Hometrust Bancshares, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2017, HomeTrust’s fiscal third quarter of fiscal 2017—not 2016 Q3 as stated in the request metadata. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
HomeTrust is a regional bank holding company whose principal activities are deposit-taking, lending, and investment. Its loan portfolio includes residential and home-equity lending, commercial real estate and construction, commercial and industrial loans, auto loans, and municipal leases.
On January 1, 2017, HomeTrust completed its acquisition of TriSummit Bancorp, adding approximately $258.1 million of loans, $280.2 million of deposits, and $12.5 million of goodwill. It also acquired United Financial of North Carolina on December 31, 2016. These acquisitions materially affect comparisons with prior periods.
Financial performance and condition
| Metric | Quarter ended March 31, 2017 | Prior-year quarter | Nine months ended March 31, 2017 | Prior-year nine months |
|---|---|---|---|---|
| Net interest income | $25.1 | $20.2 | $66.6 | $60.9 |
| Noninterest income | $3.5 | $3.4 | $11.4 | $9.8 |
| Net income | $0.3 | $3.1 | $7.1 | $8.2 |
| GAAP diluted EPS | $0.01 | $0.18 | $0.40 | $0.46 |
| Fully taxable-equivalent net interest margin | 3.62% | 3.36% | 3.47% | 3.36% |
- Earnings and margins: Quarterly pretax income was a loss of $0.1 million, principally reflecting $7.4 million of TriSummit-related merger expenses; a $0.3 million income tax benefit brought net income to $0.3 million. Excluding merger costs, certain state tax expense, and a premises-sale gain, management reported non-GAAP net income of $5.0 million, or $0.27 per diluted share, for the quarter and $12.3 million, or $0.69 per diluted share, for the nine months. These adjusted measures are not GAAP results.
- Balance sheet at March 31: Total assets were $3.17 billion, up 16.5% from June 30, 2016; gross loans were $2.28 billion, deposits $2.08 billion, borrowings $626.0 million, and stockholders’ equity $390.7 million. Net loans were $2.26 billion.
- Loan growth: Net loans increased $449.0 million from June 30, 2016, mainly from TriSummit and organic growth. Management reported organic net loan growth of $80.7 million for the quarter (18.1% annualized) and $174.3 million for the nine months (13.8% annualized). Commercial real estate and construction and development lending grew substantially.
- Credit quality: Nonperforming assets were $20.1 million, or 0.63% of assets, versus $24.5 million, or 0.90%, at June 30, 2016. Nonaccrual loans were $13.8 million. The allowance for loan losses was $21.1 million, 0.92% of gross loans; excluding acquired loans, the adjusted ratio was 1.10%. No loan-loss provision was recorded in the quarter or nine-month period. Nine-month net charge-offs were $0.2 million.
- Cash flow and liquidity: For the nine months, operating cash flow was $8.8 million, investing cash flow was negative $72.4 million, and financing cash flow was positive $91.2 million. Cash and cash equivalents ended at $80.3 million, up from $52.6 million at June 30, 2016. Management cited $3.5 million of additional FHLB borrowing capacity, a $265 million Federal Reserve line, and $60 million of lines with other banks; no amounts were outstanding on the latter lines. FHLB advances outstanding were $626 million and had maturities under 90 days.
- Capital: The Bank was categorized as well-capitalized. At March 31, its common equity Tier 1 ratio was 11.65% and total risk-based capital ratio was 12.49%; the filing says the Bank exceeded the applicable capital conservation buffer.
Material changes versus comparable periods
- Quarterly net income fell from $3.1 million to $0.3 million, despite higher net interest income, primarily because of $7.4 million in merger expenses. Nine-month net income also declined, from $8.2 million to $7.1 million, while management’s adjusted non-GAAP earnings increased.
- Quarterly net interest income rose 24.0%; the fully taxable-equivalent margin increased 26 basis points. For the nine months, net interest income rose 9.3% and the fully taxable-equivalent margin increased 11 basis points.
- Assets, loans, deposits, and borrowings expanded in large part because of the TriSummit acquisition. Accordingly, reported growth is not solely organic.
- Allowance coverage and nonperforming-asset ratios improved from June 30, 2016. The allowance-to-loans ratio declined partly because acquired loans are recorded at fair value and generally do not carry an allowance at acquisition.
- Tangible book value per share was $19.01, slightly below $19.05 at June 30, 2016; the tangible equity-to-tangible-assets ratio was 11.49%, versus 12.69%.
Outlook, management commentary, risks, and unusual items
- No quantified earnings or financial guidance was provided. Management expects opportunities for organic growth in its markets, anticipates construction lending will remain an important portfolio component, and says it will pursue expansion selectively.
- Management identified merger integration, realization of anticipated synergies, credit quality, commercial real estate and construction exposure, interest-rate changes, deposit competition, funding and liquidity, regulatory requirements, and operating-cost control as risks. It cautioned that acquired-loan discount accretion can make interest income volatile.
- HomeTrust noted that loans with interest-rate floors totaled approximately $628.7 million; some may not reprice upward until market rates rise sufficiently. Its leveraging strategy—short-term FHLB borrowings invested in liquid earning assets—contributed approximately $0.4 million to quarterly net interest income and $1.5 million for the nine months, but also exposes results to funding-cost and rate changes.
- Off-balance-sheet commitments to originate loans, undisbursed construction loans, and unused credit lines totaled approximately $593.6 million. Certificates of deposit of $327.8 million were scheduled to mature within one year. Management stated that it believed liquidity was adequate and the allowance was appropriate, while acknowledging estimates may prove incorrect and regulators could require additional reserves.
- The filing reports ordinary-course litigation but says management did not believe pending proceedings would materially adversely affect financial condition or results. No material change in risk factors or market-risk disclosures was reported. Disclosure controls were concluded effective as of March 31, 2017.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing covers the quarter ended March 31, 2017, not 2016 Q3.
- Review the $7.4 million quarterly and $7.7 million nine-month merger expense, the assumptions behind management’s adjusted non-GAAP earnings, and the progress and costs of TriSummit integration.
- Assess organic loan growth separately from acquired balances, with particular attention to commercial real estate and construction exposures, commitments, delinquencies, and acquired-loan discount accretion.
- Monitor allowance adequacy and the effect of excluding acquired loans from the allowance ratio, as well as nonperforming assets, impaired loans, and future charge-offs.
- Check funding concentration and liquidity against short-term FHLB advances, deposit maturities, unused commitments, borrowing availability, and the impact of changes in interest rates.
- Track capital ratios and tangible capital measures following acquisition-related asset and goodwill growth.