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HBCP > SEC Filings for HBCP > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for HOME BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HOME BANCORP, INC.


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The purpose of this discussion and analysis is to focus on significant changes in the financial condition of Home Bancorp, Inc. and its subsidiary, Home Bank, from December 31, 2011 to September 30, 2012 and on its results of operations for the three and nine months ended September 30, 2012 and September 30, 2011. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the financial statements and related notes appearing in Item 1.

Forward-Looking Statements

To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company or Bank, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management's current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as "plan", "believe", "expect", "intend", "anticipate", "estimate", "project" or similar expressions, or by future or conditional terms such as "will", "would", "should", "could", "may", "likely", "probably", or "possibly". The Company's or the Bank's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties. Factors that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, the risk factors described under the heading "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities Exchange Commission ("SEC") for the year ended December 31, 2011. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

EXECUTIVE OVERVIEW

During the third quarter of 2012, the Company earned $3.1 million, an increase of $2.1 million, or 230.6%, compared to the third quarter of 2011. Third quarter 2011 results include $1.4 million of pre-tax expenses related to the acquisition of GS Financial Corp. ("GSFC"). Excluding those merger-related expenses, net income for the third quarter of 2012 increased $1.2 million, or 62.4%, compared to the third quarter of 2011. Diluted earnings per share for the third quarter of 2012 were $0.42, an increase of $0.29, or 223.1%, compared to the third quarter of 2011. Excluding third quarter 2011 merger-related expenses, diluted earnings per share for the third quarter of 2012 increased $0.16, or 61.5%, compared to the third quarter of 2011. During the nine months ended September 30, 2012, the Company earned $6.9 million, an increase $3.9 million, or 130.0%, compared to the nine months ended September 30, 2011. 2011 results included $1.8 million of pre-tax expenses related to the acquisition of GSFC. Excluding those merger-related expenses, net income for the nine months of 2012 increased $2.7 million, or 63.6% compared to the nine months in 2011. Diluted earnings per share for the nine months ended September 30, 2012 were $0.95, an increase of $0.54, or 131.7%, compared to the nine months ended September 30, 2011. Excluding merger-related expenses for the nine months in 2011, diluted earnings per share for the nine months of 2012 increased $0.37, or 63.8%, compared to the third quarter of 2011.

Key components of the Company's performance during the three and nine months ended September 30, 2012 are summarized below.

Loans as of September 30, 2012 were $670.7 million, an increase of $4.3 million, or 0.6%, from December 31, 2011. The increase in loans was primarily driven by commercial real estate loans, which increased $41.7 million. This increase was partially offset by decreases in construction and land (down $15.7 million), one- to four-family first mortgage (down $8.1 million), commercial and industrial (down $12.2 million) and home equity (down $3.9 million) loans. As of September 30, 2012, Covered Loans totaled $49.5 million, a decrease of $11.6 million, or 18.9%, from December 31, 2011.

Core deposits (i.e., checking, savings, and money market accounts) grew for the thirteenth consecutive quarter, increasing $75.1 million, or 16.8%, from December 31, 2011. Core deposits totaled $521.1 million as of September 30, 2012. Total customer deposits as of September 30, 2012 were $784.9 million, an increase of $54.2 million, or 7.4%, from December 31, 2011.

Interest income increased $1.3 million, or 12.3%, in the third quarter of 2012 compared to the third quarter of 2011. This increase related primarily to organic loan growth and an increase in the yield earned on Covered Loans, which were partially offset by lower yields on interest-earning assets. For the nine months ended September 30, 2012, interest income increased $7.6 million, or 27.9%, compared to the nine months ended September 30, 2011. The increases related primarily to the acquisition of the GSFC loan portfolio in July 2011 as well as the factors noted for the quarterly increase.

Interest expense decreased $197,000, or 14.0%, for the third quarter of 2012 compared to the third quarter of 2011. For the nine months ended September 30, 2012, interest expense decreased $49,000, or 1.3%, compared to the nine months ended September 30, 2011. The decreases were primarily the result of reduced market rates and changes in the composition of interest-bearing liabilities, partially offset by higher average balances of interest-bearing liabilities.

