Hometrust Bancshares, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended December 31, 2013. Although the request identifies 2013 Q2, the filing is for HomeTrust’s fiscal second quarter of fiscal 2014. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
HomeTrust is a North Carolina-based community bank funded primarily by deposits and focused on residential and commercial real estate lending, consumer loans, commercial lending, and municipal leases. Its 21 offices served western and central North Carolina and Greenville, South Carolina. The July 31, 2013 acquisition of BankGreenville added assets, deposits, loans, and investment securities.
Key financial results
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net interest income | $13.9 | $13.6 | $27.2 | $27.1 |
| Provision for (recovery of) loan losses | ($0.7) | $0.3 | ($3.0) | $1.8 |
| Non-interest income | $2.2 | $2.9 | $4.5 | $5.2 |
| Non-interest expense | $13.3 | $13.4 | $25.2 | $26.8 |
| Net income | $2.9 | $2.3 | $6.2 | $3.4 |
| Diluted earnings per share | $0.15 | $0.11 | $0.32 | $0.17 |
| Net interest margin, fully taxable-equivalent | 3.89% | 3.91% | 3.82% | 3.85% |
- Balance sheet at Dec. 31: Assets were $1.629 billion, up 2.9% from June 30, 2013. Net loans were $1.143 billion; deposits were $1.211 billion; stockholders’ equity was $358.1 million.
- Cash and investments: Cash and cash equivalents were $84.1 million, down from $125.7 million at June 30. Available-for-sale securities rose to $82.7 million from $24.8 million; certificates of deposit at other banks were $152.0 million.
- Cash flow, six months: Operating activities provided $9.2 million and investing activities provided $1.1 million; financing activities used $52.0 million. Cash and cash equivalents declined $41.6 million, mainly reflecting securities purchases, deposit outflows, and $17.1 million of share repurchases.
- Borrowings and liquidity: Other borrowings were $2.2 million, assumed in the BankGreenville acquisition; capital lease obligations were $2.0 million. The Bank reported $272.8 million of additional FHLB borrowing capacity, a $140 million Federal Reserve line, and a $5 million line at another bank; no amounts were outstanding on the latter two lines. Brokered deposits were $10.0 million, or 0.8% of deposits. Certificates of deposit totaling $374.5 million were due within one year.
- Capital: The Bank was categorized as well-capitalized. Its Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 15.59%, 22.32%, and 23.59%, respectively.
Material changes versus comparable periods
- Quarterly net income increased to $2.9 million from $2.3 million, aided by a $0.7 million loan-loss recovery and lower funding costs. Mortgage banking income declined with weaker refinancing activity.
- Six-month net income rose to $6.2 million from $3.4 million. The improvement reflected a $3.0 million loan-loss recovery and $3.1 million less in FHLB prepayment penalties, partly offset by higher income tax expense.
- Six-month net interest income was nearly flat. Lower loan interest income was largely offset by reduced interest expense; the fully taxable-equivalent margin edged down three basis points year over year.
- Nonperforming assets fell to $66.6 million, or 4.09% of assets, from $80.3 million, or 5.07%, at June 30, 2013. Nonaccruing loans were $56.7 million and REO was $9.9 million.
- The allowance for loan losses declined to $27.1 million, or 2.32% of loans, from $32.1 million, or 2.75%, at June 30. Net charge-offs were $1.9 million for the six months, versus $2.7 million in the prior-year period. Management stated the allowance was adequate, while noting estimates could change.
- Loan balances excluding BankGreenville would have declined about $37 million; total loan originations fell 34.7% year over year to $149.5 million for the six months. Mortgage-loan originations held for sale fell 64.7% to $45.0 million.
- The company repurchased 1,041,245 shares under its August 2013 plan for $17.1 million, an average $16.38 per share; the plan was fully used by December 31. A new authorization for up to 989,183 shares was announced January 31, 2014; no shares had been purchased under it by February 6.
Outlook, risks, contingencies, and unusual items
- Management expected further modest declines in deposit costs as higher-rate certificates matured, but reported modest loan demand and no specific earnings guidance. It noted that mortgage refinancing had weakened following higher mortgage rates.
- Management warned that adjustable-rate loans with interest-rate floors could constrain net interest income in a rising-rate environment until rates exceed those floors. Loans with floors totaled about $397.9 million; $223.5 million would begin repricing only after prime rates rose at least 200 basis points.
- Credit risks include weak local economic conditions, real estate collateral values, construction and development exposure, borrower performance, and possible regulatory changes to reserves or capital. The filing also identifies interest-rate, deposit-retention, operational, cyber, acquisition-integration, and litigation risks.
- A $0.962 million nonrecurring tax charge resulted from reductions in North Carolina corporate tax rates. The company also reported $1.049 million of BankGreenville-related acquisition costs, including $0.226 million in the six-month income statement; further integration costs and potential cost savings were not reflected in its pro forma figures.
- BankGreenville consideration included approximately $7.8 million in cash, repayment of $1.05 million of preferred stock, and estimated contingent consideration of $0.68 million. Up to about $0.883 million additional cash consideration may be payable based on performance of a designated loan pool. Preliminary purchase accounting recorded $2.8 million of goodwill.
- On January 23, 2014, HomeTrust agreed to acquire Jefferson Bancshares for approximately $51.2 million, subject to approvals and other closing conditions. Jefferson shareholders are to receive $4.00 in cash and $4.00 in HomeTrust stock per share; the transaction was anticipated to close in the second calendar quarter of 2014.
- A pending lawsuit alleges failure to detect a customer’s Ponzi scheme and seeks $12.5 million in compensatory damages plus punitive or treble damages. HomeTrust disputes the claims and intends to defend itself; management judged a material financial effect unlikely, but the outcome was uncertain.
Important facts for investors to verify
- Whether credit-quality improvements, lower charge-offs, and the loan-loss recovery are sustainable, and how reserves compare with nonperforming and impaired loans.
- How BankGreenville integration costs, contingent consideration, acquired-loan performance, and anticipated savings develop.
- Liquidity and funding trends, including the large volume of certificates of deposit due within one year, deposit retention, and the effects of share repurchases.
- Progress and final terms of the Jefferson merger, including required approvals, stock issuance, integration costs, and capital implications.
- The status and potential exposure of the Ponzi-scheme litigation, and the realization of deferred tax assets after the state tax-rate reductions.