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HTBI > SEC Filings for HTBI > Form 10-Q on 10-Feb-2014All 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 allowance 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 2013 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 completed our conversion to the stock form of ownership in July, 2012, 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 non-interest 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 non-interest 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.

Beginning in fiscal year 2009 and continuing throughout much of fiscal year 2012, housing markets deteriorated in many of our market areas and we experienced significantly higher levels of delinquencies and non-performing assets, primarily in our construction and land development loan portfolios. During this period, home and lot sales activity was exceptionally slow, causing stress on builders' and developers' cash flows and their ability to service debt, which was reflected in our increased non-performing asset totals. Further, property values generally declined, reducing the value of the collateral securing loans. In addition, other non-housing-related segments of the loan portfolio developed signs of stress and increasing levels of non-accruing loans as the effects of the recent recession became more evident and the pace of the recovery remained slow. As a result, during these periods our provision for loan losses was significantly higher than historical levels and our normal expectations. This higher than normal level of delinquencies and non-accruals also had a material adverse effect on operating income as a result of foregone interest revenues, increased loan collection costs and carrying costs and valuation adjustments for REO. Beginning in fiscal 2013, home and lot sales activity and real estate values have modestly improved along with general economic conditions resulting in materially lower loan charge-offs and write-downs of REO. As a result of a continuing trend of lower non-performing and classified loans, fewer loan charge-offs and lower average loan balances compared to the same period during the prior fiscal year, the Company recorded a recovery for loan losses of $(3.0) million for the six months ended December 31, 2013 compared to a $1.8 million provision for loan losses for the six months ended December 31, 2012. Despite persistently weak economic conditions and exceptionally low interest rates which have created an unusually challenging banking environment for an extended period, for the three and six months ended December 31, 2013 we had net income of $2.9 million, or $0.15 per diluted share, and $6.2 million, or $0.32 per diluted share, respectively, as compared to net income of $2.3 million, or $0.11 per diluted share, and $3.4 million, or $0.17 per diluted share, for the three and six months ended December 31, 2012.

We currently have 21 banking offices serving nine counties in Western North Carolina, including the Asheville metropolitan area, the "Piedmont" region of North Carolina, and Greenville, South Carolina. We intend to expand through organic growth and through the acquisition of other community 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.

On January 23, 2014, the Company and Jefferson Bancshares, Inc. ("Jefferson") entered into an Agreement and Plan of Merger, pursuant to which Jefferson will be merged with and into the Company, with the Company as the surviving entity. The transaction is anticipated to close in the second calendar quarter of 2014, subject to customary closing conditions, including regulatory approvals and Jefferson shareholder approval. Under the terms of the agreement, Jefferson shareholders will receive a total of $8.00 per share in merger consideration consisting of $4.00 in cash plus $4.00 in the Company's common stock. This represents approximately $51.2 million of aggregate transaction consideration. Jefferson operates a total of 12 banking facilities in Hamblen County, Knoxville, and the greater Johnson City and Kingsport, Tennessee areas (the "Tri-Cities region").

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, although we have not done so to date. 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. 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 REO. 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 December 31, 2013 and June 30, 2013

Assets. Total assets increased $46.0 million, or 2.9%, to $1.63 billion at December 31, 2013 from $1.58 billion at June 30, 2013. This increase was largely due to the July 31, 2013 BankGreenville acquisition. The Company added $2.8 million of goodwill as a result of the BankGreenville acquisition. Assets acquired totaled $101.1 million and liabilities assumed were $94.4 million, net of all fair value adjustments. Nonperforming assets decreased to $66.6 million, or 4.09% of total assets, at December 31, 2013, compared to $80.3 million, or 5.07% of total assets, at June 30, 2013 and $85.1 million, or 5.36% at December 31, 2012. The decrease in nonperforming assets during the first six months of fiscal 2014 was primarily driven by a reduction in nonaccruing loans and REO. Nonperforming assets included $56.7 million in nonaccruing loans and $9.9 million in REO at December 31, 2013, compared to nonaccruing loans and REO of $68.6 million and $11.7 million at June 30, 2013 and $72.4 million and $12.7 million at December 31, 2012, respectively. At December 31, 2013, $31.4 million, or 55.4%, of nonaccruing loans were current on their loan payments.

Cash and cash equivalents. Total cash and cash equivalents, primarily excess cash deposited with the Federal Reserve Bank of Richmond, decreased $41.6 million, or 33.1%, to $84.1 million at December 31, 2013 from $125.7 million at June 30, 2013. The decrease was primarily attributable to the purchase of $49.3 million in investment securities during the period. Securities available for sale increased $57.9 million, or 234.0%, to $82.7 million at December 31, 2013 from $24.8 million at June 30, 2013 as a result of the purchase of investment securities coupled with $34.3 million in investment securities acquired from BankGreenville. As a part of the Company's liquidity strategy, the Company also invests a portion of its excess cash in certificates of deposit in other banks which have a higher yield than cash held in interest-earning accounts in order to maximize earnings. All of the certificates of deposit in other banks are fully insured under the FDIC. At December 31, 2013, certificates of deposits in other banks totaled $152.0 million compared to $136.6 million at June 30, 2013. In addition the Company repurchased $17.1 million of stock for cash during the six month period.