The provision for loan losses totaled $56,000 for the third quarter of 2012, a decrease of $470,000, or 89.4%, compared to the third quarter of 2011. The decrease was primarily the result of decrease in loan balances and no additional deterioration in nonperforming loans. For the nine months ended September 30, 2012, the provision for loan losses totaled $1.9 million, an increase of $1.0 million, or 116.0%, compared to the nine months ended September 30, 2011. The elevated level of provision in the nine month comparative resulted primarily from a $1.7 million partial charge-off on a $5.4 million commercial real estate loan which was transferred into repossessed assets during the third quarter of 2012. As of September 30, 2012, the Company's ratio of allowance for loan losses to total loans was 0.73%, compared to 0.77% at December 31, 2011. Excluding acquired loans, the ratio of the allowance for loan losses to total loans was 1.01% at September 30, 2012, compared to 1.14% at December 31, 2011.


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Net charge-offs for the first nine months of 2012 and 2011 were $2.1 million and $282,000, respectively. The increase in net charge-offs during 2012 resulted primarily from a $1.7 million partial charge-off on the commercial real estate loan mentioned above.

Noninterest income for the third quarter of 2012 increased $488,000, or 30.5%, compared to the third quarter of 2011. This increase resulted primarily from higher gains on the sale of mortgage loans (up $487,000) and gains on the sale of securities (up $163,000), which were partially offset by decreases in discount accretion on the FDIC loss sharing receivable, service fees and charges and bank card fees. For the nine months ended September 30, 2012, noninterest income increased $764,000, or 15.5%, compared to the nine months ended September 30, 2011. This increase resulted primarily from higher gains on the sale of mortgage loans (up $1 million) and gains on the sale of securities (up $388,000), which were partially offset by decreases in discount accretion of the FDIC loss sharing receivable and the absence of a payment received in the fiscal 2011 period upon the settlement of certain litigation.

Noninterest expense for the third quarter of 2012 decreased $793,000, or 8.6%, compared to the third quarter of 2011. Noninterest expense for the third quarter of 2011 included $1.4 million of expenses related to the acquisition of GSFC. Excluding merger-related expenses, noninterest expense for the third quarter of 2012 increased $655,000, or 8.5%, compared to the third quarter of 2011. The increase resulted primarily from higher compensation and benefits (up $598,000) and expenses related to foreclosed assets as a result of resolution costs related to NPAs acquired from GSFC (up $173,000). For the nine months ended September 30, 2012, noninterest expense increased $1.5 million, or 6.8%, compared to the nine months ended September 30, 2011. Noninterest expense for the nine months in 2011 included $1.8 million of expenses related to the acquisition of GSFC. Excluding merger-related expenses, noninterest expense for the nine months of 2012 increased $3.4 million, or 16.2%, compared to the same period in 2011. The increase was primarily due to higher compensation and benefits, occupancy, data processing and communications and foreclosed assets expenses related to the GSFC acquisition.

FINANCIAL CONDITION

Loans, Asset Quality and Allowance for Loan Losses

Loans - Loans, totaled $670.7 million as of September 30, 2012, an increase of $4.3 million, or 0.6%, from December 31, 2011. The increase in loans was primarily driven by commercial real estate loans, which increased $41.7 million. This increase was partially offset by decreases in construction and land (down $15.7 million), one- to four-family first mortgage (down $8.1 million), commercial and industrial (down $12.2 million) and home equity (down $3.9 million) loans. Covered Loans totaled $49.5 million as of September 30, 2012, a decrease of $11.6 million, or 18.9%, compared to December 31, 2011. The decrease in the Covered Loan portfolio was primarily the result of principal repayments.


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The following table summarizes the composition of the Company's loan portfolio (including loans covered by loss sharing agreements) as of the dates indicated.

