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HTBI > SEC Filings for HTBI > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for HOMETRUST BANCSHARES, INC.



Quarterly Report

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

Forward-Looking Statements

Certain matters in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about future economic performance and projections of financial items. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; decreases in the secondary market for the sale of loans that we originate; results of examinations of us by the Office of the Comptroller of the Currency ("OCC") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including as a result of Basel III; our ability to attract and retain deposits; increases in premiums for deposit insurance; management's assumptions in determining the adequacy of the allowance for loan losses; our ability to control operating costs and expenses, especially new costs associated with our operation as a public company; the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; difficulties in reducing risks associated with the loans on our balance sheet; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; computer systems on which we depend could fail or experience a security breach; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; statements with respect to our intentions regarding disclosure and other changes resulting from the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"); changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and the other risks detailed from time to time in our filings with the Securities and Exchange Commission, including our 2012 Form 10-K.

Any of the forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.

As used throughout this report, the terms "we", "our", "us", "HomeTrust Bancshares" or the "Company" refer to HomeTrust Bancshares, Inc. and its consolidated subsidiaries, including HomeTrust Bank ("HomeTrust") unless the context indicates otherwise.


Our principal business consists of attracting deposits from the general public and investing those funds, along with borrowed funds in loans secured primarily by first and second mortgages on one- to four-family residences, including home equity loans and construction and land/lot loans, commercial real estate loans, construction and development loans, and municipal leases.

Municipal leases are secured primarily by a ground lease for a firehouse or an equipment lease for fire trucks and firefighting equipment to fire departments located throughout North and South Carolina. We also purchase investment securities consisting primarily of mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises, as well as, certificates of deposit insured by the Federal Deposit Insurance Corporation ("FDIC").

We offer a variety of deposit accounts for individuals, businesses and nonprofit organizations. Deposits are our primary source of funds for our lending and investing activities. We adopted a plan of conversion, primarily to increase our capital to grow our loan portfolio organically and through acquisitions and to continue to build our franchise.

We are significantly affected by prevailing economic conditions as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, housing and financial institutions. Deposit flows are influenced by a number of factors, including interest rates paid on competing time deposits, other investments, account maturities, and the overall level of personal income and savings. Lending activities are influenced by the demand for funds, the number and quality of lenders, and regional economic cycles. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Changes in levels of interest rates affect our net interest income. A secondary source of income is noninterest income, which includes revenue we receive from providing products and services, including service charges on deposit accounts, mortgage banking income and gains and losses from sales of securities.

Our noninterest expenses consist primarily of salaries and employee benefits, expenses for occupancy, marketing and computer services and FDIC deposit insurance premiums. Salaries and benefits consist primarily of the salaries and wages paid to our employees, payroll taxes, expenses for retirement and other employee benefits. Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, property taxes, depreciation charges, maintenance and costs of utilities.

Weak economic conditions and ongoing strains in the financial and housing markets which accelerated in 2008 and have generally continued through 2012 have presented an unusually challenging environment for banks and their holding companies, including us. This has been particularly evident in our need to provide for credit losses during these periods at significantly higher levels than our historical experience and has also adversely affected our net interest income and other operating revenues and expenses. Our provision for loan losses was significant in all periods and reflects material levels of delinquencies, non-performing loans and net charge-offs, particularly for loans for the construction of one- to four-family homes and for the acquisition and development of land for residential properties. For most of the past four years, housing markets remained weak in many of our primary market areas, resulting in elevated levels of delinquencies and non-performing assets, deterioration in property values, particularly for residential land and building lots, and the need to provide for realized and anticipated losses. As a result of these factors, for the three months ended September 30, 2012 we had net income of $1.2 million and for the year ended June 30, 2012, we had net income of $4.5 million as compared to net income of $284,000 for the three months ended September 30, 2011 and a net loss of $14.7 million for the 2011 fiscal year.

We currently have 20 banking offices serving nine counties in Western North Carolina, including the Asheville metropolitan area, and the "Piedmont" region of North Carolina. Although we intend to expand primarily through organic growth, we will continue to explore opportunities to expand our unique "HomeTrust Banking Partnership" through the acquisition of other financial institutions and/or bank branches. Our goal is to continue to enhance our franchise value and earnings through strategic, planned growth in our banking operations, while maintaining the community-focused, relationship style of exceptional customer service that has differentiated our brand and characterized our success to date.

