Edgar Filing: HOME BANCORP, INC.

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Smaller reporting company

Emerging growth company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2018

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-34190

HOME BANCORP, INC.

(Exact name of Registrant as specified in its charter)


Louisiana		71-1051785
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

503 Kaliste Saloom Road, Lafayette, Louisiana		70508
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (337) 237-1960

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒

At May 1, 2018, the registrant had 9,419,361 shares of common stock, $0.01 par value, outstanding.

HOME BANCORP, INC. and SUBSIDIARY

TABLE OF CONTENTS



		Page
	PART I

Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Financial Condition		1

	Consolidated Statements of Income		2

	Consolidated Statements of Comprehensive Income		3

	Consolidated Statements of Changes in Shareholders’ Equity		4

	Consolidated Statements of Cash Flows		5

	Notes to Unaudited Consolidated Financial Statements		6

Item 2.	Managements’ Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38

Item 4.	Controls and Procedures		39

	PART II

Item 1.	Legal Proceedings		39

Item 1A.	Risk Factors		39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 3.	Defaults Upon Senior Securities		39

Item 4.	Mine Safety Disclosures		40

Item 5.	Other Information		40

Item 6.	Exhibits		40

SIGNATURES			41

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)			(Audited)
	March 31,			December 31,
	2018			2017
Assets
Cash and cash equivalents	$	124,141,699		$	150,417,829
Interest-bearing deposits in banks		2,421,000			2,421,000
Investment securities available for sale, at fair value		263,169,977			234,993,436
Investment securities held to maturity (fair values of $12,922,698 and $13,055,073, respectively)		12,949,728			13,033,590
Mortgage loans held for sale		1,310,991			5,873,132
Loans, net of unearned income		1,641,270,174			1,657,794,751
Allowance for loan losses		(14,268,843	)		(14,807,278	)

Total loans, net of unearned income and allowance for loan losses		1,627,001,331			1,642,987,473

Office properties and equipment, net		45,203,029			45,604,752
Cash surrender value of bank-owned life insurance		29,064,532			28,903,913
Goodwill and core deposit intangibles		67,499,333			68,033,472
Accrued interest receivable and other assets		34,092,412			35,852,241

Total Assets	$	2,206,854,032		$	2,228,120,838

Liabilities
Deposits:
Noninterest-bearing	$	456,353,415		$	461,999,611
Interest-bearing		1,382,851,869			1,404,227,717

Total deposits		1,839,205,284			1,866,227,328
Short-term Federal Home Loan Bank advances		3,610,380			3,642,422
Long-term Federal Home Loan Bank advances		67,277,566			68,183,173
Accrued interest payable and other liabilities		13,671,575			12,197,189

Total Liabilities		1,923,764,805			1,950,250,112

Shareholders’ Equity
Preferred stock, $0.01 par value - 10,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value - 40,000,000 shares authorized; 9,409,261 and 9,395,488 shares issued and outstanding, respectively		94,093			93,955
Additional paid-in capital		165,990,921			165,341,415
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)		(3,749,240	)		(3,838,510	)
Recognition and Retention Plan (RRP)		(79,242	)		(83,903	)
Retained earnings		123,571,082			117,312,630
Accumulated other comprehensive loss		(2,738,387	)		(954,861	)

Total Shareholders’ Equity		283,089,227			277,870,726

Total Liabilities and Shareholders’ Equity	$	2,206,854,032		$	2,228,120,838

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	For the Three Months Ended
	March 31,
	2018		2017
Interest Income
Loans, including fees	$	22,803,629	$	16,243,268
Investment securities:
Taxable interest		1,308,951		865,913
Tax-exempt interest		186,109		162,721
Other investments and deposits		426,939		91,365

Total interest income		24,725,628		17,363,267

Interest Expense
Deposits		1,902,196		992,441
Short-term Federal Home Loan Bank advances		16,576		63,977
Long-term Federal Home Loan Bank advances		300,305		337,646

Total interest expense		2,219,077		1,394,064

Net interest income		22,506,551		15,969,203
Provision for loan losses		964,257		306,832

Net interest income after provision for loan losses		21,542,294		15,662,371

Noninterest Income
Service fees and charges		1,654,746		936,928
Bank card fees		1,098,551		683,514
Gain on sale of loans, net		207,037		288,063
Income from bank-owned life insurance		160,619		118,716
Gain on sale of assets, net		145,206		355,540
Other income		214,788		443,045

Total noninterest income		3,480,947		2,825,806

Noninterest Expense
Compensation and benefits		8,941,473		6,775,449
Occupancy		1,674,869		1,219,882
Marketing and advertising		259,555		226,596
Data processing and communication		1,679,046		1,075,207
Professional services		286,054		231,371
Forms, printing and supplies		356,604		135,300
Franchise and shares tax		365,300		201,967
Regulatory fees		379,337		322,838
Foreclosed assets, net		102,998		(58,776	)
Other expenses		1,544,725		900,880

Total noninterest expense		15,589,961		11,030,714

Income before income tax expense		9,433,280		7,457,463
Income tax expense		1,969,733		2,451,762

Net Income	$	7,463,547	$	5,005,701

Earnings per share:
Basic	$	0.83	$	0.72

Diluted	$	0.81	$	0.69

Cash dividends declared per common share	$	0.15	$	0.13

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	For the Three Months Ended
	March 31,
	2018			2017
Net Income	$	7,463,547		$	5,005,701

Other Comprehensive (Loss) Income
Unrealized (losses) gains on investment securities		(1,997,296	)		105,180
Tax effect		419,432			(36,813	)

Other comprehensive (loss) income, net of taxes		(1,577,864	)		68,367

Comprehensive Income	$	5,885,683		$	5,074,068

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


	Common Stock			Additional Paid-in Capital			Unallocated Common Stock Held by ESOP			Unallocated Common Stock Held by RRP			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2016	$	73,502		$	79,425,604		$	(4,195,590	)	$	(119,633	)	$	104,647,375		$	11,766		$	179,843,024

Net income														5,005,701						5,005,701
Other comprehensive income																	68,367			68,367
Purchase of Company’s common stock at cost, 91 shares		(1	)		(539	)								(1,684	)					(2,224	)
Cash dividends declared, $0.13 per share														(957,126	)					(957,126	)
Exercise of stock options		236			279,977															280,213
RRP shares released for allocation					(3,194	)					4,660									1,466
ESOP shares released for allocation					283,079			89,270												372,349
Share-based compensation cost					107,926															107,926

Balance, March 31, 2017	$	73,737		$	80,092,853		$	(4,106,320	)	$	(114,973	)	$	108,694,266		$	80,133		$	184,719,696

Balance, December 31, 2017	$	93,955		$	165,341,415		$	(3,838,510	)	$	(83,903	)	$	117,312,630		$	(954,861	)	$	277,870,726

Net income														7,463,547						7,463,547
Other comprehensive loss																	(1,577,864	)		(1,577,864	)
Reclassification of stranded tax effects in accumulated other comprehensive income⁽¹⁾														205,662			(205,662	)		—
Purchase of Company’s common stock at cost, 41 shares		—			(410	)								(1,376	)					(1,786	)
Cash dividends declared, $0.15 per share														(1,409,381	)					(1,409,381	)
Common Stock issued under incentive plans, net of shares surrendered in payment, including tax benefit, 714 shares		7			17,777															17,784
Exercise of stock options		131			153,330															153,461
RRP shares released for allocation					(3,092	)					4,661									1,569
ESOP shares released for allocation					344,381			89,270												433,651
Share-based compensation cost					137,520															137,520

Balance, March 31, 2018	$	94,093		$	165,990,921		$	(3,749,240	)	$	(79,242	)	$	123,571,082		$	(2,738,387	)	$	283,089,227

⁽¹⁾	See Note 2 - Recent Accounting Pronouncements

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	For the Three Months Ended
	March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	7,463,547		$	5,005,701
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		964,257			306,832
Depreciation		576,342			475,414
Amortization and accretion of purchase accounting valuations and intangibles		1,970,023			1,196,576
Net amortization of mortgage servicing asset		37,628			50,005
Federal Home Loan Bank stock dividends		(26,300	)		(24,700	)
Net amortization of discount on investments		476,107			429,340
Gain on loans sold, net		(207,037	)		(288,063	)
Proceeds, including principal payments, from loans held for sale		29,782,590			30,313,165
Originations of loans held for sale		(25,013,412	)		(31,161,355	)
Non-cash compensation		571,171			480,275
Deferred income tax expense		150,165			702,634
Decrease in accrued interest receivable and other assets		1,732,479			1,257,474
Increase in cash surrender value of bank-owned life insurance		(160,619	)		(118,716	)
Decrease (increase) in accrued interest payable and other liabilities		1,454,137			(1,836,114	)

Net cash provided by operating activities		19,771,078			6,788,468

Cash flows from investing activities:
Purchases of securities available for sale		(42,046,174	)		(19,784,473	)
Proceeds from maturities, prepayments and calls on securities available for sale		11,480,093			11,083,713
Decrease (increase) in loans, net		13,568,048			(268,761	)
Decrease in interest-bearing deposits in banks		—			245,000
Proceeds from sale of repossessed assets		215,000			1,722,000
Purchases of office properties and equipment		(789,815	)		(425,773	)
Proceeds from sale of office properties and equipment		768,402			639,290

Net cash used in investing activities		(16,804,446	)		(6,789,004	)

Cash flows from financing activities:
(Decrease) increase in deposits, net		(27,038,698	)		24,078,161
Repayments of Federal Home Loan Bank advances		(964,142	)		(334,504	)
Proceeds from exercise of stock options		153,461			280,213
Issuance of stock under incentive plans		17,784			—
Dividends paid to shareholders		(1,409,381	)		(957,126	)
Purchase of Company’s common stock		(1,786	)		(2,224	)

Net cash (used in) provided by financing activities		(29,242,762	)		23,064,520

Net change in cash and cash equivalents		(26,276,130	)		23,063,984
Cash and cash equivalents at beginning of year		150,417,829			29,314,741

Cash and cash equivalents at end of year	$	124,141,699		$	52,378,725

The accompanying Notes are an integral part of these Consolidated Financial Statements.

