Business context and reporting period
Home Bancorp, Inc. is the holding company for Home Bank, N.A., a community bank operating 39 offices in south Louisiana and west Mississippi. Its core business is gathering deposits and lending, with an emphasis on commercial real estate and commercial and industrial loans. This Form 10-K reports the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter report.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars.
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets at year-end | $2,153.7 | $2,228.1 |
| Total loans at year-end | $1,649.8 | $1,657.8 |
| Deposits at year-end | $1,773.2 | $1,866.2 |
| Net interest income | $92.0 | $67.8 |
| Provision for loan losses | $3.9 | $2.3 |
| Noninterest income | $13.4 | $10.0 |
| Noninterest expense | $63.2 | $46.2 |
| Net income | $31.6 | $16.8 |
| Diluted earnings per share | $3.40 | $2.28 |
| Net cash provided by operating activities | $47.1 | $24.8 |
Net interest margin was 4.62%, up from 4.48%; net interest spread was 4.42%, up from 4.32%. Return on average assets was 1.46% (1.04%); return on average equity was 10.88% (8.63%); and the efficiency ratio was 59.96% (59.35%). Fourth-quarter net income was $8.1 million, compared with $3.2 million in Q4 2017; diluted EPS was $0.87 versus $0.41.
Year-end shareholders’ equity was $304.0 million, up 9.4%. Bank capital ratios included a 14.55% Tier 1 risk-based ratio, 11.15% leverage ratio and 15.59% total risk-based ratio; the Bank was categorized as well-capitalized. FHLB advances were $58.7 million and other borrowings were $5.5 million. Cash and cash equivalents were $59.6 million, available-for-sale securities were $260.1 million, and additional FHLB borrowing capacity was approximately $726 million. Operating cash flow increased, while cash and cash equivalents fell by $90.8 million during the year, primarily reflecting financing outflows, including a $93.1 million net decline in deposits.
Material changes versus the prior comparable period
- Net income rose 87.8% and diluted EPS rose 49.1%. Management attributed much of the increase in revenue and expense to the full-year contribution of St. Martin Bancshares, acquired in December 2017; therefore, year-over-year growth includes an acquisition-related comparison effect.
- Interest income increased 37.5%, while interest expense increased 57.4%; average deposit cost rose 17 basis points. Loan growth from originated loans was offset by acquired-loan paydowns, leaving total loans down 0.5%.
- Deposits declined 5.0%; core deposits fell 3.7% and certificates of deposit fell 9.8%. Assets declined 3.3%, largely because cash balances decreased.
- Provision for loan losses rose 70.2%; net charge-offs increased to $2.4 million from $21,000, mainly due to deterioration in three commercial loan relationships. Nonperforming loans were $24.4 million, compared with $25.0 million.
- Noninterest expense increased 36.9%, including $2.0 million of merger-related costs, and reflected higher compensation, data-processing and occupancy costs. The effective tax rate fell to 17.5% from 42.6%; the prior-year rate included a $2.7 million deferred-tax-asset remeasurement charge following the 2017 tax law change.
Outlook, commentary, risks and unusual items
The filing provides no specific earnings or growth guidance. Management said it expected sufficient funds to meet liquidity needs and anticipated most certificates maturing within 12 months would be renewed or placed in other deposit accounts. Management also reported that a cost-segregation study reduced 2018 tax expense by $819,000, a benefit it did not expect to recur; New Market Tax Credit benefits were expected to continue annually for six years. The Company invested $5.5 million in a New Market Tax Credit entity and recorded a related $5.5 million note payable.
- Credit and concentration: Commercial real estate loans were $640.6 million; construction and land loans were $193.6 million, or 11.7% of the loan portfolio. Energy-sector loans were $45.6 million, with $10.1 million in unfunded commitments; $1.5 million of energy loans were on nonaccrual. The company highlighted regional oil-and-gas exposure and the possibility of further credit deterioration.
- Allowance and acquired loans: The allowance was $16.3 million, or 0.99% of total loans (1.36% excluding acquired loans). Acquired substandard loans increased, primarily due to the SMB portfolio; management cited existing fair-value discounts as a loss buffer. CECL adoption was expected to increase the allowance, but the amount was not yet known.
- Interest-rate risk: The Company’s model estimated projected net interest income would decline 1.5% for an immediate, sustained 300-basis-point increase and 0.6% for a 200-basis-point increase; a 100-basis-point increase showed no change.
- Liquidity and commitments: Certificates of deposit totaling $203.4 million were scheduled to mature within 12 months. Off-balance-sheet commitments totaled $391.7 million, including unused credit lines, loan-in-process disbursements and commitments to originate loans.
- Other risks and contingencies: The filing discusses competition, economic and real-estate conditions, natural disasters in its Louisiana markets, cybersecurity and third-party systems, acquisitions, regulation, and accounting estimates. Ordinary-course litigation was not expected by management to materially affect the Company. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed those controls as effective.
Important facts for investors to verify
- How much of the 2018 earnings increase reflects sustainable operating performance versus the SMB acquisition, acquisition accounting and tax benefits.
- Whether deposit outflows and rising deposit costs continue, and how the $203.4 million of 2019 CD maturities are retained or replaced.
- Credit trends in commercial real estate, construction, acquired SMB loans and energy exposures, including charge-offs, nonaccruals and allowance adequacy.
- The eventual CECL allowance and earnings impact, which management had not quantified.
- Whether reported liquidity and available FHLB capacity remain adequate if deposit outflows, loan commitments or market stress increase.