Hometrust Bancshares, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014 (not calendar 2013 Q4). Consolidated results include the BankGreenville acquisition from July 31, 2013 and Jefferson Bancshares from May 31, 2014; acquisition timing affects comparability. The company is a community bank headquartered in Asheville, North Carolina, operating across North Carolina, South Carolina and East Tennessee. Financial statements were audited, with an unqualified opinion.
Key financial results and condition
| Metric | FY2014 / June 30, 2014 | Comparable period |
|---|---|---|
| Net income | $10.3 million; $0.54 per diluted share | $9.1 million; $0.45 per diluted share in FY2013 |
| Net interest income | $54.8 million | $53.1 million in FY2013 |
| Net interest margin, tax-equivalent | 3.79% | 3.81% in FY2013 |
| Total assets | $2.07 billion | $1.58 billion |
| Net loans | $1.47 billion | $1.13 billion |
| Deposits | $1.58 billion | $1.15 billion |
| Stockholders’ equity | $377.2 million | $367.5 million |
| Cash and cash equivalents | $45.8 million | $125.7 million |
| Other borrowings | $50.0 million, all FHLB advances | None at FY2013 year-end |
| Cash flow | $23.8 million operating cash flow; cash declined $79.9 million | $23.9 million operating cash flow in FY2013 |
- Earnings drivers: Net interest income rose 3.2%, aided by lower funding costs and higher securities income, partly offset by lower loan yields. The $6.3 million loan-loss recovery (versus a $1.1 million provision in FY2013) was the principal driver of the increase in net income. Merger costs were $2.7 million; management reported FY2014 net income before merger costs, net of tax, of $12.2 million.
- Expenses and other income: Noninterest expense increased 7.1% to $55.0 million, including acquisition-related costs and higher compensation. Noninterest income declined to $8.7 million from $10.4 million, mainly as mortgage banking income fell 37% amid lower refinancing activity. Adjusted efficiency ratio was 75.37%, versus 67.63% in FY2013.
- Loan portfolio and credit: Total loans before deferred fees and allowance increased 28.4% to $1.50 billion, primarily from Jefferson. Commercial real estate represented 25.2% of loans; commercial and construction lending also increased through acquisitions. Nonperforming assets were $62.7 million, or 3.02% of assets, versus $80.3 million, or 5.07%, a year earlier. Nonaccrual loans declined to $47.0 million; loans delinquent 30 days or more totaled $27.9 million.
- Reserves: Allowance for loan losses was $23.4 million, 1.56% of loans and 49.8% of nonaccrual loans. Excluding acquired loans recorded at fair value with credit discounts, the allowance was 2.08% of loans. Net charge-offs were $2.3 million, or 0.19% of average loans, compared with $4.1 million and 0.34% in FY2013.
- Funding and liquidity: Core, non-certificate deposits were 59.9% of deposits. Certificates of deposit totaling $451.1 million matured within one year. Available borrowing capacity included $253.4 million at the FHLB, a $140.2 million Federal Reserve line and a $5.0 million bank line; none of the latter two lines was drawn. Cash declined primarily due to securities purchases, acquisition consideration and share repurchases. The filing describes liquidity as adequate but does not provide a single consolidated liquidity ratio.
- Capital: HomeTrust Bank was classified as well capitalized. At June 30, 2014, its leverage, Tier 1 risk-based and total risk-based capital ratios were 13.37%, 18.29% and 19.54%, respectively. Management’s pro forma analysis stated that the company and Bank would meet the new capital rules, including the full capital conservation buffer, if effective at year-end.
Material changes, outlook and risks
- Acquisitions materially expanded the balance sheet: BankGreenville closed in July 2013 and Jefferson in May 2014. Jefferson contributed approximately $329 million of loans and $377 million of deposits at recorded acquisition values. Management expected integration costs to continue in FY2015 and anticipated further cost savings, but provided no quantified earnings guidance.
- After year-end, HomeTrust completed the Bank of Commerce acquisition on July 31, 2014. It also received approval to acquire ten Bank of America branches, expected to add approximately $504 million of deposits, with closing anticipated November 17, 2014 subject to customary conditions. On August 25, 2014, the Bank converted to a national bank charter and the parent became a bank holding company.
- Management’s strategy emphasizes organic growth, further acquisitions, commercial and industrial lending, indirect auto lending, core-deposit growth and reducing problem assets. Management noted modest, uneven economic recovery and continued pressure from low interest rates and subdued loan demand. No formal numerical outlook was provided.
- Principal risks include real-estate and borrower credit quality, commercial real-estate and construction exposures, acquisition integration and execution, deposit retention and repricing, interest-rate sensitivity, and regulatory changes. The filing identifies $577.1 million of loans with interest-rate floors; management cautions that rising rates could initially pressure earnings. Its interest-rate model estimated a 14% decline in present-value equity under an immediate 400-basis-point increase, subject to modeling limitations.
- Other notable matters: a lawsuit seeks $12.5 million in compensatory damages plus punitive or treble damages; management considers it without merit and does not expect a material effect, but outcome is uncertain. The company recorded $58.4 million of net deferred tax assets, all disallowed for regulatory capital purposes, and disclosed that future earnings or credit deterioration could affect realization. No common dividends were declared in FY2014; the company repurchased approximately $29.7 million of stock.
Most important facts for investors to verify
- Whether credit improvement persists and acquired-loan fair-value discounts and the reduced allowance remain sufficient as the portfolio expands.
- Whether Jefferson and BankGreenville integration delivers expected savings, and the final economics and execution of the Bank of Commerce and ten-branch transactions.
- Deposit renewal and funding costs as $451.1 million of certificates mature within one year, alongside the effects of changing rates on the margin and loan floors.
- Whether the $58.4 million deferred tax asset is realizable and how the pending litigation develops.
- The company’s capital and liquidity position after acquisitions, repurchases and implementation of new regulatory capital requirements.