                                        September 30,         December 31,            Increase/(Decrease)
(dollars in thousands)                      2012                  2011              Amount           Percent
Real estate loans:
One- to four-family first mortgage     $       174,694       $      182,817       $    (8,123 )          (4.4 )%
Home equity loans and lines                     39,785               43,665            (3,880 )          (8.9 )
Commercial real estate                         268,672              226,999            41,673            18.4
Construction and land                           63,320               78,993           (15,673 )         (19.8 )
Multi-family residential                        19,729               20,125              (396 )          (2.0 )

Total real estate loans                        566,200              552,599            13,601             2.5

Other loans:
Commercial and industrial                       70,770               82,981           (12,211 )         (14.7 )
Consumer                                        33,688               30,791             2,897             9.4

Total other loans                              104,458              113,772            (9,314 )          (8.2 )

Total loans                            $       670,658       $      666,371       $     4,287             0.6 %

Asset Quality - One of management's key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as "special mention," classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower's financial condition and payment record demonstrate an ability to service the debt.

Repossessed assets which are acquired as a result of foreclosure are classified as repossessed assets until sold. Third party property valuations are obtained at the time the asset is repossessed and periodically until the property is liquidated. Repossessed assets are recorded at the lesser of the balance of the loan or fair value less estimated selling costs, at the date acquired or upon receiving new property valuations. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of repossessed assets are charged to operations, as incurred.

An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger (i.e., loans with balances of $100,000 or greater) commercial real estate, multi-family residential, construction and land loans and commercial and industrial loans are individually evaluated for impairment. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer. The Company typically orders an "as is" valuation for collateral property if the loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans. As of September 30, 2012 and


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December 31, 2011, loans individually evaluated for impairment, excluding Covered Loans, amounted to $12.8 million and $11.8 million, respectively. The impaired loans include loans acquired from GSFC, which totaled $5.7 million and $5.4 million at September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012 and December 31, 2011, substandard loans, excluding Covered Loans, amounted to $21.2 million and $15.0 million, respectively. The increase in substandard loans for 2012 includes $6.8 million relating to the former GSFC portfolio. The amount of the allowance for loan losses allocated to impaired or substandard loans, excluding acquired loans, totaled $157,000 and $478,000 as of September 30, 2012 and December 31, 2011, respectively. There were no assets classified as doubtful or loss as of September 30, 2012 and December 31, 2011.

Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable as of each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of allowance for loan losses may become necessary.

Nonperforming assets ("NPAs") defined as nonaccrual loans, accruing loans past due 90 days or more and foreclosed assets, excluding Covered Assets, amounted to $17.9 million, or 1.9% of total assets, as of September 30, 2012, compared to $13.9 million, or 1.6% of total assets, as of December 31, 2011. The increase in NPAs relates primarily to a $3.2 million commercial real estate loan, net of write down, mentioned previously. Total NPAs, including Covered Assets, amounted to $30.2 million, or 3.1% of total assets as of September 30, 2012, compared to $30.4 million, or 3.2% of total assets as of December 31, 2011.

Real estate, or other collateral, which is acquired as a result of foreclosure is classified as a foreclosed asset until sold. Foreclosed assets are recorded at the lesser of the balance of the loan or fair value less estimated selling costs, at the date acquired or upon receiving new property valuations. Holding costs are charged to expense. Gains and losses on the sale of real estate owned are charged to operations, as incurred.


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The following table sets forth the composition of the Company's NPAs and troubled debt restructurings as of the dates indicated.

(dollars in thousands)                       September 30, 2012(1)             December 31, 2011(2)
Nonaccrual loans:
Real estate loans:
One- to four-family first mortgage           $                7,053           $                8,526
Home equity loans and lines                                     292                              857
Commercial real estate                                        7,438                            6,570
Construction and land                                         3,662                            2,624
Multi-family residential                                      1,327                            1,321
Other loans:
Commercial and industrial                                     1,856                            1,382
Consumer                                                         86                              187

Total nonaccrual loans                                       21,714                           21,467
Accruing loans 90 days or more past
due                                                              -                                -

Total nonperforming loans                                    21,714                           21,467
Foreclosed assets                                             8,443                            8,964