HOME BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Home Bancorp, Inc. (the “Company”) were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The results of operations for the three-month period ended March 31, 2018 are not necessarily indicative of the results which may be expected for the entire fiscal year. These statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2017.

Critical Accounting Policies and Estimates

There were no material changes or developments during the reporting period with respect to methodologies the Company uses when applying critical accounting policies and developing critical accounting estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017.

In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

2. Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Conforming Amendments Related to Leases”. This ASU amends the codification regarding leases in order to increase transparency and comparability. The ASU requires companies to recognize lease assets and liabilities on the statement of condition and disclose key information about leasing arrangements. Upon implementation, lessee will recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The ASU is effective for annual and interim periods beginning after December 15, 2018. The Company is currently assessing the amendment but does not anticipate it will have a material impact on our Consolidated Financial Statements. Based on the Company’s preliminary assessment of its current leases, the impact to the Company’s consolidated balance sheet is estimated to be less than a 1% increase in assets and liabilities.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”. The ASU requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net carrying value at the amount expected to be collected on the financial assets. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis is determined in a similar manner to other financial assets

measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Off-balance-sheet arrangements such as commitments to extend credit, guarantees, and standby letters of credit that and are not unconditionally cancellable are also within the scope of this amendment. Credit losses relating to debt securities should be recorded through an allowance for credit losses. This ASU is effective for fiscal years beginning after December 31, 2019. An entity will apply the amendments in this update on a modified retrospective basis, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently assessing this accounting standard and the implementation of a new software application during 2018 to assist in determining the impact to our Consolidated Financial Statements. The adoption of this ASU could materially affect our Consolidated Financial Statements, however, the magnitude of the impact has not yet been quantified.

In January 2017, FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other, Simplifying the Test for Goodwill Impairment”. The amendment in this ASU eliminates the requirement to calculate the implied fair value of goodwill in order to measure a goodwill impairment charge. An entity will record an impairment charge based on the excess of the carrying amount over its fair value. This ASU is effective for fiscal and interim testing periods beginning after December 15, 2019. The Company is currently assessing the amendment and does not anticipate it will have a material impact on our Consolidated Financial Statements.

In April 2017, FASB issued ASU No. 2017-8, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The accounting for purchased callable debt securities held at a discount does not change under the new guidance. This ASU is effective for fiscal and interim periods beginning after December 15, 2018. The Company is currently assessing the amendment and does not anticipate it will have an impact on our Consolidated Financial Statements.

ASU 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within accumulated other comprehensive income as a result of tax reform. This issue came about from the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017 that changed the Company’s statutory income tax rate from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company adopted ASU 2018-02 in the first quarter of 2018 and reclassified its stranded tax credit of $206,000 from accumulated other comprehensive income to retained earnings.

3. Investment Securities

Summary information regarding the Company’s investment securities classified as available for sale and held to maturity as of March 31, 2018 and December 31, 2017 is as follows.


*(dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Fair Value
					Less Than 1 Year		Over 1 Year
March 31, 2018
Available for sale:
U.S. agency mortgage-backed	$	93,491	$	552	$	912	$	437	$	92,694
Collateralized mortgage obligations		139,395		104		1,451		1,423		136,625
Municipal bonds		22,985		136		50		—		23,071
U.S. government agency		10,765		54		39		—		10,780

Total available for sale	$	266,636	$	846	$	2,452	$	1,860	$	263,170

Held to maturity:
Municipal bonds	$	12,950	$	28	$	23	$	32	$	12,923

Total held to maturity	$	12,950	$	28	$	23	$	32	$	12,923


*(dollars in thousands)*	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses				Fair Value
					Less Than 1 Year		Over 1 Year
December 31, 2017
Available for sale:
U.S. agency mortgage-backed	$	84,639	$	619	$	270	$	298	$	84,690
Collateralized mortgage obligations		115,435		46		671		1,075		113,735
Municipal bonds		25,362		177		17		1		25,521
U.S. government agency		11,026		42		21		—		11,047

Total available for sale	$	236,462	$	884	$	979	$	1,374	$	234,993

Held to maturity:
Municipal bonds	$	13,034	$	54	$	18	$	15	$	13,055

Total held to maturity	$	13,034	$	54	$	18	$	15	$	13,055

The estimated fair value and amortized cost by contractual maturity of the Company’s investment securities as of March 31, 2018 are shown in the following tables. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. The expected maturity of a security may differ from its contractual maturity because of prepayments or the exercise of call options. Accordingly, actual maturities may differ from contractual maturities.


*(dollars in thousands)*	One Year or Less		After One Year through Five Years		After Five Years through Ten Years		After Ten Years		Total
Fair Value
Securities available for sale:
U.S. agency mortgage-backed	$	2,282	$	8,168	$	46,550	$	35,694	$	92,694
Collateralized mortgage obligations		—		5,948		10,944		119,733		136,625
Municipal bonds		3,599		9,615		6,999		2,858		23,071
U.S. government agency		1,004		3,963		4,240		1,573		10,780

Total securities available for sale	$	6,885	$	27,694	$	68,733	$	159,858	$	263,170

Securities held to maturity:
Municipal bonds	$	—	$	5,805	$	6,051	$	1,067	$	12,923

Total securities held to maturity	$	—	$	5,805	$	6,051	$	1,067	$	12,923


*(dollars in thousands)*	One Year or Less		After One Year through Five Years		After Five Years through Ten Years		After Ten Years		Total
Amortized Cost
Securities available for sale:
U.S. agency mortgage-backed	$	2,283	$	8,260	$	47,365	$	35,583	$	93,491
Collateralized mortgage obligations		—		5,971		11,190		122,234		139,395
Municipal bonds		3,578		9,569		6,971		2,867		22,985
U.S. government agency		999		3,998		4,194		1,574		10,765

Total securities available for sale	$	6,860	$	27,798	$	69,720	$	162,258	$	266,636

Securities held to maturity:
Municipal bonds	$	—	$	5,802	$	6,073	$	1,075	$	12,950

Total securities held to maturity	$	—	$	5,802	$	6,073	$	1,075	$	12,950

Management evaluates securities for other-than-temporary impairment at least quarterly, and more frequently when economic and market conditions warrant such evaluations. Consideration is given to (1) the extent and length of time the fair value has been below cost; (2) the reasons for the decline in value; and (3) the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost, which may extend to maturity.

The Company performs a process to identify securities that could potentially have a credit impairment that is other-than-temporary. This process involves evaluating each security for impairment by monitoring credit performance, collateral type, collateral geography, bond credit support, loan-to-value ratios, credit scores, loss severity levels, pricing levels, downgrades by rating agencies, cash flow projections and other factors as indicators of potential credit issues. When the Company determines that a security is deemed other-than-temporarily impaired, an impairment loss is recognized.

As of March 31, 2018, 149 of the Company’s investment securities had unrealized losses totaling 2.1% of the individual securities’ amortized cost basis and 1.6% of the Company’s total amortized cost basis of the investment securities portfolio. At such date, 36 of the 149 securities had been in a continuous loss position for over 12 months. The 36 securities had an aggregate amortized cost basis of $52.4 million and an unrealized loss of $1.9 million at March 31, 2018. Management has the intent and ability to hold these securities until maturity, or until anticipated recovery; hence, no declines in these securities were deemed other-than-temporary at March 31, 2018.

As of March 31, 2018 and December 31, 2017, the Company had $176,902,000 and $121,984,000, respectively, of securities pledged to secure public deposits.

4. Earnings Per Share

Earnings per common share were computed based on the following:


	Three Months Ended March 31,
*(in thousands, except per share data)*	2018		2017
Numerator:
Net income available to common shareholders	$	7,464	$	5,006
Denominator:
Weighted average common shares outstanding		9,012		6,936
Effect of dilutive securities:
Restricted stock		23		3

Stock options		234		268

Weighted average common shares outstanding – assuming dilution		9,269		7,207

Basic earnings per common share	$	0.83	$	0.72

Diluted earnings per common share	$	0.81	$	0.69

Options on 444 and 43,326 shares of common stock were not included in the computation of diluted earnings per share for the three months ended March 31, 2018 and March 31, 2017, respectively, because the effect of these shares was anti-dilutive.

5. Credit Quality and Allowance for Loan Losses

The following briefly describes the distinction between originated and Acquired Loans and certain significant accounting policies relevant to each category.

Originated Loans

Loans originated for investment are reported at the principal balance outstanding net of unearned income. Interest on loans and accretion of unearned income are computed in a manner that approximates a level yield on recorded principal. Interest on loans is recorded as income is earned. The accrual of interest on an originated loan is discontinued when it is probable the borrower will not be able to meet payment obligations as they become due. The Company maintains an allowance for loan losses on originated loans that represents management’s estimate of probable losses incurred in this portfolio category.

Acquired Loans

Loans that were acquired as a result of business combinations are referred to as “Acquired Loans.” Acquired Loans were recorded at estimated fair value at the acquisition date with no carryover of the related allowance for loan losses. The Acquired Loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration (“acquired impaired”), and then further segregated into loan pools designed to facilitate the estimation of expected cash flows. The fair value estimate for each pool of acquired performing and acquired impaired loans was based on the estimate of expected cash flows, both principal and interest, from that pool, discounted at prevailing market interest rates.

