Hometrust Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2014, the second quarter of fiscal 2015. Unless otherwise stated, dollar amounts below are in millions. The filing reports unaudited consolidated results.
Business context and reporting period
HomeTrust is a regional bank headquartered in Asheville, North Carolina. It gathers deposits and primarily makes residential, commercial real estate, commercial and industrial, and municipal lease loans. The period reflects continued expansion: Bank of Commerce was acquired July 31, 2014, and ten Bank of America branches were acquired November 14, 2014. The branch acquisition added approximately $329 million of deposits; HomeTrust reported 45 locations at December 31.
Financial performance and condition
| Metric | Three months ended Dec. 31, 2014 | Prior-year quarter | Six months ended Dec. 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $20.2 | $13.9 | $38.8 | $27.2 |
| Noninterest income | $2.8 | $2.2 | $5.6 | $4.5 |
| Net income | $2.0 | $2.9 | $4.3 | $6.2 |
| Diluted earnings per share | $0.10 | $0.15 | $0.22 | $0.32 |
| Tax-equivalent net interest margin | 3.74% | 3.89% | 3.85% | 3.82% |
Quarterly total revenue, defined as net interest income plus noninterest income, was $23.0 million versus $16.1 million. Six-month total revenue was $44.4 million versus $31.7 million. Six-month operating cash flow was $7.2 million, compared with $9.2 million a year earlier. Cash and cash equivalents ended the period at $360.2 million, up from $45.8 million at June 30, 2014; the increase was principally acquisition-related.
At December 31, total assets were $2.64 billion, loans net of allowance were $1.63 billion, deposits were $1.94 billion, borrowings were $250.0 million, and stockholders’ equity was $380.9 million. Total loans increased 10.2% from June 30, while deposits increased 22.4%. The allowance for loan losses was $23.4 million, or 1.41% of total loans; excluding acquired loans, the allowance ratio was 1.79%.
Asset quality improved from June 30: nonperforming assets fell to $44.3 million (1.68% of assets) from $53.6 million (2.59%); nonaccruing loans declined to $33.7 million from $37.9 million, and REO to $10.6 million from $15.7 million. Delinquent loans of 30 days or more were $34.6 million, versus $27.9 million at June 30. The six-month loan-loss provision was a $0.25 million recovery, compared with a $3.0 million recovery a year earlier; net charge-offs were a $0.18 million recovery versus $1.9 million of net charge-offs.
FHLB advances accounted for the $200 million increase in borrowings since June 30. All $250 million of advances had maturities under 90 days and a 0.21% weighted-average rate. The Bank also reported $77.8 million of additional FHLB borrowing capacity and unused lines of credit of $106.1 million with the Federal Reserve and $20.0 million with another bank. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 14.45%.
Material changes versus comparable periods
- Net income declined 28.8% for the quarter and 30.6% for the six months, despite sharply higher net interest income. Management attributed the decline principally to merger-related costs: $2.3 million in the quarter and $3.7 million in the six-month period.
- Six-month noninterest expense rose 53.2% to $38.6 million, including higher salaries, occupancy and core deposit intangible amortization associated largely with acquisitions.
- Tax-equivalent quarterly margin decreased 15 basis points year over year; management cited acquired branch funds initially invested at low short-term rates, loan payoffs and adjustable-rate loan repricing. The six-month margin increased 3 basis points, but was 15 basis points lower excluding purchase-accounting accretion.
- Acquisitions materially expanded the balance sheet. Loan growth also included $40.9 million of home equity lines purchased in December and $26.4 million of net organic growth. Six-month loan originations rose to $244.0 million from $149.5 million.
Outlook, commentary, risks and unusual items
No numerical earnings or margin guidance was provided. Management intends to pursue organic growth and potential acquisitions, and expects additional cost savings from recent acquisitions; the timing and amount are not quantified. Integration and systems-conversion expenses were expected to continue through fiscal 2015. Pro forma acquisition results exclude significant one-time merger expenses and do not include expected future savings.
Acquired-loan purchase-accounting accretion supported net interest income and may vary from quarter to quarter. Excluding loan and certificate-of-deposit purchase-accounting accretion, the tax-equivalent margin was 3.41% for the quarter and 3.59% for the six months. Approximately $577.7 million of loans had interest-rate floors, creating potential sensitivity to rate changes; the filing also cites interest-rate, credit, integration, deposit-retention, regulatory, technology and litigation risks.
A December 2014 purchase of $40.9 million of home equity lines was outside HomeTrust’s primary market area; management said the loans had an average FICO score of 757 and loan-to-value ratios below 90%, and established an allowance based on relevant state loss history. Acquired loans are generally recorded with a credit discount rather than included in the allowance unless their credit quality deteriorates further.
An unresolved lawsuit alleges failure to detect a customer’s Ponzi scheme and seeks $12.5 million in compensatory damages plus treble or other punitive damages. The company considers the claims without merit and management does not expect a material effect, but counsel could not assess the likely outcome while discovery continues. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether integration costs abate and expected acquisition-related savings are realized; reported earnings include substantial merger expense.
- Whether credit quality continues to improve, particularly delinquencies, classified assets, nonaccruals, and the adequacy of reserves on both originated and acquired loans.
- How excess acquired liquidity is deployed and whether short-term FHLB advances are renewed, repaid or replaced as they mature.
- Whether purchase-accounting accretion, acquired deposit costs and interest-rate movements sustain net interest margin; compare results with and without accretion.
- Developments in the $12.5 million lawsuit and any related potential punitive damages or legal costs.
- The timing and final fair values of acquisitions, which the filing says remained preliminary and subject to refinement.