Critical Accounting Policies and Estimates

Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an "emerging growth company" we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We intend to take advantage of the benefits of this extended transition period. Accordingly, our financial statements may not be comparable to companies that comply with such new or revised accounting standards.

The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are:
loss exposure at default; the amount and timing of future cash flows on impaired loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, bank regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Business Combinations. We use the acquisition method of accounting for all business combinations. The acquisition method of accounting requires us as acquirer to recognize the fair value of assets acquired and liabilities assumed at the acquisition date as well as recognize goodwill or a gain from a bargain purchase, if appropriate. In addition, prior to our stock conversion in July 2012, we recognized the fair value of the acquired institution's equity as a separate component to equity capital on the balance sheet as required for business combinations of mutual institutions. Any acquisition-related costs and restructuring costs are recognized as period expenses as incurred.

Real Estate Owned ("REO"). REO represents real estate acquired as a result of customers' loan defaults. At the time of foreclosure, REO is recorded at the fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Revenue and expenses from operations and subsequent valuation adjustments to the carrying amount of the property are included in non-interest expense in the consolidated statements of income. In some instances, we may make loans to facilitate the sales of other real estate owned. Management reviews all sales for which it is the lending institution for compliance with sales treatment under provisions established by ASC Topic 360, "Accounting for Sales of Real Estate". Any gains related to sales of REO may be deferred until the buyer has a sufficient initial and continuing investment in the property.

Post Retirement Plan Assumptions. We have various post retirement plans for the benefit of our directors, executive officers and employees. For some of these plans, the computations include assumptions with regard to discount rates and expected rates of return, which are used to calculate benefit expense and the accrued benefit plan obligation. Changes in management's assumptions can materially affect amounts recognized in our Consolidated Financial Statements.

Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.

Comparison of Financial Condition at September 30, 2012 and June 30, 2012

Assets. Total assets decreased $117.1 million to $1.60 billion at September 30, 2012 from $1.72 billion at June 30, 2012 primarily due to the refunding of $76.0 million in funds held on deposit for orders to purchase shares of the Company's common stock in its recent oversubscribed stock offering, which was consummated on July 10, 2012.

Loans. Net loans decreased $26.8 million, or 2.2%, to $1.17 billion at September 30, 2012 compared to $1.19 billion at June 30, 2012 as new loan originations during the quarter were offset by normal loan repayments, refinances, charge-offs and foreclosures . The decrease in net loans was primarily due to a $9.0 million decrease in one-to four-family loans, a $6.7 million

decrease in commercial real estate loans, and a $3.6 million decrease in commercial construction and development loans since June 30, 2012. We also continued to reduce our exposure to weaker credits as we aggressively managed problem assets. All other categories of loans also decreased during the last three months, as demand for new loans from creditworthy borrowers was weak and utilization of existing credit lines was low despite the modest recovery in the general economy. Total loan originations increased $25.5 million, or 29.7%, to $111.2 million during the three months ended September 30, 2012 compared to $85.7 million during the three months ended September 30, 2011.

Allowance for loan losses. Our allowance for loan losses at September 30, 2012 was $35.9 million or 2.98% of total loans, compared to $35.1 million or 2.85% of total loans at June 30, 2012. We recorded net charge-offs of $713,000 for the three months ended September 30, 2012, compared to $3.0 million for the three months ended June 30, 2012. Net charge-offs as a percentage of average loans also decreased to 0.23% for the three months ended September 30, 2012 from 0.96% for the quarter ended June 30, 2012. Non-performing loans increased to $69.7 million at September 30, 2012 from $64.2 million at June 30, 2012 due to increases in non-performing commercial real estate loans. Non-performing loans to total loans increased to 5.78% at September 30, 2012 from 5.21% at June 30, 2012. At September 30, 2012, $34.2 million or 48.9% of total non-accruing loans were current on their loan payments.

The ratio of classified assets to total assets increased to 8.40% at September 30, 2012 from 7.75% at June 30, 2012. Classified assets totaled $134.7 million at September 30, 2012, compared to $133.4 million at June 30, 2012.

Investments. Securities available for sale decreased $801,000, to $30.5 million at September 30, 2012 compared to $31.3 million at June 30, 2012, as proceeds from maturities were used to repay FHLB advances. FHLB stock decreased $3.3 million due to redemptions by the FHLB during the period.

