Home Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and reporting period: Louisiana-based bank holding company and its subsidiary, Home Bank, N.A. Results cover the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. The company attributes much of its year-over-year growth to its acquisition of St. Martin Bancshares, Inc. (SMB).
Financial results and position
Dollars in millions, except per-share data and ratios.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $23.5 | $16.0 | $69.4 | $47.8 |
| Provision for loan losses | $0.8 | $0.7 | $2.3 | $1.1 |
| Noninterest income | $3.3 | $2.3 | $10.2 | $7.3 |
| Noninterest expense | $15.7 | $11.3 | $47.6 | $33.4 |
| Net income | $8.3 | $4.1 | $23.5 | $13.6 |
| Diluted earnings per share | $0.89 | $0.56 | $2.53 | $1.88 |
| Tax-equivalent net interest margin | 4.74% | 4.29% | 4.64% | 4.35% |
- Q3 net income rose 102.0%; nine-month net income rose 73.0%. Diluted EPS increased 58.9% and 34.6%, respectively. Management says acquisition effects drove much of the growth; prior-period merger costs also affected comparisons.
- Assets were $2.14 billion, down 3.9% from year-end 2017. Loans were $1.63 billion, down 1.5%; deposits were $1.77 billion, down 5.1%. Investment securities totaled $269.9 million, up 8.8%.
- Cash and cash equivalents fell to $61.7 million from $150.4 million. Nine-month operating cash flow was $32.2 million; investing cash flow was negative $9.4 million and financing cash flow was negative $111.5 million. Net cash declined $88.7 million, primarily alongside deposit outflows and net repayments of FHLB advances.
- FHLB advances totaled $59.6 million at quarter-end, down from $71.8 million at year-end. The company reported $730.9 million of additional FHLB borrowing availability. Shareholders’ equity was $295.7 million, up 6.4%; the Bank’s reported regulatory capital ratios were well above stated minimums.
- The allowance for loan losses was $15.7 million, or 0.96% of loans (1.38% excluding acquired loans), versus 0.89% at year-end. Nine-month net charge-offs were $1.4 million, primarily associated with two commercial and industrial relationships. Nonperforming loans were $20.9 million, or 1.28% of loans; nonperforming assets were $21.4 million, or 1.00% of assets.
Material changes versus comparable periods
- SMB acquisition-related assets expanded average interest-earning assets and contributed substantially to higher interest income and net interest income. Tax-equivalent net interest margin rose 45 basis points year over year in Q3 and 29 basis points for the nine-month period.
- Interest expense also increased, reflecting acquired interest-bearing liabilities and higher deposit rates. Q3 interest expense rose 52.0%; nine-month interest expense rose 53.2%.
- Noninterest expense increased 38.4% in Q3 and 42.4% for the nine months, with higher staffing, occupancy and data-processing costs following the acquisition. Nine-month 2018 included $2.0 million of pretax merger expenses; the comparable 2017 period included $247,000. No merger-related expense was recorded in Q3 2018.
- Organic originated loans grew 10.6% during the first nine months, but reductions in acquired loans more than offset that growth, leaving total loans lower. Commercial real estate was the largest loan category and grew 2.9% from year-end.
- Nonperforming assets declined from $25.8 million at year-end to $21.4 million; however, individually impaired originated loans increased from $3.5 million to $9.8 million. The filing reports no originated loans over 90 days past due and accruing.
- Unrealized losses on available-for-sale securities widened: the portfolio’s net unrealized loss was $5.8 million at September 30, versus $1.5 million at year-end. Management stated it intended and was able to hold securities in continuous loss positions until recovery or maturity and did not identify other-than-temporary impairment.
Outlook, commentary, risks and unusual items
- No earnings or growth guidance is provided. Management said it began raising deposit rates and offering special rates to address deposit outflows. It anticipated that a significant portion of the $207.5 million of certificates of deposit maturing within 12 months would renew, based on historical experience.
- Management cautions that results for the nine months are not necessarily indicative of full-year results. Its interest-rate model estimated modest net interest income sensitivity to immediate rate increases: 0.0% at +300 basis points, 0.1% at +200 basis points and 0.2% at +100 basis points. Actual effects depend on timing, balance-sheet mix and other factors.
- Credit risks include potential further losses, changes in economic conditions and the judgment involved in estimating the allowance. The company noted that regulators may require additional provisions and that future allowance adjustments may be necessary.
- The company is assessing the expected-credit-loss standard (CECL); adoption could materially change credit-loss accounting, but the impact was not yet determined. The company estimated the new lease standard would increase assets and liabilities by less than 1%, with no material overall financial-statement impact anticipated.
- The Tax Cuts and Jobs Act reduced the federal statutory corporate tax rate from 35% to 21%; the company reported effective tax rates of 20.3% in Q3 2018 and 34.5% in Q3 2017. It adopted ASU 2018-02 and reclassified $206,000 of stranded tax effects from accumulated other comprehensive income to retained earnings.
- Management said ordinary-course litigation was not expected to materially affect financial condition or results. It reported no material risk-factor changes from the 2017 Form 10-K and stated disclosure controls were effective.
Important facts for investors to verify
- How much of earnings growth reflects recurring organic performance versus SMB acquisition effects, merger costs and acquired-loan accretion?
- Whether deposit outflows persist, the cost and effectiveness of deposit-rate offers, and renewal rates for the $207.5 million of CDs maturing within 12 months.
- Performance of the two commercial and industrial relationships that drove most nine-month charge-offs, and trends in impaired loans, nonaccrual loans and the allowance.
- Interest-rate exposure and the effect of higher deposit costs on net interest margin, alongside the valuation impact of further securities-market declines.
- CECL implementation assumptions and eventual allowance impact, as well as actual lease-standard adoption effects.