Home Bancorp, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. Home Bancorp, Inc. is a bank holding company operating through Home Bank, N.A. This unaudited filing covers the quarter and nine months ended September 30, 2020. Results reflect the COVID-19 environment and the January 1, 2020 adoption of the expected-credit-loss standard, CECL.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $23.3 million | $21.1 million | $67.0 million | $64.7 million |
| Provision for loan losses | $0 | $1.1 million | $12.7 million | $2.3 million |
| Net income | $8.8 million | $6.9 million | $13.2 million | $21.3 million |
| Diluted EPS | $1.01 | $0.75 | $1.51 | $2.32 |
| Net interest margin, tax-equivalent | 3.82% | 4.12% | 3.91% | 4.30% |
For Q3, net income increased 28.1% year over year, primarily as lower deposit interest expense and no loan-loss provision outweighed weaker noninterest income. For the first nine months, net income fell 38.2%, mainly because of COVID-related credit provisions. Total interest income was essentially flat year over year for the nine-month period; lower interest expense supported higher net interest income.
- Balance sheet at September 30: Assets were $2.58 billion, up 17.2% from December 31, 2019. Loans were $1.96 billion, up $240.9 million (14.1%); the increase was driven by $254.5 million in net PPP loans, while loans excluding PPP declined $13.6 million. Deposits rose $386.5 million (21.2%) to $2.21 billion.
- Credit reserves and asset quality: The allowance for loan losses was $33.0 million, or 1.69% of loans; the total allowance for credit losses, including unfunded commitments, was $36.6 million, or 1.87%. Nonperforming assets were $24.8 million, down from $28.5 million at year-end 2019. Nonperforming loans were 1.17% of loans versus 1.42% at year-end.
- Funding, liquidity and capital: Cash and cash equivalents were $185.8 million versus $39.8 million at year-end. Total deposits were $2.21 billion; FHLB advances outstanding were $31.4 million, with $775.3 million of additional availability. The company reported total primary and secondary liquidity of $1.13 billion. The Bank’s common equity Tier 1 ratio was 14.03% and total risk-based capital ratio was 15.29%, above stated regulatory minimums.
- Cash flow, nine months: Operating activities provided $18.1 million; investing activities used $231.9 million, largely reflecting net loan growth; financing activities provided $359.7 million, including deposit growth. Cash and cash equivalents increased $146.0 million to $185.8 million.
- Shareholder returns: Dividends declared were $0.22 per share in Q3 and $0.66 for the first nine months. The company repurchased 438,892 shares for $11.6 million during the nine-month period. A new authorization allows repurchases of up to 444,000 shares.
Material changes and unusual items
- CECL adoption increased the allowance for credit losses by $7.0 million at January 1 and reduced retained earnings by $4.7 million after tax. The company recorded $14.0 million of loan and unfunded-commitment provisions over the first nine months; none in Q3.
- PPP activity included approximately 3,072 loans totaling $262.2 million funded in Q2 and Q3. At quarter-end, $254.5 million remained recorded, net of $7.6 million in deferred lender fees. PPP loans reduced Q3 net interest margin by an estimated 14 basis points.
- COVID-related payment deferrals fell to $70.2 million, or 4% of loans, from $558.8 million, or 28%, at June 30. Of loans that exited deferral, $469.0 million (98%) were current and performing at September 30. Separately, $70.2 million of modified loans were reported under CARES Act relief and were not categorized as TDRs.
- Q3 2019 noninterest income included a $1.2 million non-taxable BOLI death benefit, a significant comparison item. Q3 2020 noninterest income also benefited from higher loan-sale gains, while service fees were lower.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management says it continues to monitor borrowers, industry exposures, asset quality and unfunded commitments as the effects of COVID-19 evolve. Key risks include further deterioration in borrower performance or collateral values, additional credit provisions, weaker demand, lower asset yields in a near-zero-rate environment, pressure on fee income, and pandemic-related operational or cyber risks. The company also cites potential energy-market and regional economic impacts. Management says ordinary-course litigation is not expected to materially affect financial condition or results. A $40 million interest-rate swap portfolio hedges variable-rate liabilities; management estimates $63,000 will be reclassified to interest expense over the next 12 months.
Important facts for investors to verify
- Whether PPP forgiveness and fee amortization proceed as expected, and how loan balances and yields change as PPP loans run off.
- Whether COVID-related deferrals remain performing and whether special-mention or nonperforming loans, particularly in commercial real estate, hospitality, restaurants and energy, increase.
- Whether the $36.6 million credit-loss allowance remains adequate as economic forecasts and CECL assumptions change; the reserve depends on management estimates.
- Deposit retention and the refinancing or renewal of $290.8 million of certificates of deposit scheduled to mature within 12 months.
- Effects of interest-rate movements on net interest margin; the company’s model estimated projected net interest income changes of +2.1% for a 200-basis-point increase and -3.2% for a 100-basis-point decrease.
- Ongoing capital returns, including the new repurchase authorization, alongside the company’s stated potential to suspend repurchases or reduce dividends if earnings weaken materially.