.4 million, mainly as the company purchased securities and repurchased stock. Additional liquidity included $159.7 million of insured certificates of deposit at other banks, $89.9 million of available-for-sale securities, and stated borrowing capacity of $277.4 million at the FHLB, $139.5 million at the Federal Reserve, and $5.0 million at another bank. The Bank reported regulatory capital ratios above “well-capitalized” thresholds, including a 14.54% Tier 1 leverage ratio and 22.35% total risk-based capital ratio.
Material changes versus comparable periods
- Nine-month net income rose to $8.8 million from $6.0 million, principally reflecting a $4.8 million loan-loss recovery versus a $2.3 million provision in the prior period. Quarterly net income was essentially unchanged.
- Credit metrics improved: nonperforming assets fell to $63.6 million, or 3.90% of assets, from $80.3 million, or 5.07%, at June 30, 2013. Nonaccruing loans declined to $54.4 million from $68.6 million, and classified assets fell to $96.7 million from $117.6 million.
- Net interest income edged higher, but interest income declined as loan balances and yields fell; lower deposit and borrowing costs largely offset this. Tax-equivalent net interest margin narrowed 4 basis points year over year for the nine-month period.
- Non-interest income fell, mainly because rising mortgage rates reduced refinancing activity and mortgage banking revenue. Nine-month mortgage banking income and fees declined 38.4% to $2.4 million.
- Assets rose 3.1% from June 30, 2013, largely due to BankGreenville. Deposits increased 4.9% on the same comparison, including $89.1 million acquired; excluding the acquisition, certificates of deposit declined as the company managed down higher-cost funding.
- Stockholders’ equity decreased to $358.4 million, primarily reflecting $20.5 million of share repurchases, partly offset by retained earnings growth.
Outlook, management commentary, risks and unusual items
- Management described loan demand as modest and refinancing activity as weaker, and expected additional modest reductions in deposit costs as certificates mature. No specific earnings or financial guidance was provided.
- Management attributed lower credit losses to improving borrower performance, lower charge-offs, and fewer classified and nonperforming loans, while cautioning that economic weakness, collateral values, and the allowance estimate remain uncertain. About $24.4 million, or 44.8%, of nonaccruing loans were current on payments.
- The company completed the BankGreenville acquisition on July 31, 2013. It recorded $2.8 million of goodwill and $530,000 of core deposit intangibles; fair values remained subject to refinement. Management expected integration costs during fiscal 2014 and anticipated further cost savings, which were not reflected in acquisition pro forma results.
- Two acquisitions were pending: Jefferson Bancshares, with approximately $51.2 million of consideration, was expected to close in calendar Q2 2014; Bank of Commerce, with approximately $10.1 million cash consideration plus redemption of $3.2 million of preferred stock, was expected to close in calendar Q3 2014. Both depended on customary approvals and conditions. A Jefferson-related class-action suit sought to enjoin that merger; defendants disputed the claims.
- Other notable risks include a pending lawsuit alleging failure to detect a customer’s Ponzi scheme, potential credit deterioration in real estate and commercial lending, interest-rate sensitivity (including $380.1 million of loans with rate floors), deposit retention, acquisition integration, regulatory requirements, and litigation exposure. Management said it did not expect the Ponzi-scheme litigation to materially affect results, while noting the outcome could not be assured.
- The company recorded $449,000 of merger-related expense in the quarter and $711,000 for the nine months. Nine-month income tax expense included a $962,000 nonrecurring charge related to North Carolina tax-rate reductions. Disclosure controls were judged effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether credit improvement persists and whether the $25.3 million allowance adequately covers impaired, nonaccruing, and classified loans; review collateral values and the $24.4 million of nonaccruing loans current on payments.
- How much of reported earnings depends on loan-loss recoveries, and whether core revenue and net interest margin can withstand lower loan yields and rate-floor effects.
- Liquidity and funding trends, including the $83.4 million cash balance, $364.6 million of certificates maturing within one year, and $217.0 million of stated loan commitments and unused lines.
- Completion, final terms, integration costs, expected savings, and capital impact of the Jefferson and Bank of Commerce transactions, including the Jefferson litigation.
- Share repurchase pace and effect on capital: $20.5 million was spent in the nine months, while 216,035 shares had been bought under the February 2014 authorization by March 31.
- Potential outcomes of the $12.5 million compensatory-damages claim and other litigation, and any resulting financial exposure.