The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. Management estimates an allowance for loan losses for acquired performing loans using a methodology similar to that used for originated loans. The allowance determined for each loan pool is compared to the remaining fair value discount for that pool. If the allowance amount calculated under the Company’s methodology is greater than the Company’s remaining discount, the additional amount called for is added to the reported allowance through a provision for loan losses. If the allowance amount calculated under the Company’s methodology is less than the Company’s recorded discount, no additional allowance or provision is recognized. Actual losses first reduce any remaining nonaccretable discount for the loan pool. Once the nonaccretable discount is fully depleted, losses are applied against the allowance established for that pool. Acquired performing loans are placed on nonaccrual status and considered and reported as nonperforming or past due using the same criteria applied to the originated portfolio.

The excess of cash flows expected to be collected from an acquired impaired loan pool over the pool’s estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the pool. Each pool of acquired impaired loans is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Management recasts the estimate of cash flows expected to be collected on each acquired impaired loan pool periodically. If the present value of expected cash flows for a pool is less than its carrying value, an impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. If the present value of expected cash flows for a pool is greater than its carrying value, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield, which will be taken into interest income over the remaining life of the loan pool. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans, even if they would otherwise qualify for such treatment.

Allowance for Loan Losses

The allowance for loan losses and recorded investment in loans as of the dates indicated are as follows.


	As of March 31, 2018
	Originated Loans
*(dollars in thousands)*	Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Acquired Loans		Total
Allowance for loan losses:
One- to four-family first mortgage	$	1,662	$	—	$	137	$	1,799
Home equity loans and lines		691		348		114		1,153
Commercial real estate		4,869		—		182		5,051
Construction and land		1,827		—		7		1,834
Multi-family residential		400		—		—		400
Commercial and industrial		2,787		408		324		3,519
Consumer		496		—		17		513

Total allowance for loan losses	$	12,732	$	756	$	781	$	14,269


	As of March 31, 2018
	Originated Loans
*(dollars in thousands)*	Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Acquired Loans⁽¹⁾		Total
Loans:
One- to four-family first mortgage	$	204,805	$	—	$	261,388	$	466,193
Home equity loans and lines		53,727		909		37,184		91,820
Commercial real estate		375,230		22		230,141		605,393
Construction and land		130,894		—		49,654		180,548
Multi-family residential		33,462		—		19,263		52,725
Commercial and industrial		123,338		1,138		57,735		182,211
Consumer		39,621		—		22,759		62,380

Total loans	$	961,077	$	2,069	$	678,124	$	1,641,270


	As of December 31, 2017
	Originated Loans
*(dollars in thousands)*	Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Acquired Loans		Total
Allowance for loan losses:
One- to four-family first mortgage	$	1,574	$	—	$	89	$	1,663
Home equity loans and lines		676		348		78		1,102
Commercial real estate		4,766		—		140		4,906
Construction and land		1,742		—		7		1,749
Multi-family residential		355		—		—		355
Commercial and industrial		2,721		1,625		184		4,530
Consumer		496		—		6		502

Total allowance for loan losses	$	12,330	$	1,973	$	504	$	14,807


	As of December 31, 2017
	Originated Loans
*(dollars in thousands)*	Collectively Evaluated for Impairment		Individually Evaluated for Impairment		Acquired Loans⁽¹⁾		Total
Loans:
One- to four-family first mortgage	$	199,199	$	—	$	278,012	$	477,211
Home equity loans and lines		53,349		925		40,171		94,445
Commercial real estate		369,740		22		241,596		611,358
Construction and land		124,963		—		52,300		177,263
Multi-family residential		30,540		—		20,438		50,978
Commercial and industrial		120,818		2,512		61,954		185,284
Consumer		39,854		—		21,402		61,256

Total loans	$	938,463	$	3,459	$	715,873	$	1,657,795

⁽¹⁾	$13.8 million and $14.2 million in Acquired Loans were deemed to be acquired impaired loans and were accounted for under ASC 310-30 at March 31, 2018 and December 31, 2017, respectively.

A summary of activity in the allowance for loan losses for the three months ended March 31, 2018 and March 31, 2017 follows.


	For the Three Months Ended March 31, 2018
*(dollars in thousands)*	Beginning Balance		Charge-offs			Recoveries		Provision		Ending Balance
Originated loans:
Allowance for loan losses:
One- to four-family first mortgage	$	1,574	$	—		$	—	$	88	$	1,662
Home equity loans and lines		1,024		—			2		13		1,039
Commercial real estate		4,766		—			—		103		4,869
Construction and land		1,742		—			—		85		1,827
Multi-family residential		355		—			—		45		400
Commercial and industrial		4,346		(1,497	)		21		325		3,195
Consumer		496		(29	)		1		28		496

Total allowance for loan losses	$	14,303	$	(1,526	)	$	24	$	687	$	13,488

Acquired loans:
Allowance for loan losses:
One- to four-family first mortgage	$	89	$	—		$	—	$	48	$	137
Home equity loans and lines		78		—			—		36		114
Commercial real estate		140		—			—		42		182
Construction and land		7		—			—		—		7
Multi-family residential		—		—			—		—		—
Commercial and industrial		184		—			—		140		324
Consumer		6		—			—		11		17

Total allowance for loan losses	$	504	$	—		$	—	$	277	$	781

Total loans:
Allowance for loan losses:
One- to four-family first mortgage	$	1,663	$	—		$	—	$	136	$	1,799
Home equity loans and lines		1,102		—			2		49		1,153
Commercial real estate		4,906		—			—		145		5,051
Construction and land		1,749		—			—		85		1,834
Multi-family residential		355		—			—		45		400
Commercial and industrial		4,530		(1,497	)		21		465		3,519
Consumer		502		(29	)		1		39		513

Total allowance for loan losses	$	14,807	$	(1,526	)	$	24	$	964	$	14,269


	For the Three Months Ended March 31, 2017
(dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
Originated loans:
Allowance for loan losses:
One- to four-family first mortgage	$	1,436	$	—		$	—	$	(10	)	$	1,426
Home equity loans and lines		654		(10	)		15		328			987
Commercial real estate		4,177		—			—		65			4,242
Construction and land		1,763		—			—		(73	)		1,690
Multi-family residential		361		—			—		18			379
Commercial and industrial		3,316		—			103		(224	)		3,195
Consumer		513		(8	)		—		(7	)		498

Total allowance for loan losses	$	12,220	$	(18	)	$	118	$	97		$	12,417

Acquired loans:
Allowance for loan losses:
One- to four-family first mortgage	$	75	$	—		$	—	$	37		$	112
Home equity loans and lines		74		—			—		—			74
Commercial real estate		—		—			—		—			—
Construction and land		19		—			—		55			74
Multi-family residential		—		—			—		—			—
Commercial and industrial		123		—			—		117			240
Consumer		—		—			—		1			1

Total allowance for loan losses	$	291	$	—		$	—	$	210		$	501

Total loans:
Allowance for loan losses:
One- to four-family first mortgage	$	1,511	$	—		$	—	$	27		$	1,538
Home equity loans and lines		728		(10	)		15		328			1,061
Commercial real estate		4,177		—			—		65			4,242
Construction and land		1,782		—			—		(18	)		1,764
Multi-family residential		361		—			—		18			379
Commercial and industrial		3,439		—			103		(107	)		3,435
Consumer		513		(8	)		—		(6	)		499

Total allowance for loan losses	$	12,511	$	(18	)	$	118	$	307		$	12,918

Credit Quality

The following tables present the Company’s loan portfolio by credit quality classification as of the dates indicated.


	March 31, 2018
*(dollars in thousands)*	Pass		Special Mention		Substandard		Doubtful		Total
Originated loans:
One- to four-family first mortgage	$	200,385	$	1,205	$	3,215	$	—	$	204,805
Home equity loans and lines		52,907		—		1,729		—		54,636
Commercial real estate		361,621		4,479		9,152		—		375,252
Construction and land		128,561		1,698		635		—		130,894
Multi-family residential		33,462		—		—		—		33,462
Commercial and industrial		107,181		4,111		13,184		—		124,476
Consumer		39,313		115		193		—		39,621

Total originated loans	$	923,430	$	11,608	$	28,108	$	—	$	963,146


	March 31, 2018
*(dollars in thousands)*	Pass		Special Mention		Substandard		Doubtful		Total
Acquired loans:
One- to four-family first mortgage	$	251,847	$	2,949	$	6,592	$	—	$	261,388
Home equity loans and lines		36,671		361		152		—		37,184
Commercial real estate		207,491		12,446		10,204		—		230,141
Construction and land		45,688		2,875		1,091		—		49,654
Multi-family residential		18,359		627		277		—		19,263
Commercial and industrial		53,081		2,074		2,580		—		57,735
Consumer		22,082		361		316		—		22,759

Total acquired loans	$	635,219	$	21,693	$	21,212	$	—	$	678,124

Total loans:
One- to four-family first mortgage	$	452,232	$	4,154	$	9,807	$	—	$	466,193
Home equity loans and lines		89,578		361		1,881		—		91,820
Commercial real estate		569,112		16,925		19,356		—		605,393
Construction and land		174,249		4,573		1,726		—		180,548
Multi-family residential		51,821		627		277		—		52,725
Commercial and industrial		160,262		6,185		15,764		—		182,211
Consumer		61,395		476		509		—		62,380

Total loans	$	1,558,649	$	33,301	$	49,320	$	—	$	1,641,270


	December 31, 2017
*(dollars in thousands)*	Pass		Special Mention		Substandard		Doubtful		Total
Originated loans:
One- to four-family first mortgage	$	196,203	$	990	$	2,006	$	—	$	199,199
Home equity loans and lines		52,492		283		1,499		—		54,274
Commercial real estate		356,020		5,080		8,662		—		369,762
Construction and land		122,076		2,043		844		—		124,963
Multi-family residential		30,540		—		—		—		30,540
Commercial and industrial		105,097		4,640		13,593		—		123,330
Consumer		39,335		120		399		—		39,854

Total originated loans	$	901,763	$	13,156	$	27,003	$	—	$	941,922

Acquired loans:
One- to four-family first mortgage	$	269,144	$	2,825	$	6,043	$	—	$	278,012
Home equity loans and lines		39,603		307		261		—		40,171
Commercial real estate		218,234		12,522		10,840		—		241,596
Construction and land		48,748		3,056		496		—		52,300
Multi-family residential		19,644		636		158		—		20,438
Commercial and industrial		56,635		2,998		2,321		—		61,954
Consumer		21,172		69		161		—		21,402

Total acquired loans	$	673,180	$	22,413	$	20,280	$	—	$	715,873


	December 31, 2017
*(dollars in thousands)*	Pass		Special Mention		Substandard		Doubtful		Total
Total loans:
One- to four-family first mortgage	$	465,347	$	3,815	$	8,049	$	—	$	477,211
Home equity loans and lines		92,095		590		1,760		—		94,445
Commercial real estate		574,254		17,602		19,502		—		611,358
Construction and land		170,824		5,099		1,340		—		177,263
Multi-family residential		50,184		636		158		—		50,978
Commercial and industrial		161,732		7,638		15,914		—		185,284
Consumer		60,507		189		560		—		61,256

Total loans	$	1,574,943	$	35,569	$	47,283	$	—	$	1,657,795

The above classifications follow regulatory guidelines and can generally be described as follows:

•

Pass loans are of satisfactory quality.

