HOME BANCORP, INC. annual report, FY2017

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Home Bancorp, Inc. — 2017 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017. Home Bancorp is a Louisiana bank holding company operating Home Bank, N.A., with 40 offices in Louisiana and west Mississippi. The Bank primarily gathers deposits and makes residential, commercial real estate, construction, commercial and industrial, and consumer loans.

Financial performance and condition

  • Earnings: Net income was $16.8 million, up 5.1% from $16.0 million in 2016. Diluted EPS was $2.28, up 1.3% from $2.25. The annual effective tax rate rose to 42.6% from 32.1%, including a $2.7 million deferred-tax remeasurement charge following the Tax Cuts and Jobs Act.
  • Revenue and margins: Interest income was $74.4 million (+9.9%); interest expense was $6.5 million (+24.3%). Net interest income increased 8.7% to $67.8 million. Net interest margin was 4.48%, versus 4.34%; net interest spread was 4.32%, versus 4.22%. Noninterest income declined 10.7% to $10.0 million, while noninterest expense declined 1.3% to $46.2 million. Efficiency ratio improved to 59.35% from 63.61%.
  • Cash flow: Operating activities provided $24.8 million, compared with $20.5 million in 2016. Cash and cash equivalents ended the year at $150.4 million, up from $29.3 million. Investing activities provided $78.7 million, largely reflecting acquisition-related cash and other investing flows.
  • Balance sheet and funding: Total assets were $2.23 billion, up 43.1%; net loans were $1.64 billion and deposits were $1.87 billion. Shareholders’ equity rose 54.5% to $277.9 million, largely reflecting $83.0 million of stock issued for the St. Martin Bancshares acquisition. FHLB advances totaled $71.8 million, down from $118.5 million; $520.0 million of additional FHLB capacity was available. The Bank also reported $235.0 million of available-for-sale securities.
  • Capital: At year-end, the Bank’s common equity Tier 1 and Tier 1 risk-based capital ratios were each 12.54%, total risk-based capital was 13.48%, and leverage capital was 11.66%. The Bank was classified as well capitalized.

Material changes versus 2016

  • The December 6, 2017 acquisition of St. Martin Bancshares added approximately $592.7 million of assets, including $439.9 million of loans, and $533.5 million of deposits. Home Bancorp issued approximately 1.94 million shares; the acquisition recorded $49.3 million of goodwill and $6.8 million of core deposit intangible. The acquired business contributed only part-year results.
  • Year-end assets, loans, and deposits expanded substantially, primarily because of the acquisition. Excluding acquired SMB deposits, core deposits grew 6.3% and certificates of deposit grew 8.6%.
  • Credit quality weakened: nonaccrual loans increased 82.0% to $25.0 million; nonperforming assets were $25.8 million, or 1.16% of assets, versus $16.6 million, or 1.07%. Substandard loans rose to $47.3 million from $32.4 million. Net charge-offs remained low at $21,000.
  • The allowance for loan losses was $14.8 million, or 0.89% of total loans, versus $12.5 million, or 1.02%, in 2016. Excluding acquired loans, allowance coverage of originated loans was 1.52%, compared with 1.38%.
  • Higher purchase-accounting accretion—up $3.1 million—helped lift interest income. Noninterest income fell partly because of lower mortgage-sale gains, fewer recoveries on acquired loans, and a loss related to a banking-center closure.
  • Quarterly net income was $3.2 million in Q4 2017 versus $4.3 million in Q4 2016; Q4 2017 included the tax remeasurement charge.

Outlook, commentary, risks and unusual items

  • The filing provides no specific earnings, growth, or margin guidance. Management said it anticipated sufficient liquidity to meet requirements and expected most certificates maturing within 12 months to be redeposited; this is not a quantified forecast.
  • Management highlighted the regional economy’s exposure to oil and gas: energy-sector loans were $58.8 million (3.5% of loans), with $9.3 million of unfunded commitments; $2.2 million of energy loans were on nonaccrual.
  • Other key risks include commercial real estate and construction lending, concentration in south Louisiana and west Mississippi, natural disasters, competition, interest-rate movements, acquisition integration, cybersecurity and operational disruption, regulatory changes, and the adequacy of loan-loss reserves.
  • CECL was expected to take effect for the Company after December 15, 2019. Management warned it could increase the allowance and implementation costs; the impact was not yet quantifiable. The Tax Act also reduced the federal corporate rate to 21%, but caused the one-time $2.7 million DTA charge in 2017.
  • Year-end acquisition fair values were preliminary and subject to adjustment during the measurement period. Management’s internal-control assessment excluded SMB, which represented approximately 27% of assets at acquisition; the auditor nevertheless opined that the Company’s assessed financial-reporting controls were effective. The financial statements received an unqualified audit opinion.
  • Ordinary-course legal matters were not expected by management to have a material effect. The filing reports $384.7 million of total off-balance-sheet credit commitments, including lines, undisbursed loans, standby letters, and loan-origination commitments.

Most important facts for investors to verify

  • Whether the rise in nonaccrual and substandard loans—particularly commercial real estate and commercial and industrial exposures—continues, and whether allowance coverage remains adequate.
  • How much future earnings depend on acquired-loan accretion, and whether SMB integration delivers results sufficient to support the acquisition goodwill and related intangibles.
  • Whether deposit retention and funding costs remain favorable as certificates mature and interest rates change; verify the reported liquidity and available FHLB capacity.
  • The recurring earnings and tax implications after the one-time deferred-tax remeasurement, including the reported 2017 effective tax rate and quarterly earnings trend.
  • The eventual CECL allowance and implementation impact, and the status of integrating SMB into internal controls after its exclusion from the 2017 assessment.