Real estate owned. REO decreased $3.1 million, to $13.1 million at September 30, 2012. The total balance of REO included $6.0 million in land, construction and development projects (both residential and commercial), $2.3 million in commercial real estate and $4.8 million in single-family homes at September 30, 2012. During the three months ended September 30, 2012, we transferred $2.7 million of loans into REO, disposed of $5.1 million of properties and recognized a net loss of $327,000 on sales and valuation adjustments.

Deposits. Deposits decreased $305.9 million to $1.16 billion at September 30, 2012, primarily due to the reduction of $264.2 million in funds held on deposit at June 30, 2012 for orders to purchase shares of the Company's common stock. In addition, certificates of deposit decreased $45.9 million during the quarter as a result of the managed decline of higher rate certificates of deposit consistent with the Company's strategy to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts.

Borrowings. Borrowings, including FHLB advances and retail repurchase agreements, decreased 36.1% to $14.2 million at September 30, 2012 from $22.3 million at June 30, 2012. FHLB advances decreased $7.5 million, to $7.6 million at September 30, 2012 from $15.1 million at June 30, 2012 from prepayments of higher rate long-term FHLB advances during the quarter. We recognized a $1.6 million loss, included in noninterest expense, as a result of these prepayments. Other borrowings at September 30, 2012 decreased $600,000 to $6.6 million and consisted of retail repurchase agreements that are primarily related to customer cash management accounts.

Equity. Total equity at September 30, 2012 increased to $371.5 million. The increase in equity reflected a $208.2 million increase in common stock and additional paid in capital due to the consummation of the Company's common stock offering on July 10, 2012, net income of $1.2 million and a $117,000 increase in accumulated other comprehensive income recognized for the three months ended September 30, 2012.

Average Balances, Interest and Average Yields/Cost

The following table sets forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

                                                                  For the Three Months Ended September 30,
                                                           2012                                               2011
                                        Average          Interest                          Average          Interest
                                        Balance          Earned/           Yield/          Balance          Earned/           Yield/
                                      Outstanding        Paid(2)          Rate(2)        Outstanding        Paid(2)          Rate(2)
                                                                           (Dollars in thousands)
Interest-earning assets:
 Loans receivable
(1)                                   $  1,237,419     $     16,052             5.19 %   $  1,326,897     $     17,770             5.36 %
 Deposits in other financial
  institutions                             229,419              380             0.66 %        138,785              163             0.47 %
securities                                  31,237               96             1.23 %         49,562              124             1.00 %
 Other                                      15,646               36             0.92 %          9,303               18             0.77 %
 Total interest-earning assets           1,513,721           16,564             4.38 %      1,524,547           18,075             4.74 %

Interest-bearing liabilities:
 Interest-bearing checking accounts        170,935               57             0.13 %        155,378               78             0.20 %
 Money market
accounts                                   257,981              245             0.38 %        250,733              414             0.66 %
accounts                                   121,737               70             0.23 %         76,289              100             0.52 %
accounts                                   598,930            1,648             1.10 %        760,948            2,397             1.26 %
 Borrowings                                 21,682              189             3.49 %         99,403              390             1.57 %
 Total interest-bearing liabilities      1,171,265            2,209             0.75 %      1,342,751            3,379             1.00 %

 Tax-equivalent net interest income                    $     14,355                                       $     14,696
 Tax-equivalent interest rate
spread                                                                          3.63 %                                             3.74 %
 Net earning
assets                                $    342,456                                       $    181,796
 Tax-equivalent yield on average
assets                                                                          3.79 %                                             3.86 %

 Average interest-earning assets to
 average interest-bearing
liabilities                                 129.24 %                                           113.54 %


(1) The average loans receivable, net balances include loans held for sale and non-accruing loans.
(2) Interest income used in the average interest/earned and yield calculation includes the tax equivalent adjustment of $860,000 for both three months ended September 30, 2012 and 2011, respectively, calculated based on a federal tax rate of 34%.

Rate/Volume Analysis

The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and that due to the changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

                                                         Three Months Ended September 30, 2012
                                                                      Compared to
                                                         Three Months Ended September 30, 2011
                                                            (decrease)                      Total
                                                              due to                      increase/
                                                     Volume              Rate            (decrease)

Interest-earning assets:
 Loans receivable                                 $      (1,198 )     $      (520 )     $      (1,718 )
 Deposits in other financial institutions                   106               111                 217
 Investment securities                                      (46 )              18                 (28 )
 Other                                                       12                 6                  18

  Total interest-earning assets                   $      (1,126 )     $      (385 )     $      (1,511 )

Interest-bearing liabilities:
. . .
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