•

Special mention loans have an existing weakness that could cause future impairment, including the deterioration of financial ratios, past due status, questionable management capabilities and possible reduction in the collateral values.

•

Substandard loans have an existing specific and well-defined weakness that may include poor liquidity and deterioration of financial performance. Such loans may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

•

Doubtful loans have specific weaknesses that are severe enough to make collection or liquidation in full highly questionable and improbable.

In addition, residential loans are classified using an inter-agency regulatory methodology that incorporates, among other factors, the extent of delinquencies and loan-to-value ratios. These classifications were the most current available as of the dates indicated and were generally updated within the quarter.

Age analysis of past due loans as of the dates indicated are as follows.


	March 31, 2018
*(dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	1,494	$	—	$	310	$	1,804	$	203,001	$	204,805
Home equity loans and lines		73		—		26		99		54,537		54,636
Commercial real estate		517		—		—		517		374,735		375,252
Construction and land		—		—		—		—		130,894		130,894
Multi-family residential		—		—		—		—		33,462		33,462

Total real estate loans		2,084		—		336		2,420		796,629		799,049

Other loans:
Commercial and industrial		876		—		409		1,285		123,191		124,476
Consumer		117		48		83		248		39,373		39,621

Total other loans		993		48		492		1,533		162,564		164,097

Total originated loans	$	3,077	$	48	$	828	$	3,953	$	959,193	$	963,146


	March 31, 2018
*(dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	5,182	$	1,004	$	3,860	$	10,046	$	251,342	$	261,388
Home equity loans and lines		300		46		82		428		36,756		37,184
Commercial real estate		2,292		581		2,952		5,825		224,316		230,141
Construction and land		902		125		338		1,365		48,289		49,654
Multi-family residential		179		—		—		179		19,084		19,263

Total real estate loans		8,855		1,756		7,232		17,843		579,787		597,630

Other loans:
Commercial and industrial		603		10		832		1,445		56,290		57,735
Consumer		701		168		292		1,161		21,598		22,759

Total other loans		1,304		178		1,124		2,606		77,888		80,494

Total acquired loans	$	10,159	$	1,934	$	8,356	$	20,449	$	657,675	$	678,124

Total loans:
Real estate loans:
One- to four-family first mortgage	$	6,676	$	1,004	$	4,170	$	11,850	$	454,343	$	466,193
Home equity loans and lines		373		46		108		527		91,293		91,820
Commercial real estate		2,809		581		2,952		6,342		599,051		605,393
Construction and land		902		125		338		1,365		179,183		180,548
Multi-family residential		179		—		—		179		52,546		52,725

Total real estate loans		10,939		1,756		7,568		20,263		1,376,416		1,396,679

Other loans:
Commercial and industrial		1,479		10		1,241		2,730		179,481		182,211
Consumer		818		216		375		1,409		60,971		62,380

Total other loans		2,297		226		1,616		4,139		240,452		244,591

Total loans	$	13,236	$	1,982	$	9,184	$	24,402	$	1,616,868	$	1,641,270


	December 31, 2017
*(dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	837	$	131	$	44	$	1,012	$	198,187	$	199,199
Home equity loans and lines		1,018		—		26		1,044		53,230		54,274
Commercial real estate		670		—		—		670		369,092		369,762
Construction and land		744		—		200		944		124,019		124,963
Multi-family residential		—		—		—		—		30,540		30,540

Total real estate loans		3,269		131		270		3,670		775,068		778,738

Other loans:
Commercial and industrial		882		825		1,641		3,348		119,982		123,330
Consumer		380		9		278		667		39,187		39,854

Total other loans		1,262		834		1,919		4,015		159,169		163,184

Total originated loans	$	4,531	$	965	$	2,189	$	7,685	$	934,237	$	941,922


	December 31, 2017
*(dollars in thousands)*	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Loans
Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	3,867	$	2,087	$	2,816	$	8,770	$	269,242	$	278,012
Home equity loans and lines		137		61		46		244		39,927		40,171
Commercial real estate		5,071		436		1,864		7,371		234,225		241,596
Construction and land		2,089		159		239		2,487		49,813		52,300
Multi-family residential		—		—		—		—		20,438		20,438

Total real estate loans		11,164		2,743		4,965		18,872		613,645		632,517

Other loans:
Commercial and industrial		809		678		185		1,672		60,282		61,954
Consumer		329		152		95		576		20,826		21,402

Total other loans		1,138		830		280		2,248		81,108		83,356

Total acquired loans	$	12,302	$	3,573	$	5,245	$	21,120	$	694,753	$	715,873

Total loans:
Real estate loans:
One- to four-family first mortgage	$	4,704	$	2,218	$	2,860	$	9,782	$	467,429	$	477,211
Home equity loans and lines		1,155		61		72		1,288		93,157		94,445
Commercial real estate		5,741		436		1,864		8,041		603,317		611,358
Construction and land		2,833		159		439		3,431		173,832		177,263
Multi-family residential		—		—		—		—		50,978		50,978

Total real estate loans		14,433		2,874		5,235		22,542		1,388,713		1,411,255

Other loans:
Commercial and industrial		1,691		1,503		1,826		5,020		180,264		185,284
Consumer		709		161		373		1,243		60,013		61,256

Total other loans		2,400		1,664		2,199		6,263		240,277		246,540

Total loans	$	16,833	$	4,538	$	7,434	$	28,805	$	1,628,990	$	1,657,795

Excluding Acquired Loans with deteriorated credit quality, the Company did not have any loans greater than 90 days past due and accruing as of March 31, 2018 or December 31, 2017.

The following table summarizes the accretable yield on loans accounted for under ASC 310-30 as of the dates indicated.


	For the Three Months Ended
*(dollars in thousands)*	March 31, 2018			March 31, 2017
Balance at beginning of period	$	(9,303	)	$	(11,091	)
Accretion		478			873

Transfers from nonaccretable difference to accretable yield		(966	)		(769	)

Balance at end of period	$	(9,791	)	$	(10,987	)

The following table summarizes information pertaining to Originated Loans, which were deemed impaired loans as of the dates indicated.


	For the Period Ended March 31, 2018
*(dollars in thousands)*	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines		462		476		—		464		—
Commercial real estate		22		23		—		22		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		335		348		—		354		—
Consumer		—		—		—		—		—

Total	$	819	$	847	$	—	$	840	$	—

With an allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines		447		460		348		449		—
Commercial real estate		—		—		—		—		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		803		903		408		1,622		—
Consumer		—		—		—		—		—

Total	$	1,250	$	1,363	$	756	$	2,071	$	—

Total impaired loans:
One- to four-family first mortgage	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines		909		936		348		913		—
Commercial real estate		22		23		—		22		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		1,138		1,251		408		1,976		—
Consumer		—		—		—		—		—

Total	$	2,069	$	2,210	$	756	$	2,911	$	—


	For the Period Ended December 31, 2017
*(dollars in thousands)*	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines		470		476		—		395		1
Commercial real estate		22		32		—		19		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		428		434		—		2,849		2
Consumer		—		—		—		—		—

Total	$	920	$	942	$	—	$	3,263	$	3

With an allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	42	$	—
Home equity loans and lines		455		461		348		383		1
Commercial real estate		—		—		—		296		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		2,084		2,157		1,625		1,985		52
Consumer		—		—		—		—		—

Total	$	2,539	$	2,618	$	1,973	$	2,706	$	53


Total impaired loans:
One- to four-family first mortgage	$	—	$	—	$	—	$	42	$	—
Home equity loans and lines		925		937		348		778		2
Commercial real estate		22		32		—		315		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		2,512		2,591		1,625		4,834		54
Consumer		—		—		—		—		—

Total	$	3,459	$	3,560	$	1,973	$	5,969	$	56


	For the Period Ended March 31, 2017
*(dollars in thousands)*	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	—	$	—
Home equity loans and lines		476		476		—		159		6
Commercial real estate		22		22		—		8		—
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		3,683		3,783		—		3,349		50
Consumer		—		—		—		—		—

Total	$	4,181	$	4,281	$	—	$	3,516	$	56

With an allowance recorded:
One- to four-family first mortgage	$	—	$	—	$	—	$	166	$	—
Home equity loans and lines		461		461		348		154		6
Commercial real estate		450		480		5		454		5
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		2,127		2,193		940		1,827		27
Consumer		—		—		—		—		—

Total	$	3,038	$	3,134	$	1,293	$	2,601	$	38

Total impaired loans:
One- to four-family first mortgage	$	—	$	—	$	—	$	166	$	—
Home equity loans and lines		937		937		348		313		12
Commercial real estate		472		502		5		462		5
Construction and land		—		—		—		—		—
Multi-family residential		—		—		—		—		—
Commercial and industrial		5,810		5,976		940		5,176		77
Consumer		—		—		—		—		—

Total	$	7,219	$	7,415	$	1,293	$	6,117	$	94

The following table summarizes information pertaining to nonaccrual loans as of dates indicated.


