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HBCP > SEC Filings for HBCP > Form 10-K on 15-Mar-2013All Recent SEC Filings

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

Form 10-K for HOME BANCORP, INC.


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.


The following is an analysis and discussion of the financial condition and results of operations of Home Bancorp, Inc. (the "Company"), and its wholly owned subsidiary, Home Bank (the "Bank"). This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes included herein in Part II, Item 8, "Financial Statements and Supplementary Data" and the description of our business included herein in Part 1, Item 1 "Business".


Net income for 2012 totaled $9.2 million, an increase of 79.5% from the $5.1 million earned in 2011. Diluted earnings per share for 2012 were $1.28, an increase of 80.3% from the $0.71 earned in 2011. The increase in net income and diluted earnings per share was driven primarily by the full year impact of the acquisition of GS Financial Corp. ("GSFC") in July 2011. Key components of the Company's performance in 2012 are summarized below.

Loans, including those covered under loss sharing agreements with the FDIC ("Covered Loans"), as of December 31, 2012 were $673.1 million, an increase of $6.8 million, or 1.0%, from December 31, 2011. Loan growth during the year was primarily related to commercial real estate loans (up $25.8 million), which was virtually offset by decreases in most other loan categories. As of December 31, 2012, Covered Loans totaled $45.8 million, a decrease of $15.3 million, or 25.1%, from December 31, 2011.

Total customer deposits as of December 31, 2012 were $771.4 million, an increase of $40.7 million, or 5.6%, from December 31, 2011. The increase in deposits was driven primarily by strong growth in NOW (up $29.6 million) and demand deposit (up $24.6 million) accounts, which was partially offset by certificates of deposit (down $31.8 million).

Interest income increased $7.7 million, or 20.0%, in 2012 compared to 2011. The increase was primarily due to a higher average volume of loans receivable during 2012 resulting primarily to the GSFC acquisition, which more than offset decreases in the average yield on interest-earning assets.

Interest expense decreased $303,000, or 5.8%, in 2012 compared to 2011. The decrease was primarily due to lower rates paid on interest-bearing liabilities as the result of reduced market rates and an improved mix of interest-bearing liabilities.

The Company purchased 337,887 shares of its common stock during 2012 at an average price per share of $17.25. As of December 31, 2012, an additional 145,436 shares remain eligible for purchase under the share repurchase plan announced in July 2012.

The provision for loan losses totaled $2.4 million in 2012, 65.1% higher than the $1.5 million recorded in 2011. The elevated level of provision resulted primarily from a $1.7 million charge-off on a $5.4 million commercial real estate loan and other credit quality declines in the commercial real estate, construction and land and commercial and industrial loan portfolios. At December 31, 2012, the Company's ratio of allowance for loan losses to total loans was 0.79%, compared to 0.77% at December 31, 2011. Excluding loans acquired from GSFC and Statewide ("acquired loans"), the ratio of the allowance for loan losses to total organic loans was 1.01% at December 31, 2012 compared to 1.14% at December 31, 2011. Net charge-offs for 2012 were $2.2 million, or 0.33% of total loans, compared to $276,000, or 0.04%, in 2011. The increase in net charge-offs for 2012 resulted primarily from the charge-off on the commercial real estate loan mentioned above.

Noninterest income increased $671,000, or 9.9%, in 2012 compared to 2011. The increase was primarily the result of an increase of $1.1 million in gains on the sale of mortgage loans and a $393,000 difference in

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gains/losses on sale of securities, which were partially offset by the absence of a $525,000 payment received in settlement of a lawsuit during 2011 and $270,000 less accretion on the FDIC loss sharing receivable in 2012 compared to 2011.

Noninterest expense increased $1.7 million, or 5.4%, in 2012 compared to 2011. Noninterest expense for 2011 includes merger-related expenses of $2.1 million. Excluding merger-related expenses, the increase in noninterest expense was primarily the result of the full year impact of the addition of GSFC employees, its operations and facilities and higher costs associated with foreclosed assets.


