Home Bancorp, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014; balance-sheet comparisons are to December 31, 2013. The Louisiana-based banking company completed its acquisition of Britton & Koontz Capital Corporation on February 14, adding five Mississippi branches; two Baton Rouge locations were consolidated.
Key financial results and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $13.10 million | $9.93 million | $24.91 million | $19.78 million |
| Noninterest income | $2.25 million | $2.28 million | $3.91 million | $4.09 million |
| Noninterest expense | $10.37 million | $8.09 million | $21.63 million | $16.43 million |
| Net income | $2.75 million | $1.24 million | $4.19 million | $3.11 million |
| Diluted earnings per share | $0.40 | $0.18 | $0.61 | $0.44 |
The filing presents bank interest and noninterest income rather than a conventional revenue measure. Net interest margin, on a taxable-equivalent basis, was 4.64% for Q2 and 4.68% for the six-month period, versus 4.59% and 4.61%, respectively, in 2013. Net interest spread was 4.55% and 4.58%, versus 4.45% and 4.46%.
- Balance sheet at June 30: Assets were $1.259 billion, up 27.9% from year-end; loans were $907.6 million, up 28.3%; deposits were $981.7 million, up 32.4%; shareholders’ equity was $148.1 million, up 4.3%.
- Liquidity and funding: Cash and cash equivalents were $56.3 million, with a further $5.8 million in interest-bearing bank deposits. Available-for-sale securities were $179.2 million. Borrowings included $102.5 million in FHLB advances and $20.7 million under repurchase agreements. The company reported $347.8 million of additional FHLB borrowing availability; $146.4 million of certificates of deposit mature within 12 months.
- Cash flow for six months: Operating activities provided $11.1 million; investing activities used $1.1 million; financing activities provided $13.7 million. Cash and cash equivalents increased $23.7 million to $56.3 million. Investing cash flows include $23.0 million net cash disbursed in the acquisition.
- Credit quality: The allowance for loan losses was $7.76 million, or 0.85% of total loans (1.10% excluding acquired loans). Nonperforming loans were $19.6 million, or 2.16% of loans; nonperforming assets were $26.5 million, or 2.11% of assets. Net charge-offs were $116,000 for the first six months, versus $2.0 million in 2013.
- Capital: The Bank reported Tier 1 risk-based capital of 16.29%, total risk-based capital of 17.20%, and Tier 1 leverage capital of 11.11%, each above the filing’s “well capitalized” thresholds.
Material changes versus prior periods
- Reported net income rose 121.3% year over year in Q2 and 34.8% for the first six months. Growth reflected the acquisition’s additional earning assets and the lower loan-loss provision; the acquisition also added operating costs.
- Interest income rose 28.5% in Q2 and 22.0% for six months, largely from acquired assets. Interest expense fell 9.1% and 18.2%, respectively, reflecting funding mix and lower market rates.
- Provision for loan losses declined 63.9% in Q2 and 65.5% for six months. The company attributed the Q2 provision primarily to loan growth and deterioration in certain acquired GSFC loans.
- Noninterest expense increased 28.1% in Q2 and 31.7% for six months. Excluding merger expenses, it increased 25.6% and 18.5%, respectively, with higher compensation, occupancy, data processing and foreclosed-asset costs.
- Noninterest income was slightly lower in Q2 and down 4.5% for six months, reflecting lower securities and mortgage-loan sale gains, partly offset by higher service charges and bank-card fees.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or growth guidance. Management cautions that interim results are not necessarily indicative of full-year results and that actual outcomes may differ from forward-looking statements.
- The acquisition’s aggregate cash purchase price was $34.5 million; preliminary purchase accounting recorded $114,000 of goodwill. Merger-related expenses were $207,000 in Q2 and $2.16 million for six months. Management’s non-GAAP adjustments exclude these costs: adjusted diluted EPS was $0.42 for Q2 and $0.82 for six months, compared with reported $0.40 and $0.61.
- Interest-rate simulations showed projected net interest income declining 0.3%, 0.9% and 1.5% under immediate, sustained rate increases of 100, 200 and 300 basis points, respectively; actual impacts depend on repricing, growth, spreads and other factors.
- Loan commitments and other off-balance-sheet exposures included $97.8 million of available lines of credit, $62.2 million of undisbursed loans in process, $77.8 million of commitments to originate loans and $4.0 million of standby letters of credit.
- Management reported ordinary-course claims and litigation, but did not expect their resolution to materially affect financial condition or results. No material changes to previously disclosed risk factors were reported.
- Management said 34 debt securities had been in a continuous unrealized-loss position for over 12 months; it intended and was able to hold them until maturity or recovery and concluded no other-than-temporary impairment existed.
Important facts for investors to verify
- How much of loan, deposit and earnings growth is sustainable organically versus attributable to the Britton & Koontz acquisition, and whether expected integration benefits materialize.
- Credit performance and allowance adequacy in acquired portfolios, especially acquired loans with deteriorated credit quality, and trends in nonperforming assets and foreclosed assets.
- The effect of higher operating costs and merger-related charges on ongoing profitability; compare reported results with management’s non-GAAP adjustments.
- Deposit retention and funding costs as certificates mature, use of FHLB capacity, and the liquidity implications of loan commitments and repurchase agreements.
- Interest-rate sensitivity, securities valuation and the assumptions underlying acquired-loan fair values and expected cash flows.