	March 31, 2018						December 31, 2017
*(dollars in thousands)*	Originated		Acquired⁽¹⁾		Total		Originated		Acquired⁽¹⁾		Total
Nonaccrual loans:
One- to four-family first mortgage	$	3,074	$	2,012	$	5,086	$	2,006	$	1,167	$	3,173
Home equity loans and lines		1,666		144		1,810		1,434		108		1,542
Commercial real estate		9,152		121		9,273		8,662		95		8,757
Construction and land		9		351		360		200		249		449
Multi-family residential		—		—		—		—		—		—
Commercial and industrial		9,313		965		10,278		9,678		932		10,610
Consumer		193		313		506		399		103		502

Total	$	23,407	$	3,906	$	27,313	$	22,379	$	2,654	$	25,033

⁽¹⁾

Table excludes Acquired Loans which were being accounted for under ASC 310-30 because they continue to earn interest from accretable yield regardless of their status as past due or otherwise not in compliance with their contractual terms. Acquired Loans with deteriorated credit quality, which were being accounting for under ASC 310-30 and which were 90 days or more past due totaled $5.4 million and $4.3 million as of March 31, 2018 and December 31, 2017, respectively.

As of March 31, 2018, the Company had no outstanding commitments to lend additional funds to any customer whose loan was classified as impaired.

Troubled Debt Restructurings

During the course of its lending operations, the Company periodically grants concessions to its customers in an attempt to protect as much of its investment as possible and to minimize risk of loss. These concessions may include restructuring the terms of a customer loan to alleviate the burden of the customer’s near-term cash requirements. Loans are considered troubled debt restructurings (“TDR”) when the Company agrees to restructure a loan to a borrower who is experiencing financial difficulties in a manner that is deemed to be a “concession”. The Company defines a concession as a modification of existing terms granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties that the Company would otherwise not consider. The concession either is granted through an agreement with the customer or is imposed by a court or by law. Concessions include modifying original loan terms to reduce or defer cash payments required as part of the loan agreement, including but not limited to:

•

a reduction of the stated interest rate for the remaining original life of the debt,

•

an extension of the maturity date or dates at an interest rate lower than the current market rate for new debt with similar risk characteristics,

•

a reduction of the face amount or maturity amount of the debt, or

•

a reduction of accrued interest receivable on the debt.

In its determination of whether the customer is experiencing financial difficulties, the Company considers numerous indicators, including, but not limited to:

•

whether the customer is currently in default on its existing loan, or is in an economic position where it is probable the customer will be in default on its loan in the foreseeable future without a modification,

•

whether the customer has declared or is in the process of declaring bankruptcy,

•

whether there is substantial doubt about the customer’s ability to continue as a going concern,

•

whether, based on its projections of the customer’s current capabilities, the Company believes the customer’s future cash flows will be insufficient to service the debt, including interest, in accordance with the contractual terms of the existing agreement for the foreseeable future, and

•

whether, without modification, the customer cannot obtain sufficient funds from other sources at an effective interest rate equal to the current market rate for similar debt for a non-troubled debtor.

If the Company concludes that both a concession has been granted and the concession was granted to a customer experiencing financial difficulties, the Company identifies the loan as a TDR. For purposes of the determination of an allowance for loan losses on TDRs, such loans are reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined that losses are probable on such TDRs, either because of delinquency or other credit quality indicators, the Company specifically allocates a portion of the allowance for loan losses to these loans.

Information about the Company’s TDRs is presented in the following tables.


	As of March 31, 2018
*(dollars in thousands)*	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	291	$	—	$	1,872	$	2,163
Home equity loans and lines		44		18		570		632
Commercial real estate		95		—		7,793		7,888
Construction and land		158		—		—		158
Multi-family residential		—		—		—		—

Total real estate loans		588		18		10,235		10,841

Other loans:
Commercial and industrial		—		—		4,360		4,360
Consumer		—		—		110		110

Total other loans		—		—		4,470		4,470

Total loans	$	588	$	18	$	14,705	$	15,311

Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	211	$	1	$	56	$	268
Home equity loans and lines		—		—		73		73
Commercial real estate		—		778		—		778
Construction and land		—		—		—		—
Multi-family residential		—		—		—		—

Total real estate loans		211		779		129		1,119

Other loans:
Commercial and industrial		78		—		835		913
Consumer		—		—		—		—

Total other loans		78		—		835		913

Total loans	$	289	$	779	$	964	$	2,032

Total loans:
Real estate loans:
One- to four-family first mortgage	$	502	$	1	$	1,928	$	2,431
Home equity loans and lines		44		18		643		705
Commercial real estate		95		778		7,793		8,666
Construction and land		158		—		—		158
Multi-family residential		—		—		—		—

Total real estate loans		799		797		10,364		11,960

Other loans:
Commercial and industrial		78		—		5,195		5,273
Consumer		—		—		110		110

Total other loans		78		—		5,305		5,383

Total loans	$	877	$	797	$	15,669	$	17,343


	As of December 31, 2017
*(dollars in thousands)*	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs
Originated loans:
Real estate loans:
One- to four-family first mortgage	$	306	$	274	$	473	$	1,053
Home equity loans and lines		275		64		316		655
Commercial real estate		96		332		1,942		2,370
Construction and land		169		—		—		169
Multi-family residential		—		—		—		—

Total real estate loans		846		670		2,731		4,247

Other loans:
Commercial and industrial		—		—		4,581		4,581
Consumer		—		—		178		178

Total other loans		—		—		4,759		4,759

Total loans	$	846	$	670	$	7,490	$	9,006

Acquired loans:
Real estate loans:
One- to four-family first mortgage	$	214	$	3	$	59	$	276
Home equity loans and lines		—		—		91		91
Commercial real estate		—		803		—		803
Construction and land		—		—		—		—
Multi-family residential		—		—		—		—

Total real estate loans		214		806		150		1,170

Other loans:
Commercial and industrial		—		—		203		203
Consumer		—		—		—		—

Total other loans		—		—		203		203

Total loans	$	214	$	806	$	353	$	1,373

Total loans:
Real estate loans:
One- to four-family first mortgage	$	520	$	277	$	532	$	1,329
Home equity loans and lines		275		64		407		746
Commercial real estate		96		1,135		1,942		3,173
Construction and land		169		—		—		169
Multi-family residential		—		—		—		—

Total real estate loans		1,060		1,476		2,881		5,417

Other loans:
Commercial and industrial		—		—		4,784		4,784
Consumer		—		—		178		178

Total other loans		—		—		4,962		4,962

Total loans	$	1,060	$	1,476	$	7,843	$	10,379

The following table summarizes information pertaining to loans modified as of the periods indicated.


	For the Three Months Ended March 31,
	2018						2017
*(dollars in thousands)*	Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment		Number of Contracts		Pre- modification Outstanding Recorded Investment		Post- modification Outstanding Recorded Investment
Troubled debt restructurings:
One- to four-family first mortgage		1	$	1,138	$	1,138		—	$	—	$	—
Home equity loans and lines		—		—		—		1		15		15
Commercial real estate		1		6,423		5,923		1		461		461
Construction and land		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—
Commercial and industrial		2		776		714		—		—		—
Other consumer		—		—		—		1		43		42

Total		4	$	8,337	$	7,775		3	$	519	$	518

None of the performing troubled debt restructurings as of March 31, 2018 had defaulted subsequent to the restructuring through the date the financial statements were available to be issued.

6. Fair Value Measurements and Disclosures

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company groups assets and liabilities measured or disclosed at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels used to measure fair value are as follows:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities quarterly.

Recurring Basis

Investment Securities Available for Sale

Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities bids, offers and other reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted

prices are not available in an active market, fair values are estimated primarily by the use of pricing models. Level 2 investment securities are primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.

Management primarily identifies investment securities, which may have traded in illiquid or inactive markets, by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of March 31, 2018, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

The following tables present the balances of assets measured for fair value on a recurring basis as of March 31, 2018 and December 31, 2017.


*(dollars in thousands)*	March 31, 2018		Level 1		Level 2		Level 3
Available for sale securities:

U.S. agency mortgage-backed	$	92,694	$	—	$	92,694	$	—
Collateralized mortgage obligations		136,625		—		136,625		—
Municipal bonds		23,071		—		23,071		—
U.S. government agency		10,780		—		10,780		—

Total	$	263,170	$	—	$	263,170	$	—


*(dollars in thousands)*	December 31, 2017		Level 1		Level 2		Level 3
Available for sale securities:

U.S. agency mortgage-backed	$	87,758	$	—	$	87,758	$	—
Collateralized mortgage obligations		113,735		—		113,735		—
Municipal bonds		25,521		—		25,521		—
U.S. government agency		7,980		—		7,980		—

Total	$	234,994	$	—	$	234,994	$	—

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

Nonrecurring Basis

In accordance with the provisions of ASC 310, Receivables, the Company records loans considered impaired at fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from external parties of the collateral less any prior liens and when there is no observable market price. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company classifies repossessed assets as Level 3 assets.

The Company has segregated all financial assets that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.


			Fair Value Measurements Using
*(dollars in thousands)*	March 31, 2018		Level 1		Level 2		Level 3
Assets
Impaired loans	$	1,312	$	—	$	—	$	1,312
Repossessed assets		543		—		—		543

Total	$	1,855	$	—	$	—	$	1,855


			Fair Value Measurements Using
*(dollars in thousands)*	December 31, 2017		Level 1		Level 2		Level 3
Assets
Impaired loans	$	1,486	$	—	$	—	$	1,486
Repossessed assets		728		—		—		728

Total	$	2,214	$	—	$	—	$	2,214

The following table shows significant observable inputs used in the fair value measurement of Level 3 assets.