On July 15, 2011, the Company acquired GSFC, the former holding company of Guaranty Savings Bank ("Guaranty") of Metairie, Louisiana. On the acquisition date, Home Bancorp Acquisition Corp., a newly created wholly owned subsidiary of the Company, was merged with and into GSFC, and immediately thereafter, GSFC was merged with and into the Company, with the Company as the surviving corporation, and Guaranty, the former subsidiary of GSFC, was merged with and into Home Bank, with Home Bank as the surviving institution. Shareholders of GSFC received $21.00 per share in cash, yielding an aggregate purchase price of $26,417,000. As a result of the acquisition, the four former Guaranty branches in the Greater New Orleans area were added to the Bank's branch office network. Assets acquired from GSFC totaled $256.7 million, which included loans of $182.4 million, investment securities of $46.5 million and cash of $9.3 million. The Bank also recorded a core deposit intangible asset of $859,000 and goodwill of $354,000 relating to the acquisition of GSFC, and assumed liabilities of $230.6 million, which included $193.5 million in deposits and $34.7 million in Federal Home Loan Bank ("FHLB") advances.

On March 12, 2010, the Bank acquired certain assets and liabilities of the former Statewide Bank ("Statewide"), a full-service community bank formerly headquartered in Covington, Louisiana, from the Federal Deposit Insurance Corporation ("FDIC"). As a result of the Statewide acquisition, the Bank's branch office network was expanded to include six branches in the Northshore (of Lake Pontchartrain) region of Louisiana. Assets acquired in the Statewide transaction totaled $188.0 million, which included loans of $110.4 million, investment securities of $24.8 million and cash of $11.6 million. In addition, the Bank recorded an FDIC loss sharing receivable, representing the portion of estimated losses covered by loss sharing agreements between the Bank and the FDIC, of $34.4 million. The loss sharing agreements between the Bank and the FDIC afford us significant protection against future losses in the loan portfolio ("Covered Loans") and repossessed assets (collectively referred to as "Covered Assets") acquired in the Statewide transaction. The Bank also recorded a core deposit intangible asset of $1.4 million and goodwill of $560,000 relating to the Statewide acquisition, and assumed liabilities of $223.9 million, which included $206.9 million in deposits and $16.8 million in FHLB advances.


The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

Allowance for Loan Losses. The allowance for loan losses on loans in our portfolio is maintained at an amount which management determines covers the reasonably estimable and probable losses on such portfolio. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged

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against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries are added to the allowance. The allowance is an amount that represents the amount of probable and reasonably estimable known and inherent losses in the loan portfolio, based on evaluations of the collectability of loans. The evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, estimated losses relating to specifically identified loans and current economic conditions. This evaluation is inherently subjective as it requires material estimates including, among others, exposure to default, the amount and timing of expected future cash flows on loans, value of collateral, estimated losses on our commercial and residential loan portfolios as well as consideration of general loss experience. All of these estimates may be susceptible to significant change.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. The OCC, as an integral part of its examination processes, periodically reviews our allowance for loan losses. The OCC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations. To the extent that actual outcomes differ from management's estimates, additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods. As part of the risk management program, an independent review is performed on the loan portfolio, which supplements management's assessment of the loan portfolio and the allowance for loan losses. The result of the independent review is reported directly to the Audit Committee of the Board of Directors.

Acquired loans from the Statewide and GSFC transactions were recorded at fair value at the date of acquisition with no carryover of the allowance for loan losses. As of December 31, 2012, our allowance for loan losses included $205,000 allocated to acquired loans with deteriorated credit quality. Our accounting policy for acquired loans is described below.

Acquisition Accounting for Loans. The Company accounts for acquisitions in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. The fair value of acquired loans is represented by the expected cash flows from the portfolio discounted at current market rates. In estimating the cash flows, the Company uses a model based on assumptions about the amount and timing of principal and interest payments, estimated prepayments, estimated default rates, estimated loss severities in the event of defaults and current market rates.

The Company accounts for all of the Covered Loans acquired in the Statewide transaction and approximately $9.6 million of loans acquired in the GSFC transaction under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In accordance with ASC 310-30 and in estimating the fair value of the acquired loans as of the acquisition date, we (a) calculate the contractual amount and timing of undiscounted principal and interest payments (the "undiscounted contractual cash flows") and (b) estimate the amount and timing of undiscounted expected principal and interest payments (the "undiscounted expected cash flows"). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference.

