HBCP

Business Context and Reporting Period

Company: HOME BANCORP, INC. (Home Bancorp)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2010
Key Event: On March 12, 2010, Home Bancorp's subsidiary, Home Bank, acquired assets and assumed liabilities of Statewide Bank in an FDIC-assisted transaction. This acquisition significantly expanded the company's footprint to 18 branches and added approximately $188 million in assets, including $110.4 million in loans and $206.9 million in deposits.

Key Financial Metrics

Material Changes vs. Prior Period

• Balance Sheet Expansion: Total assets increased 35.2% year-over-year and 35.2% from the prior year-end, driven primarily by the Statewide Bank acquisition. Loans grew 35.2% and deposits grew 44.4% from December 31, 2009.
• Profitability: Net income for the quarter increased 2.1% compared to Q2 2009. However, net income for the six-month period decreased 26.8% compared to the same period in 2009, largely due to higher noninterest expenses associated with the acquisition and a new headquarters location.
• Asset Quality: Nonperforming assets (including covered assets) totaled $23.97 million (3.38% of total assets) at June 30, 2010, compared to $1.70 million (0.32% of total assets) at December 31, 2009. This increase is primarily due to the inclusion of acquired nonperforming assets from Statewide Bank. Excluding covered assets, nonperforming assets were $2.11 million (0.30% of total assets).
• Investment Portfolio: The company recorded an other-than-temporary impairment (OTTI) charge of $141,000 in Q2 2010 related to non-agency mortgage-backed securities.

Guidance, Outlook, and Risks

• Acquisition Integration: Management expects to finalize fixed asset purchase and lease assumption decisions regarding the Statewide acquisition in the third quarter of 2010. The company anticipates that a significant portion of maturing certificates of deposit will be redeposited.
• Capital Management: The company completed a stock repurchase program in June 2010, acquiring 446,344 shares. A new program to repurchase up to 5% of outstanding shares was approved in July 2010. Regulatory capital ratios remain well in excess of requirements (Tier 1 risk-based capital at 21.58%).
• FDIC Loss Sharing: The company holds a $34.7 million FDIC loss sharing receivable. Risks include the potential for the estimated receivable to be inadequate if assumptions regarding the acquired loan portfolio prove incorrect, or if the company fails to comply with the terms of the loss sharing agreements.
• Market Risk: The company is exposed to interest rate risk. Modeling suggests a 200 basis point increase in rates would increase projected net interest income by 4.9%, while a 100 basis point decrease would reduce it by 2.6%.
• Oil Spill Exposure: Direct exposure to borrowers with significant operations linked to deep-water drilling in the Gulf of Mexico was $5.6 million (1.2% of total loans) as of June 30, 2010. All such loans are currently performing.

Investor Verification Checklist

• FDIC Loss Sharing Adequacy: Verify the assumptions used to calculate the $34.7 million FDIC loss sharing receivable and the potential impact if actual losses on the acquired portfolio exceed estimates.
• Nonperforming Asset Trends: Monitor the performance of the acquired "Covered Loans" versus "Noncovered Loans" to assess the true organic asset quality of the combined entity.
• Deposit Stability: Track the retention rate of the acquired deposits, particularly the out-of-state brokered deposits that were re-priced, to ensure funding stability.
• Expense Run Rate: Evaluate whether the elevated noninterest expenses (up 35% year-over-year) are temporary integration costs or a permanent increase in the cost structure.
• Investment Portfolio Quality: Review the remaining non-agency mortgage-backed securities for further potential impairment charges given the $141,000 OTTI charge already recognized.