*(dollars in thousands)*	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts		Weighted Average Discount
As of March 31, 2018:
Impaired loans	$	1,312	Third party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100%		35	%

Repossessed assets	$	543	Third party appraisals, sales contracts, Broker price opinions	Collateral discounts and estimated costs to sell		6% - 88%		24	%

*(dollars in thousands)*	Fair Value		Valuation Technique	Unobservable Inputs	Range of Discounts		Weighted Average Discount
As of December 31, 2017:
Impaired loans	$	1,486	Third party appraisals and discounted cash flows	Collateral discounts and discount rates		0% - 100%		57	%

Repossessed assets	$	728	Third party appraisals, sales contracts, Broker price opinions	Collateral discounts and estimated costs to sell		6% - 100%		28	%

ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statements. These estimates are subjective in nature, involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.

The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using first party pricing services or quoted market prices of securities with similar characteristics.

The carrying value of mortgage loans held for sale approximates their fair value.

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.

The cash surrender value of bank-owned life insurance (“BOLI”) approximates its fair value.

The fair value of customer deposits, excluding certificates of deposit, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

The fair value of short-term FHLB advances is the amount payable at maturity. The fair value of long-term FHLB advances is estimated by discounting the future cash flows using the rates currently offered for advances of similar maturities.

The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.


			Fair Value Measurements at March 31, 2018
	Carrying
*(dollars in thousands)*	Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	124,142	$	124,142	$	124,142	$	—	$	—
Interest-bearing deposits in banks		2,421		2,421		2,421		—		—
Investment securities available for sale		263,170		263,170		—		263,170		—
Investment securities held to maturity		12,950		12,923		—		12,923		—
Mortgage loans held for sale		1,311		1,311		—		1,311		—
Loans, net		1,627,001		1,609,954		—		1,608,642		1,312
Cash surrender value of BOLI		29,065		29,065		29,065		—		—

Financial Liabilities
Deposits	$	1,839,205	$	1,836,954	$	—	$	1,836,954	$	—
Short-term FHLB advances		3,610		3,610		3,610		—		—
Long-term FHLB advances		67,278		66,166		—		66,166		—


			Fair Value Measurements at December 31, 2017
	Carrying
*(dollars in thousands)*	Amount		Total		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	150,418	$	150,418	$	150,418	$	—	$	—
Interest-bearing deposits in banks		2,421		2,421		2,421		—		—
Investment securities available for sale		234,993		234,993		—		234,993		—
Investment securities held to maturity		13,034		13,055		—		13,055		—
Mortgage loans held for sale		5,873		5,873		—		5,873		—
Loans, net		1,642,987		1,642,634		—		1,641,148		1,486
Cash surrender value of BOLI		28,904		28,904		28,904		—		—

Financial Liabilities
Deposits	$	1,866,227	$	1,864,735	$	—	$	1,864,735	$	—
Short-term FHLB advances		3,642		3,642		3,642		—		—
Long-term FHLB advances		68,183		67,143		—		67,143		—

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. (the “Company”) and its wholly owned subsidiary, Home Bank, N. A. (the “Bank”), from December 31, 2017 through March 31, 2018 and on its results of operations for the three months ended March 31, 2018 and March 31, 2017. This discussion and analysis is intended to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated 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, 2017. 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 first quarter of 2018, the Company earned $7.5 million, an increase of $2.5 million, or 49.1%, compared to the first quarter of 2017. Diluted earnings per share for the first quarter of 2018 were $0.81, an increase of $0.12, or 17.4%, compared to the first quarter of 2017. The first quarter of 2018 includes merger expenses related to the acquisition of St. Martin Bancshares, Inc. (“SMB”) totaling $694,000, net of taxes while the first quarter of 2017 includes a gain on the sale of a banking center totaling $247,000, net of taxes.

Key components of the Company’s performance during the three months ended March 31, 2018 include:

•

Assets totaled $2.2 billion as of March 31, 2018, a decrease of $21.3 million, or 1.0%, from December 31, 2017.

•

Loans as of March 31, 2018 were $1.6 billion, a decrease of $16.5 million, or 1.0% from December 31, 2017.

•

Investment securities totaled $276.1 million as of March 31, 2018, an increase of $28.1 million, or 11.3% from December 31, 2017.

•

Deposits as of March 31, 2018 were $1.8 billion, a decrease of $27.0 million, or 1.4%, from December 31, 2017. CD balances declined $27.6 million during the quarter.

•

Interest income increased $7.4 million, or 42.4%, in the first quarter of 2018 compared to the first quarter of 2017. The increase was driven primarily by the addition of the interest-earning assets acquired from SMB.

•

Interest expense increased $825,000, or 59.2% in the first quarter of 2018 compared to the first quarter of 2017. The increase was primarily the result of the addition of the interest-bearing liabilities acquired from SMB.

•

The provision for loan losses totaled $964,000 for the first quarter of 2018, an increase of $657,000, or 214.3%, compared to the first quarter of 2017. At March 31, 2018, the Company’s ratio of the allowance for loan losses to total loans was 0.87%, compared to 1.05% at March 31, 2017. Excluding Acquired Loans, the ratio of the allowance for loan losses to total loans was 1.40% at March 31, 2018, compared to 1.38% at March 31, 2017. Net loan charge-offs for the first quarter of 2018 were $1.5 million compared to net loan recoveries of $100,000 for the first quarter of 2017. The increase in net loan charge-offs resulted primarily from further deterioration of two loan relationships identified as problem credits in previous periods.

•

Noninterest income for the first quarter of 2018 increased $655,000, or 23.2%, compared to the first quarter of 2017. The first quarter of 2017 include a gain on the sale of a banking center totaling $380,000 (pre-tax). The increase resulted primarily from additional service fees and charges and bank card fees due to the SMB acquisition (up $718,000 and $415,000, respectively), which were partially offset by decreases in other income (down $228,000 due to lower recoveries on acquired assets) and gains on sale of banking centers (down $210,000).

•

Noninterest expense for the first quarter of 2018 increased $4.6 million, or 41.3%, compared to the first quarter of 2017. Noninterest expense includes merger-related expenses totaling $879,000 for the three months ended March 31, 2018. The increase related primarily to the growth of the Company’s employee base, higher occupancy and data processing costs due to the SMB acquisition.

FINANCIAL CONDITION

Loans, Asset Quality and Allowance for Loan Losses

Loans – Loans outstanding as of March 31, 2018 were $1.6 billion, a decrease of $16.5 million from December 31, 2017. Growth in originated loans of 2.3% (9.5% annualized) during the first three months of 2018 was offset by reductions in Acquired Loan balances.

The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.


	March 31,		December 31,		Increase/(Decrease)
*(dollars in thousands)*	2018		2017		Amount			Percent
Real estate loans:
One- to four-family first mortgage	$	466,193	$	477,211	$	(11,018	)		(2.3	)%
Home equity loans and lines		91,820		94,445		(2,625	)		(2.8	)
Commercial real estate		605,393		611,358		(5,965	)		(1.0	)
Construction and land		180,548		177,263		3,285			1.9
Multi-family residential		52,725		50,978		1,747			3.4

Total real estate loans		1,396,679		1,411,255		(14,576	)		(1.0	)

Other loans:
Commercial and industrial		182,211		185,284		(3,073	)		(1.7	)
Consumer		62,380		61,256		1,124			1.8

Total other loans		244,591		246,540		(1,949	)		(0.8	)

Total loans	$	1,641,270	$	1,657,795	$	(16,525	)		(1.0	)%

The outstanding balance of direct loans to borrowers in the energy sector totaled $57.7 million, or 3.5% of total outstanding loans, at March 31, 2018, compared to $58.8 million at December 31, 2017. Unfunded loan commitments to customers in the energy sector totaled $9.9 million at March 31, 2018, compared to $9.3 million at December 31, 2017. At March 31, 2018, loans constituting 93.0% of the balance of our direct energy-related loans were performing in accordance with their original loan agreements. The Company holds no shared national credits.

In addition to our exposure to direct energy-related loans, given the effect of the energy sector on the overall economy in several of our markets, we also have indirect exposure in making loans to borrowers who are not themselves in the energy sector but whose customers include energy sector entities.

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 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 their 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 initially recorded at fair value less estimated costs to sell. 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 loans, multi-family residential loans, 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 at the bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans. As of March 31, 2018 and December 31, 2017, loans individually evaluated for impairment, excluding Acquired Loans, amounted to $2.1 million and $3.5 million, respectively. As of March 31, 2018 and December 31, 2017, acquired impaired loans (loans considered to have deteriorated credit quality at the time of acquisition) amounted to $13.8 million and $14.2 million, respectively. As of March 31, 2018 and December 31, 2017, substandard loans, excluding Acquired Loans, amounted to $28.1 million and $27.0 million, respectively. The amount of the allowance for loan losses allocated to substandard loans originated by Home Bank totaled $756,000 as of March 31, 2018 and $2.0 million as of December 31, 2017. The amount of the allowance for loan losses allocated to Acquired Loans totaled $781,000 and $504,000, respectively, at such dates. There were no assets classified as doubtful or loss as of March 31, 2018 or December 31, 2017.

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 bank’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 analyzes all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establishes 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.

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.

The following table sets forth the composition of the Company’s nonperforming assets (“NPAs”) and performing troubled debt restructurings as of the dates indicated.