In accordance with ASC 805, acquired loans without deteriorated credit are recorded at fair value and accounted for under ASC Topic 310-20, Nonrefundable Fees and Other Costs. Acquired loans without deteriorated credit quality, which relate solely to the GSFC acquisition, totaled $178.2 million at the date of acquisition.

On the acquisition date, the amount by which the undiscounted expected cash flows exceeded the estimated fair value of the acquired loans is the "accretable yield". The accretable yield is taken into interest income over the life of the loans using the effective yield method. The accretable yield changes over time due to both accretion and as actual and expected cash flows vary from the acquisition date estimated cash flows. The accretable yield is then measured as of each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans. The remaining undiscounted expected cash flows are calculated as of each financial reporting date based on information then currently available. Increases in expected cash flows over those originally estimated increase the accretable yield and are

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recognized as interest income prospectively. Increases in expected cash flows also lead to the reduction of any allowance for loan losses recorded after the acquisition. Decreases in expected cash flows, compared to those originally estimated, decrease the accretable yield and are recognized by recording a provision for loan losses. As the accretable yield increases or decreases from changes in cash flow expectations, the offset is a decrease or increase to the nonaccretable difference. As of December 31, 2012, $205,000 of our allowance for loan losses was allocated to acquired loans in the GSFC portfolio with deteriorated credit quality.

Income Taxes. We make estimates and judgments to calculate some of our tax liabilities and determine the recoverability of some of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. We also estimate a valuation allowance for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, our estimates and judgments to calculate our deferred tax accounts have not required significant revision to our initial estimates.

In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.

Other-than-temporary Impairment of Investment Securities. Securities are evaluated periodically to determine whether a decline in their fair value is other-than-temporary. The term "other-than-temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Management reviews criteria such as the magnitude and duration of the decline, the reasons for the decline and the performance and valuation of the underlying collateral, when applicable, to predict whether the loss in value is other-than-temporary and the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Once a decline in value is determined to be other-than-temporary, the carrying value of the security is reduced to its fair value and a corresponding charge to earnings is recognized for the decline in value determined to be credit related. The decline in value attributable to noncredit factors is recognized in other comprehensive income.

Stock-based Compensation. The Company accounts for its stock options in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC 718 requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Management utilizes the Black-Scholes option valuation model to estimate the fair value of stock options. The option valuation model requires the input of highly subjective assumptions, including expected stock price volatility and option life. These subjective input assumptions materially affect the fair value estimate.


Loans, Loan Quality and Allowance for Loan Losses

Loans - The types of loans originated by the Company are subject to federal and state laws and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.

The Company's lending activities are subject to underwriting standards and loan origination procedures established by our Board of Directors and management. Loan originations are obtained through a variety of

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sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. Single-family residential mortgage loan applications and consumer loan applications are taken at any of the Bank's branch offices. Applications for other loans typically are taken personally by one of our loan officers, although they may be received by a branch office initially and then referred to a loan officer. All loan applications are processed and underwritten centrally at the Bank's main office.

The loans and repossessed assets that were acquired from Statewide are covered by loss sharing agreements between the FDIC and the Bank, which affords the Bank significant loss protection. As a result of the loss coverage provided by the FDIC, the risk of loss on the Covered Assets is significantly different from those assets not covered under the loss share agreements. As of their acquisition date, Covered Assets were recorded at their fair value, which included an estimate of credit losses. Asset quality information on Covered Assets is reported before consideration of applied loan discounts, as these discounts were recorded based on the estimated cash flow of the total loan pool and not on a specific loan basis. Because of the loss share agreements, balances disclosed below are for general comparative purposes only and do not represent the Company's risk of loss on Covered Assets. Because these assets are covered by the loss share agreements with the FDIC during the periods specified in the loss sharing agreements, the FDIC will absorb 80% of the first $41,000,000 of losses incurred on Covered Assets and 95% of losses on Covered Assets exceeding $41,000,000. Losses on non-residential Covered Loans are covered during the five-year period subsequent to the acquisition date; while residential Covered Loans are covered for 10 years.

