Business context and reporting period
HomeTrust Bancshares, Inc. is a community banking company operating primarily in western and central North Carolina and Greenville, South Carolina. This Form 10-Q covers the three months ended September 30, 2013—fiscal first quarter 2014, not calendar first quarter 2013. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
The quarter included the July 31, 2013 acquisition of BankGreenville Financial Corporation. The interim financial statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Quarter / period-end | Comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $15.6 million | $15.9 million in prior-year quarter |
| Net interest income | $13.3 million | $13.5 million; down 1.6% |
| Net income / diluted EPS | $3.3 million / $0.17 | $1.2 million / $0.06 |
| Net interest margin, fully taxable-equivalent | 3.74% | 3.79% in prior-year quarter |
| Operating cash flow | $5.9 million provided | $8.7 million used in prior-year quarter |
| Cash and cash equivalents | $92.9 million | $125.7 million at June 30, 2013 |
| Total assets / deposits | $1.67 billion / $1.24 billion | $1.58 billion / $1.15 billion at June 30, 2013 |
| Loans, net of allowance | $1.17 billion | $1.13 billion at June 30, 2013 |
| Allowance for loan losses | $29.2 million; 2.43% of total loans | $32.1 million; 2.75% at June 30, 2013 |
| Borrowings / stockholders’ equity | $2.2 million / $368.1 million | No other borrowings / equity of $367.5 million at June 30, 2013 |
The company recorded a $2.3 million recovery of loan losses, versus a $1.5 million provision a year earlier. Net charge-offs were $0.6 million. Nonaccruing loans were $68.4 million, or 5.68% of loans; impaired loans totaled $88.9 million. REO was $14.5 million. The Bank was reported as “well-capitalized”: Tier 1 capital to adjusted assets was 15.04%, and total risk-based capital was 22.91%.
Material changes versus comparable periods
- Net income rose to $3.3 million from $1.2 million, primarily due to the loan-loss recovery and lower noninterest expense. The recovery and reduced REO costs materially affect year-over-year comparability.
- Net interest income fell $0.2 million; the taxable-equivalent margin declined five basis points. Lower loan yields and balances outweighed reduced funding costs.
- Noninterest expense declined 11.3% to $11.9 million, including lower REO-related expense and no repeat of the prior-year $1.6 million FHLB prepayment penalty. Salaries and benefits increased 13.4%, partly from the acquisition and equity compensation.
- Total assets grew 5.7% from June 30, 2013, mainly from the BankGreenville acquisition. It added $101.1 million in assets, $94.4 million in liabilities, and $2.8 million in goodwill. The preliminary purchase accounting remains subject to refinement.
- Excluding acquired BankGreenville loans, net loans would have fallen $12.4 million. Loan originations declined 29.3% year over year to $78.8 million. The company attributed softer demand partly to weak borrower demand and higher mortgage rates.
- Cash decreased $32.8 million, principally as the company purchased $41.8 million of securities. Securities available for sale increased to $97.9 million from $24.8 million at June 30.
- The company repurchased 234,356 shares for $3.6 million at an average $16.51 per share; 806,889 shares remained authorized under the announced repurchase plan at quarter-end.
Outlook, risks, contingencies and unusual items
- Management described economic recovery in its markets as modest and uneven, with continued stress possible. It expects modest further deposit-cost reductions as higher-rate certificates mature; no quantitative earnings guidance was provided.
- Credit risks include elevated delinquencies, nonaccruals and classified loans, real-estate collateral exposure, and uncertainty in allowance estimates. Management considered the allowance adequate, but regulators may require adjustments. Delinquent loans increased from June 30, partly due to the acquisition.
- Management noted that $408 million of loans had interest-rate floors averaging 4.48%; many would not begin repricing upward until market rates rise. The company also cited interest-rate, loan-demand, deposit-retention, regulatory, technology, integration and operating-cost risks.
- Acquisition-related costs were reported as $0.744 million net of tax, including $0.090 million in the quarter’s income statement. Integration and systems-conversion costs were expected during fiscal 2014; additional cost savings were anticipated but not quantified.
- Income tax expense was $2.7 million, a 44.5% effective rate. It included a nonrecurring $0.962 million charge from reductions in North Carolina corporate tax rates and their effect on deferred tax assets.
- A pending lawsuit alleges failure to detect a customer’s Ponzi scheme and seeks $12.5 million in compensatory damages plus potential punitive or treble damages. The company considers the claims without merit and does not expect a material effect, but counsel could not assess the likely outcome while the case remained in discovery.
- Available liquidity included $237.2 million of additional FHLB borrowing capacity, a $141.5 million Federal Reserve line and a $5.0 million bank line; none of the latter two lines was drawn. Certificates of deposit of $386.3 million were scheduled to mature within one year. Loan commitments and unused lines totaled approximately $206.3 million.
Important facts for investors to verify
- Review the allowance reduction and recovery against continuing credit exposures: nonaccruing loans, impaired loans, delinquencies, REO and acquired problem assets.
- Check the final BankGreenville purchase accounting, contingent consideration (potentially up to approximately $0.883 million), integration costs and realization of expected savings.
- Assess whether weaker organic loan production and refinancing activity, together with margin pressure and rate-sensitive loan floors, persist.
- Monitor deposit retention and repricing, near-term certificate maturities, available borrowing capacity and the company’s liquidity after securities purchases and repurchases.
- Track the deferred-tax impact of state rate changes and developments in the pending litigation; neither the final tax effects nor litigation outcome is certain.