	March 31, 2018							December 31, 2017
*(dollars in thousands)*	Originated		Acquired⁽¹⁾		Total			Originated		Acquired⁽¹⁾		Total
Nonaccrual loans⁽²⁾:
Real estate loans:
One- to four-family first mortgage	$	3,074	$	2,012	$	5,086		$	2,006	$	1,167	$	3,173
Home equity loans and lines		1,666		144		1,810			1,434		108		1,542
Commercial real estate		9,152		121		9,273			8,662		95		8,757
Construction and land		9		351		360			200		249		449
Multi-family residential		—		—		—			—		—		—
Other loans:
Commercial and industrial		9,313		965		10,278			9,678		932		10,610
Consumer		193		313		506			399		103		502

Total nonaccrual loans		23,407		3,906		27,313			22,379		2,654		25,033
Accruing loans 90 days or more past due		—		—		—			—		—		—

Total nonperforming loans		23,407		3,906		27,313			22,379		2,654		25,033
Foreclosed assets		107		436		543			144		584		728

Total nonperforming assets		23,514		4,342		27,856			22,523		3,238		25,761
Performing troubled debt restructurings		606		1,068		1,674			1,516		1,020		2,536

Total nonperforming assets and troubled debt restructurings	$	24,120	$	5,410	$	29,530		$	24,039	$	4,258	$	28,297

Nonperforming loans to total loans						1.66	%						1.51	%
Nonperforming loans to total assets						1.24	%						1.12	%
Nonperforming assets to total assets						1.26	%						1.16	%

⁽¹⁾

Table excludes Acquired Loans, which were being accounted for under ASC 310-30 because they continue to earn interest from accretable yield regardless of their status as past due or otherwise not in compliance with their contractual terms. Acquired Loans with deteriorated credit quality, which were being accounted for under ASC 310-30 and which were 90 days or more past due, totaled $8.7 million and $4.3 million as of March 31, 2018 and December 31, 2017, respectively.

⁽²⁾

Nonaccrual loans include originated restructured loans placed on nonaccrual totaling $14.7 million and $7.5 million at March 31, 2018 and December 31, 2017, respectively. Acquired restructured loans placed on nonaccrual totaled $964,000 and $353,000 at March 31, 2018 and December 31, 2017, respectively.

The Company recorded net loan charge-offs for the first quarter of 2018 of $1.5 million compared to net loan recoveries for the first quarter of 2017 of $100,000. The increase in net loan charge-offs resulted primarily from further deterioration in two loan relationships identified as problem credits in prior periods.

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 ratings to segments of the loan 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 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. See Note 5 to the Unaudited Consolidated Financial Statements for additional information concerning our allowance for Acquired Loans.

Acquired Loans were recorded at their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses. If the present value of expected cash flows for a pool is less than its carrying value, an impairment is recognized by an increase in the allowance for loan losses and a charge to the provision for loan losses. As of March 31, 2018 and December 31, 2017, $781,000 and $504,000, respectively, of our allowance for loan losses was 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 three months of 2018.


*(dollars in thousands)*	Originated			Acquired		Total
Balance, December 31, 2017	$	14,303		$	504	$	14,807
Provision charged to operations		687			277		964
Loans charged off		(1,526	)		—		(1,526	)
Recoveries on charged off loans		24			—		24

Balance, March 31, 2018	$	13,488		$	781	$	14,269

At March 31, 2018, the Company’s ratio of allowance for loan losses to total loans was 0.87%, compared to 0.89% and 1.05% at December 31, 2017 and March 31, 2017, respectively. Excluding Acquired Loans, the ratio of allowance for loan losses to total loans was 1.40% at March 31, 2018, compared to 1.52% and 1.38% at December 31, 2017 and March 31, 2017, respectively.

The allowance for loan losses attributable to originated direct energy-related loans totaled 2.76% of the outstanding balance of energy-related loans at March 31, 2018, compared to 2.49% and 3.16% at December 31, 2017 and March 31, 2017, respectively.

Investment Securities

The Company’s investment securities portfolio totaled $276.1 million as of March 31, 2018, an increase of $28.1 million, or 11.3%, from December 31, 2017. As of March 31, 2018, the Company had a net unrealized loss on its available for sale investment securities portfolio of $3.5 million, compared to a net unrealized loss of $1.5 million as of December 31, 2017.

The following table summarizes activity in the Company’s investment securities portfolio during the first three months of 2018.


*(dollars in thousands)*	Available for Sale			Held to Maturity
Balance, December 31, 2017	$	234,993		$	13,034
Purchases		42,046			—
Sales		—			—
Principal maturities, prepayments and calls		(11,480	)		—
Amortization of premiums and accretion of discounts		(392	)		(84	)
Decrease in market value		(1,997	)		—

Balance, March 31, 2018	$	263,170		$	12,950

Funding Sources

Deposits – Deposits totaled $1.8 billion as of March 31, 2018, a decrease of $27.0 million, or 1.4%, compared to December 31, 2017. Core deposits (i,e, checking, savings and money market accounts) totaled $1.5 billion as of March 31, 2018, an increase of $569,000 compared to December 31, 2017. Certificates of deposit totaled $361.6 million as of March 31, 2018, a decrease of $27.6 million, or 7.1%, compared to December 31, 2017.

The following table sets forth the composition of the Company’s deposits at the dates indicated.


	March 31,		December 31,		Increase/(Decrease)
*(dollars in thousands)*	2018		2017		Amount			Percent
Demand deposit	$	456,353	$	461,999	$	(5,646	)		(1.2	)%
Savings		215,428		217,639		(2,211	)		(1.0	)
Money market		299,338		306,509		(7,171	)		(2.3	)
NOW		506,521		490,924		15,597			3.2
Certificates of deposit		361,565		389,156		(27,591	)		(7.1	)

Total deposits	$	1,839,205	$	1,866,227	$	(27,022	)		(1.4	)%

Federal Home Loan Bank Advances – Short-term FHLB advances totaled $3.6 million as of March 31, 2018, a decrease of $32,000, or 0.9%, compared to $3.6 million as of December 31, 2017. Long-term FHLB advances totaled $67.3 million as of March 31, 2018, a decrease of $906,000, or 1.3%, compared to $68.2 million as of December 31, 2017.

Shareholders’ Equity – Shareholders’ equity increased $5.2 million, or 1.9%, from $277.9 million as of December 31, 2017 to $283.1 million as of March 31, 2018.

As of March 31, 2018, the Company and the Bank had regulatory capital that were well in excess of regulatory requirements. The following table presents actual and required capital ratios for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of March 31, 2018 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.


	Actual					Minimum Capital Required – Basel III Phase-In Schedule					Minimum Capital Required – Basel III Fully Phased-In					To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Company:
Tier 1 risk-based capital	$	218,328		13.79	%	$	124,688		7.875	%	$	134,584		8.50	%	$	N/A		N/A
Total risk-based capital		232,597		14.69			156,355		9.875			166,251		10.50			N/A		N/A
Tier 1 leverage capital		218,328		10.21			85,504		4.00			85,504		4.00			N/A		N/A

	Actual					Minimum Capital Required – Basel III Phase-In Schedule					Minimum Capital Required – Basel III Fully Phased-In					To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Bank:
Common equity Tier 1 capital (to risk-weighted assets)	$	204,424		12.93	%	$	100,765		6.375	%	$	110,644		7.00	%	$	102,741		6.50	%
Tier 1 risk-based capital		204,424		12.93			124,475		7.875			134,354		8.50			126,451		8.00
Total risk-based capital		218,692		13.84			156,087		9.875			165,966		10.50			158,063		10.00
Tier 1 leverage capital		204,424		9.57			85,412		4.00			85,412		4.00			106,765		5.00

LIQUIDITY AND ASSET/LIABILITY MANAGEMENT

Liquidity Management

Liquidity management encompasses our ability to ensure that funds are available to meet the cash flow requirements of depositors and borrowers, while also ensuring adequate cash flow exists to meet the Company’s needs, including operating, strategic and capital. The Company develops its liquidity management strategies as part of its overall asset/liability management process. Our primary sources of funds are from deposits, amortization of loans, loan prepayments and the maturity of loans, investment securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and investment securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan prepayments can be greatly influenced by general interest rates, economic conditions and competition. The Company also maintains excess funds in short-term, interest-bearing assets that provide additional liquidity. As of March 31, 2018, cash and cash equivalents totaled $124.1 million. At such date, investment securities available for sale totaled $263.2 million.

The Company uses its liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating

expenses. As of March 31, 2018, certificates of deposit maturing within the next 12 months totaled $218.9 million. Based upon historical experience, the Company anticipates that a significant portion of the maturing certificates of deposit will be redeposited with us. For the three months ended March 31, 2018, the average balance of outstanding FHLB advances was $71.2 million. As of March 31, 2018, the Company had $70.9 million in total outstanding FHLB advances and had $737.1 million in additional FHLB advances available.

In addition to cash flow from loan and securities payments and prepayments as well as from sales of securities available for sale, the Company has significant borrowing capacity available to fund liquidity needs. In recent years, the Company has utilized borrowings as a cost efficient addition to deposits as a source of funds. Borrowings consist of advances from the FHLB of Dallas, of which the Company is a member. Under terms of the collateral agreement with the FHLB, the Company pledges residential mortgage loans and investment securities as well as the Company’s stock in the FHLB as collateral for such advances.

Asset/Liability Management

The objective of asset/liability management is to implement strategies for the funding and deployment of the Company’s financial resources that are expected to maximize soundness and profitability over time at acceptable levels of risk. Interest rate sensitivity is the potential impact of changing rate environments on both net interest income and cash flows. The Company measures its interest rate sensitivity over the near term primarily by running net interest income simulations. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the change in its net interest income over a range of interest rate scenarios. Based on the Company’s interest rate risk model, the table below sets forth the results of immediate and sustained changes in interest rates as of March 31, 2018.