The following table summarizes the changes in the carrying amount of Covered Loans, net of the allowance for losses on Covered Loans, and accretable yield on those loans for the years ended December 31, 2012, 2011 and 2010.

                                                                                   December 31,
                                                      2012                             2011                             2010
                                           Carrying                         Carrying                         Carrying
                                            Amount,        Accretable        Amount,        Accretable        Amount,        Accretable
(dollars in thousands)                        Net            Yield             Net            Yield             Net            Yield

Balance beginning of year                  $  61,020      $     (8,550 )    $  80,447      $     (5,505 )    $      -       $         -
Addition from FDIC-assisted transactions          -                 -              -                 -         110,418           (11,110 )
Accretion                                     (4,613 )           4,613         (5,170 )           5,170         (5,605 )           5,605
Payments received                             (6,885 )              -         (14,354 )              -         (13,623 )              -
Other principal reduction                     (2,355 )              -          (4,135 )              -          (5,686 )              -
Net increase in expected cash flows               36               (36 )        8,215            (8,215 )           -                 -
Transfers to repossessed assets               (1,489 )              -          (3,933 )              -          (5,057 )              -
Provision for losses on Covered Loans             50                -             (50 )              -              -                 -

Balance end of year                        $  45,764      $     (3,973 )    $  61,020      $     (8,550 )    $  80,447      $     (5,505 )

In addition to Covered Loans, our Covered Assets included $2.7 million, $6.1 million and $5.7 million, respectively, of repossessed assets at December 31, 2012, 2011 and 2010.

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The following tables show the composition of the Company's loan portfolio as of the dates indicated.

                                                                      December 31,
(dollars in thousands)                        2012          2011          2010          2009          2008
Real estate loans:
One- to four-family first mortgage          $ 177,816     $ 182,817     $ 122,614     $ 120,044     $ 138,173
Home equity loans and lines                    40,425        43,665        30,915        24,678        23,127
Commercial real estate                        252,805       226,999       150,824        97,513        84,096
Construction and land                          75,529        78,994        57,538        35,364        35,399
Multi-family residential                       19,659        20,125         5,718         4,089         7,142

Total real estate loans                       566,234       552,600       367,609       281,688       287,937

Other loans:
Commercial and industrial                      72,253        82,980        48,410        38,340        34,434
Consumer                                       34,641        30,791        23,892        16,619        13,197

Total other loans                             106,894       113,771        72,302        54,959        47,631

Total loans                                 $ 673,128     $ 666,371     $ 439,911     $ 336,647     $ 335,568

Loan growth during the year was related primarily to commercial real estate loans, which were up $25.8 million during the year. Consumer loans also grew $3.9 million in 2012. This growth was largely offset by decreases in commercial and industrial (down $10.7 million), one- to four-family mortgage (down $5.0 million), construction and land (down $3.5 million), and home equity (down $3.2 million) loans. Covered Loans totaled $45.8 million as of December 31, 2012, a decrease of $15.3 million, or 25.1%, compared to December 31, 2011. The decrease in the Covered Loan portfolio was primarily the result of principal repayments.

The following table reflects contractual loan maturities as of December 31, 2012, unadjusted for scheduled principal reductions, prepayments or repricing opportunities. Of the $508.5 million in loans which have contractual maturity dates subsequent to December 31, 2013, $435.0 million have fixed interest rates and $73.5 million have floating or adjustable interest rates.

                                                               Due In
                                        One year or        One through        More than five
(dollars in thousands)                     less            five years             years              Total
One- to four-family first mortgage     $      25,248      $      45,325      $        107,243      $ 177,816
Home equity loans and lines                    6,964             18,898                14,563         40,425
Commercial real estate                        35,808            160,155                56,842        252,805
Construction and land                         57,395             13,684                 4,450         75,529
Multi-family residential                       4,306             10,121                 5,232         19,659
Commercial and industrial                     31,680             34,868                 5,705         72,253
Consumer                                       3,247              6,814                24,580         34,641

Total                                  $     164,648      $     289,865      $        218,615      $ 673,128

Loan 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

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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 . . .

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