HOME BANCORP, INC. quarterly report, Q2 FY2018

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Home Bancorp, Inc. — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018. Balance-sheet comparisons are against December 31, 2017; operating results are compared with the corresponding 2017 periods. The filing covers Home Bancorp and its wholly owned bank subsidiary. Results include the impact of the acquisition of St. Martin Bancshares (SMB).

Financial performance and position

  • Q2 earnings: Net income was $7.8 million, up 73.3% year over year; diluted EPS was $0.84 versus $0.62. Six-month net income was $15.2 million, up 60.6%; diluted EPS was $1.64 versus $1.31.
  • Income and margins: Q2 net interest income was $23.3 million, up 46.8%; six-month net interest income was $45.8 million, up 43.9%. Tax-equivalent net interest margin was 4.69% for Q2 and 4.59% for the first half, versus 4.35% and 4.38%, respectively, in 2017. Noninterest income was $3.3 million for Q2 and $6.8 million for the first half.
  • Expenses and provision: Noninterest expense was $16.3 million in Q2 and $31.9 million in the first half. The loan-loss provision was $581,000 for Q2 and $1.5 million for the first half.
  • Assets and loans: Total assets were $2.160 billion, down 3.1% from year-end. Loans were $1.626 billion before allowance, down 1.9%; originated loans grew 4.9% during the half, but acquired loan balances declined. Commercial real estate loans totaled $604.7 million.
  • Credit quality: Nonperforming loans were $22.2 million, or 1.37% of loans, versus $25.0 million at year-end. Nonperforming assets were $22.7 million, or 1.05% of assets, versus 1.16%. The allowance was $15.0 million, or 0.92% of total loans; excluding acquired loans, the coverage ratio was 1.40%. First-half net charge-offs were $1.4 million, primarily tied to two previously identified problem relationships.
  • Deposits, debt and liquidity: Deposits were $1.789 billion, down 4.2%; cash and cash equivalents were $80.5 million, versus $150.4 million at year-end. FHLB advances totaled approximately $70.0 million ($3.6 million short-term and $66.4 million long-term). The company reported $740.1 million of additional FHLB borrowing capacity. Certificates of deposit totaling $215.2 million mature within 12 months.
  • Cash flow: For the first half, operating activities provided $17.3 million; investing activities used $4.9 million and financing activities used $82.2 million. Cash declined $69.9 million, chiefly alongside a $77.7 million net decrease in deposits.
  • Capital and shareholder returns: Shareholders’ equity was $289.4 million, up 4.1% from year-end. The Bank’s actual capital ratios exceeded applicable minimums; its total risk-based capital ratio was 14.52% and Tier 1 leverage ratio was 10.16%. Dividends declared were $0.17 per share for Q2 and $0.32 for the first half.

Material changes versus comparable periods

  • SMB acquisition-related assets drove most of the increase in interest income and net interest income, while acquired liabilities contributed to higher interest expense. Higher average earning assets and improved loan yields also supported margin expansion.
  • Q2 interest income rose 47.0% year over year, while interest expense rose 49.1%. For the first half, the respective increases were 44.7% and 54.0%.
  • Operating expenses increased 47.7% in Q2 and 44.5% for the first half, reflecting the larger employee base, higher occupancy and data-processing costs following SMB, as well as merger costs.
  • First-half provision expense increased to $1.5 million from $457,000, and net charge-offs shifted from $42,000 in net recoveries in 2017 to $1.4 million in net charge-offs in 2018.
  • Available-for-sale securities increased to $264.3 million from $235.0 million, while their net unrealized loss widened to $4.5 million from $1.5 million. Accumulated other comprehensive loss was $3.5 million at June 30.

Outlook, risks and unusual items

  • The filing gives no specific earnings or revenue guidance. Management said further deposit-rate increases are likely to retain and attract deposits, and expects a significant portion of near-term CD maturities to be redeposited based on historical experience.
  • Q2 2018 included $1.1 million of pretax SMB merger expenses ($894,000 net of tax); first-half merger expenses were $2.0 million pretax ($1.6 million net of tax). Q2 2017 included a $449,000 pretax write-down of a closed banking center, contributing to a reported loss on asset sales.
  • The lower 2018 effective tax rate—20.5% in Q2 versus 34.6% in Q2 2017—reflects the Tax Cuts and Jobs Act’s reduction of the federal statutory rate from 35% to 21%.
  • Interest-rate simulations estimated projected net interest income would increase 2.3% under an immediate, sustained 300-basis-point increase, 1.8% at +200 basis points, and 1.1% at +100 basis points. Actual outcomes depend on repricing, deposit behavior, growth and spreads.
  • Credit risks include higher first-half charge-offs, commercial real estate and commercial-and-industrial exposures, and uncertainty in loss estimates. Management cautioned that future conditions could require additional loan-loss provisions. Adoption of the expected-credit-loss standard (ASU 2016-13) could materially change credit-loss accounting; the company was assessing its impact.
  • Off-balance-sheet commitments included $161.0 million of available lines, $107.3 million of undisbursed loans in process, $107.2 million of commitments to originate loans and $4.4 million of standby letters of credit. Management said ordinary-course litigation was not expected to have a material effect. No material change to previously disclosed risk factors was reported.

Important facts for investors to verify

  • Whether deposit outflows continue and how much of the $215.2 million in CDs maturing within 12 months renews, including the effect of deposit-rate increases on funding costs.
  • Whether originated-loan growth persists as acquired loans run off, and how the commercial real estate and C&I portfolios perform.
  • The drivers and recurrence of first-half net charge-offs, provision expense and changes in nonperforming loans and TDRs.
  • The sustainable earnings contribution from SMB after merger expenses, and whether elevated compensation, occupancy and data-processing costs moderate.
  • The eventual impact of ASU 2016-13 on the allowance and retained earnings, and the sensitivity of securities values, margins and liquidity to interest-rate changes.