Loans. Net loans receivable increased $10.8 million, or 1.0%, to $1.14 billion at December 31, 2013 from $1.13 billion at June 30, 2013, as the $47.8 million in loans acquired from BankGreenville were partially offset by normal loan repayments, charge-offs and transfers to REO. Since June 30, 2013, commercial real estate loans increased $10.9 million, commercial construction and development loans increased $8.1 million and commercial and industrial loans increased $6.4 million. Excluding loans acquired from BankGreenville, net loans would have otherwise decreased $37.0 million as demand for new loans from creditworthy borrowers remains relatively weak and utilization of existing credit lines was low despite the modest recovery in the general economy. In addition, the recent rise in mortgage interest rates has significantly reduced refinancing activity. Total loan originations decreased $79.5 million, or 34.7%, to $149.5 million during the six months ended December 31, 2013 compared to $229.0 million during the six months ended December 31, 2012.

Allowance for loan losses. The allowance for loan losses was $27.1 million, or 2.32% of total loans, at December 31, 2013 compared to $32.1 million, or 2.75% of total loans, at June 30, 2013. The Company recorded net loan charge-offs of $1.4 million and $1.9 million for the three and six months ended December 31, 2013, respectively, as compared to $1.9 million and $2.7 million, respectively, for the same periods last year. Net loan charge-offs as a percentage of average loans also decreased significantly to 0.46% and 0.33% for the three and six months ended December 31, 2013, respectively, from 0.64% and 0.43%, respectively, for the three and six months ended December 31, 2012. Nonaccruing loans decreased 17.3% to $56.7 million at December 31, 2013 from $68.6 million at June 30, 2013 despite the acquisition of $1.2 million of nonaccruing loans from BankGreenville. Nonaccruing loans to total loans decreased to 4.84% at December 31, 2013 from 5.88% at June 30, 2013. At December 31, 2013, $31.4 million or 55.4% of total nonaccruing loans were current on their loan payments. In addition, the allowance as a percentage of non-performing loans increased to 47.87% at December 31, 2013, compared to 47.31% at December 31, 2012.

The ratio of classified assets to total assets decreased to 6.33% at December 31, 2013 from 7.43% at June 30, 2013 and 8.04% at December 31, 2012. Classified assets decreased to $103.1 million at December 31, 2013 compared to $117.6 million and $127.6 million at June 30, 2013 and December 31, 2012, respectively, primarily as a result of our efforts to return nonperforming loans to performing status, loans being paid off, and sales of REO.

Investments. Securities available for sale increased $57.9 million, or 234.0%, to $82.7 million at December 31, 2013 from $24.8 million at June 30, 2013 as a result of the purchase of $49.3 million in investment securities coupled with the acquisition of $34.3 million in investment securities from BankGreenville. A total of $5.4 million of principal payments were received on mortgage-backed securities. The securities purchased and acquired during the period were primarily short- to intermediate-term U.S. government agency notes and mortgage-backed securities and, to a lesser extent, intermediate-term taxable municipal securities. We evaluate individual investment securities quarterly for other-than-temporary declines in market value. We do not believe that there are any other-than-temporary impairments at December 31, 2013; therefore, no impairment losses have been recorded during the first six months of fiscal 2014. FHLB stock increased $235,000 due to the BankGreenville acquisition.

Real estate owned REO decreased $1.8 million, to $9.9 million at December 31, 2013 primarily due to the sale of $7.2 million in REO during the period partially offset by $2.1 million in REO added from the BankGreenville acquisition. The total balance of REO included $5.1 million in land, construction and development projects (both residential and commercial), $1.7 million in commercial real estate and $3.1 million in single-family homes at December 31, 2013. During the six months ended December 31, 2013, we transferred $3.5 million of loans into REO, disposed of $7.2 million of properties and recognized a net loss of $205,000 on sales and impairment adjustments.

Deposits. Deposits increased $56.7 million, or 4.9%, from $1.15 billion at June 30, 2013 to $1.21 billion at December 31, 2013. This increase was due to $89.1 million of deposits acquired from BankGreenville. The Company also recorded $530,000 of core deposit intangibles in connection with the BankGreenville acquisition. Excluding the BankGreenville acquisition, certificates of deposit decreased $23.5 million during the six month period primarily as a result of the managed decline of higher rate certificates of deposit as we competed less aggressively on time deposit interest rates, 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. Other borrowings increased to $2.2 million at December 31, 2013 from none at June 30, 2013, as a result of obligations assumed in the BankGreenville acquisition.

Equity. Stockholders' equity at December 31, 2013 decreased to $358.1 million from $367.5 million at June 30, 2013. The decrease in stockholders' equity was primarily a result of the repurchase of 1,041,245 shares at a price of $17.1 million during the six months ended December 31, 2013, partially offset by a $6.2 million increase in retained earnings as a result of the net income during the period. As of December 31, 2013, all of the 1,041,245 shares authorized in the August 2013 stock repurchase plan had been purchased at an average cost of $16.38 per share.

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 December 31,
                                                 2013                                          2012
                                 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)          $  1,191,755     $  15,127           5.08 %   $  1,215,968     $  15,830           5.21 %
 Deposits in other financial
. . .
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