Total nonperforming assets                                   30,157                           30,431
Performing troubled debt
restructurings                                                1,491                              598

Total nonperforming assets and
troubled debt restructurings                 $               31,648           $               31,029

Nonperforming loans to total loans                             3.24 %                           3.22 %
Nonperforming loans to total assets                            2.23 %                           2.23 %
Nonperforming assets to total assets                           3.10 %                           3.16 %

(1) Includes $12.9 million in Covered Assets acquired from Statewide and $11.2 million of assets acquired from GSFC. Excluding acquired loans and assets, ratios for nonperforming loans to total loans, nonperforming loans to total assets and nonperforming assets to total assets were 0.55%, 0.34% and 0.86%, respectively, at September 30, 2012.

(2) Includes $16.6 million in Covered Assets acquired from Statewide and $9.9 million of assets acquired from GSFC. Excluding acquired loans and assets, ratios for nonperforming loans to total loans, nonperforming loans to total assets and nonperforming assets to total assets were 0.85%, 0.51% and 0.54%, respectively, at December 31, 2011.

Net loan charge-offs for the third quarter of 2012 were $464,000, compared to $53,000 for the third quarter of 2011. Net loan charge-offs for the nine months ended September 30, 2012 were $2.1 million compared to $282,000 for the nine months ended September 30, 2011. The increase in net charge-offs for the third quarter of 2012 and for the nine months of 2012 resulted primarily from a $1.7 million partial charge-off on a $5.4 million commercial real estate loan. The collateral underlying the original loan was transferred into repossessed assets during the third quarter of 2012.

Allowance for Loan Losses - The allowance for loan losses is established through provisions for loan losses. The Company maintains the allowance at a level believed, to the best of management's knowledge, to cover all known and inherent losses in the portfolio that are both probable and reasonable to estimate at each reporting date. Management reviews the allowance for loan losses at least quarterly in order to identify those inherent losses and to assess the overall collection probability for the loan portfolio. The evaluation process includes, among other things, an analysis of delinquency trends, nonperforming loan trends, the level of charge-offs and recoveries, prior loss experience, total loans outstanding, the volume of loan originations, the type, size and geographic concentration of loans, the value of collateral securing loans, the borrower's ability to repay and repayment performance, the number of loans requiring heightened management oversight, economic conditions and industry experience. Based on this evaluation, management assigns risk rankings to segments of the loan


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portfolio. Such risk ratings are periodically reviewed by management and revised as deemed appropriate. These efforts are supplemented by reviews and validations performed by independent loan reviewers. The results of the reviews are reported to the Audit Committee of the Board of Directors. The establishment of the allowance for loan losses is significantly affected by management judgment. There is a likelihood that different amounts would be reported under different conditions or assumptions. Federal regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require management to make additional provisions for estimated loan losses based upon judgments different from those of management.

With respect to acquired loans, the Company follows the reserve standard set forth in ASC 310, Receivables. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration in credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the loan's contractual terms. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each loan pool meeting the criteria above, and determines the excess of the loan pool's scheduled contractual principal and interest payments in excess of cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool's cash flows expected to be collected over the fair value, is accreted into interest income over the remaining life of the pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their estimated fair values. As a result, acquired loans subject to ASC 310 are excluded from the calculation of the allowance for loan losses as of the acquisition date.

Acquired loans were recorded as of their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses. Under current accounting principles, if the Company determines that losses arose after the acquisition date, the additional losses will be reflected as a provision for loan losses. As of September 30, 2012, the Company did not have any allowance for loan losses allocated to acquired loans.

We will continue to monitor and modify our allowance for loan losses as conditions warrant. No assurance can be given that our level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the conditions used by management to determine the current level of the allowance for loan losses.

The following table presents the activity in the allowance for loan losses during the first nine months of 2012.

                   (dollars in thousands)             Amount
                   Balance, December 31, 2011        $  5,104
                   Provision charged to operations      1,928
                   Loans charged off                   (2,151 )
                   Recoveries on charged off loans         25

                   Balance, September 30, 2012       $  4,906

. . .

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