Shift in Interest Rates (in bps)		% Change in Projected Net Interest Income
+300		1.8%
+200		1.5
+100		0.9

The actual impact of changes in interest rates will depend on many factors. These factors include the Company’s ability to achieve expected growth in earning assets and maintain a desired mix of earning assets and interest-bearing liabilities, the actual timing of asset and liability repricing, the magnitude of interest rate changes and corresponding movement in interest rate spreads, and the level of success of asset/liability management strategies.

Off-Balance Sheet Activities

To meet the financing needs of its customers, the Bank issues financial instruments which represent conditional obligations that are not recognized, wholly or in part, in the statements of financial condition. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments expose the Company to varying degrees of credit and interest rate risk in much the same way as funded loans. The same credit policies are used in these commitments as for on-balance sheet instruments. The Company’s exposure to credit losses from these financial instruments is represented by their contractual amounts.

The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans as of March 31, 2018 and December 31, 2017.


	Contract Amount
	March 31,		December 31,
*(dollars in thousands)*	2018		2017
Standby letters of credit	$	5,082	$	6,620
Available portion of lines of credit		171,556		203,367
Undisbursed portion of loans in process		109,945		78,578
Commitments to originate loans		124,256		96,183

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to be drawn upon, the total commitment amounts generally represent future cash requirements.

Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

The Company is subject to certain claims and litigation arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company.

RESULTS OF OPERATIONS

During the first quarter of 2018, the Company earned $7.5 million, an increase of $2.5 million or 49.1%, compared to the first quarter of 2017. Diluted earnings per share for the first quarter of 2018 were $0.81, an increase of $0.12, or 17.4%, compared to the first quarter of 2017. The first quarter of 2018 includes merger expenses totaling $694,000, net of taxes, related to the acquisition of SMB and the first quarter of 2017 includes a gain of the sale of a banking center totaling $247,000, net of taxes.

Net Interest Income – Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. The Company’s net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s tax-equivalent net interest spread was 4.32% and 4.29% for the three months ended March 31, 2018 and March 31, 2017, respectively. The Company’s tax-equivalent net interest margin, which is net interest income as a percentage of average interest-earning assets, was 4.49% and 4.42% for the three months ended March 31, 2018 and March 31, 2017, respectively.

Net interest income totaled $22.5 million for the three months ended March 31, 2018, an increase of $6.5 million, or 40.9%, compared to the three months ended March 31, 2017. The addition of SMB’s interest-earning assets accounted for the vast majority of the increase.

The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent (“TE”) yields are calculated using a marginal tax rate of 21% for 2018 and 35% for 2017.


	Three Months Ended March 31,
	2018							2017
					Average							Average
	Average				Yield/			Average				Yield/
*(dollars in thousands)*	Balance		Interest		Rate ⁽¹⁾			Balance		Interest		Rate⁽¹⁾
Interest-earning assets:
Loans receivable⁽¹⁾
Originated loans	$	910,874	$	12,277		5.41	%	$	900,852	$	11,321		5.17	%
Acquired loans		736,629		10,527		5.73			329,555		4,922		5.99

Total loans receivable⁽¹⁾		1,647,503		22,804		5.55			1,230,407		16,243		5.29


Investment securities
Taxable		223,383		1,309	2.34			167,757		866	2.06

Tax-exempt (TE)		36,444		186	2.59			32,700		163	3.06

Total investment securities		259,827		1,495	2.38			200,457		1,029	2.23

Other interest-earning assets		103,338		427	1.68			24,932		91	1.49

Total interest-earning assets (TE)		2,010,668		24,726	4.94			1,455,796		17,363	4.81
Noninterest-earning assets		194,242						105,486

Total assets	$	2,204,910					$	1,561,282	$

Interest-bearing liabilities:
Deposits:

Savings, checking and money market	$	1,010,980	$	1,013	0.41	%	$	684,872	$	415	0.25	%
Certificates of deposit		375,959		889	0.96			276,908		577	0.85

Total interest-bearing deposits		1,386,939		1,902	0.56			961,780		992	0.42
Short-term FHLB advances		3,619		17	1.83			40,000		64	0.64
Long term FHLB advances		67,575		300	1.78			78,308		338	1.72

Total interest-bearing liabilities		1,458,133		2,219	0.62			1,080,088		1,394	0.52
Noninterest-bearing liabilities		464,924						298,326

Total liabilities		1,923,057						1,378,414
Shareholders’ equity		281,853						182,868

Total liabilities and shareholders’ equity	$	2,204,910					$	1,561,282

Net interest-earning assets	$	552,535					$	375,708

Net interest spread (TE)			$	22,507	4.32	%			$	15,969	4.29	%

Net interest margin (TE)					4.49	%					4.42	%

⁽¹⁾	Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process. Acquired Loans were recorded at fair value upon acquisition and accrete interest income over the remaining lives of the respective loans.

The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).


	For the Three Months Ended
	March 31,
	2018 Compared to 2017
	Change Attributable To
					Total
					Increase
*(dollars in thousands)*	Rate		Volume		(Decrease)
Interest income:
Loans receivable	$	982	$	5,579	$	6,561
Investment securities		114		352		466
Other interest-earning assets		27		309		336

Total interest income		1,123		6,240		7,363


	For the Three Months Ended
	March 31,
	2018 Compared to 2017
	Change Attributable To
						Total
						Increase
*(dollars in thousands)*	Rate		Volume			(Decrease)
Interest expense:

Savings, checking and money market accounts		350		248			598
Certificates of deposit		90		222			312
FHLB advances		76		(161	)		(85	)

Total interest expense		516		309			825

Increase (decrease) in net interest income	$	607	$	5,931		$	6,538

Provision for Loan Losses – For the quarter ended March 31, 2018, the Company recorded a provision for loan losses of $964,000, which was 214.3% higher than the $307,000 recorded for the same period in 2017. The Company recorded net loan charge-offs of $1.5 million during the first quarter of 2018, compared to $100,000 of net loan recoveries in the first quarter of 2017. The increase in net loan charge-offs resulted primarily from further deterioration of two loan relationships identified as problem credits in prior periods.

As of March 31, 2018, the Company’s ratio of allowance for loan losses to total loans was 0.87%, compared to 0.89% and 1.05% at December 31, 2017 and March 31, 2017, respectively. Excluding Acquired Loans, the ratio of the allowance for loan losses to total loans was 1.40% at March 31, 2018, compared to 1.52% and 1.38% at December 31, 2017 and March 31, 2017, respectively. The ratio of nonperforming loans to total assets was 1.24% at March 31, 2018, compared to 1.12% at December 31, 2017.

Noninterest Income – The Company’s noninterest income was $3.5 million for the quarter ended March 31, 2018, $655,000, or 23.2%, higher than the $2.8 million earned for the same period in 2017. The increase resulted primarily from additional service fees and charges and bank card fees due to the SMB acquisition (up $718,000 and $415,000, respectively), which were partially offset by decreases in other income (down $228,000 due to lower recoveries on acquired assets) and the absence of any gain on the sale of banking centers in the 2018 period (down $210,000).

Noninterest Expense – The Company’s noninterest expense was $15.6 million for the three months ended March 31, 2018, $4.6 million, or 41.3%, higher than the $11.0 million recorded for the same period in 2017. Noninterest expense for the first quarter of 2018 includes merger-related expenses totaling $879,000 (pre-tax). The increase related primarily to the growth of the Company’s employee base, higher occupancy and data processing costs due to the SMB acquisition.

Income Taxes – For the quarters ended March 31, 2018 and March 31, 2017, the Company incurred income tax expense of $2.0 million and $2.5 million, respectively. The Company’s effective tax rate was 20.9% and 32.9% during the first quarters of 2018 and 2017, respectively. The lower effective tax rate recorded during the first quarter of 2018 was the result of the Tax Act. The Tax Act reduced the federal corporate statutory tax rate from 35% to 21%. Differences between the effective tax rate and the statutory tax rate primarily relate to variances in items that are non-taxable or non-deductible (e.g., state tax, tax-exempt income, merger-related expenses, etc.).

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Quantitative and qualitative disclosures about market risk are presented in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2017, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability Management and Market Risk”. Additional information at March 31, 2018 is included herein under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Asset/Liability Management”.

Item 4.

Controls and Procedures.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the first quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

Not applicable.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for December 31, 2017 filed with the Securities and Exchange Commission.

Item 2.

Unregistered Sales of Equity Securities and the Use of Proceeds.

The Company’s purchases of its common stock made during the quarter consisted of stock repurchases under the Company’s approved plans and are set forth in the following table.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plan or Programs⁽¹⁾
January 1 – January 31, 2018		—	$	—		—		367,512
February 1 – February 28, 2018		41		43.56		41		367,471
March 1 – March 31, 2018		—		—		—		367,471

Total		41	$	43.56		41		367,471

⁽¹⁾

On June 7, 2013, the Company announced the commencement of a stock repurchase program. Under the 2013 plan, the Company can repurchase up to 370,000 shares, or approximately 5% of its common stock outstanding, through open market or privately negotiated transactions. On April 26, 2016, the Company announced a new stock repurchase program. Under the 2016 plan, the Company can repurchase up to 365,000 shares, or approximately 5% of its common stock outstanding at the time of adoption, through open market or privately negotiated transactions.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits and Financial Statement Schedules.


No.		Description

31.1		Rule 13(a)-14(a) Certification of the Chief Executive Officer

31.2		Rule 13(a)-14(a) Certification of the Chief Financial Officer

32.0		Section 1350 Certification

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		HOME BANCORP, INC.

May 8, 2018	By:	/s/ John W. Bordelon
		John W. Bordelon
		President, Chief Executive Officer and Director

May 8, 2018	By:	/s/ Joseph B. Zanco
		Joseph B. Zanco
		Executive Vice President and Chief Financial Officer

May 8, 2018	By:	/s/ Mary H. Hopkins
		Mary H. Hopkins
		Home Bank, N.A. First Vice President and Director of Financial Management