Hometrust Bancshares, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2014, HomeTrust’s first quarter of fiscal 2015 (not calendar-year 2014 Q1). HomeTrust is a regional bank headquartered in Asheville, North Carolina, focused on deposit gathering and residential, commercial real estate, commercial and industrial, and municipal lending. The quarter’s results and balance-sheet growth reflect recent acquisitions, especially Bank of Commerce, acquired July 31, 2014; comparisons with the prior year are therefore not fully like-for-like.
Financial performance and condition
Dollar amounts below are in millions unless stated otherwise.
- Earnings: Net income was $2.26 million, or $0.12 per diluted share, versus $3.33 million, or $0.17, a year earlier. Pretax income was $3.12 million versus $5.99 million.
- Interest income and margins: Interest income was $19.87 million versus $14.84 million; interest expense fell to $1.27 million from $1.55 million. Net interest income rose 39.9% to $18.60 million. Net interest margin was 3.99% on a fully taxable-equivalent basis, up 25 basis points year over year; the reported, non-tax-equivalent margin was 3.85%, up 32 basis points.
- Other income and expenses: Noninterest income increased to $2.77 million from $2.27 million. Noninterest expense rose 55.8% to $18.50 million from $11.88 million, including $1.42 million of merger-related expense versus $0.22 million. The filing attributes higher payroll, occupancy, technology, and other costs largely to acquisitions.
- Credit costs and asset quality: The company recorded a $0.25 million recovery of loan losses, compared with a $2.30 million recovery in the prior-year quarter. Net charge-offs were $0.10 million versus $0.57 million. The allowance was $23.08 million, or 1.43% of total loans; management reported 1.97% excluding loans acquired in the three named acquisitions. Nonaccruing loans were $45.5 million, and nonperforming assets were $60.0 million, or 2.71% of assets. Impaired loans totaled $70.2 million. The allowance represented 50.76% of nonaccruing loans.
- Balance sheet at September 30: Total assets were $2.214 billion, up 6.3% from June 30, largely due to Bank of Commerce. Net loans were $1.585 billion, up $112.0 million from June 30; deposits were $1.659 billion, up $75.7 million. Stockholders’ equity was $378.0 million.
- Cash flow and liquidity: Cash and cash equivalents were $32.2 million, down $13.6 million during the quarter. Operating cash flow was negative $2.9 million; investing cash flow was negative $37.6 million and financing cash flow was positive $27.0 million. Certificates of deposit in other banks were $175.9 million. Management cited additional FHLB borrowing capacity of $212.9 million, a $108.5 million Federal Reserve line, and a $20.0 million bank line; these other lines were undrawn. Brokered deposits were $10.0 million.
- Borrowings and capital: Other borrowings increased to $112.0 million from $50.0 million at June 30, principally reflecting FHLB advances. Those advances had maturities under 90 days and a 0.19% weighted-average rate. The Bank was categorized as well-capitalized; its total risk-based capital ratio was 16.43%, Tier 1 risk-based ratio 15.08%, and Tier 1 leverage ratio 11.53%.
Material changes versus comparable periods
- Compared with the prior-year quarter, net income declined about 32%, despite higher net interest income. Management cited a $2.1 million smaller loan-loss recovery and $1.2 million higher merger expense as principal factors. The prior-year quarter also included a nonrecurring $0.96 million charge related to the reduced value of deferred tax assets following North Carolina tax-rate reductions.
- Average loans increased $370.4 million year over year, substantially reflecting acquisitions. Lower funding costs helped lift net interest margin, while average loan yield edged down to 4.91% from 4.96%.
- Compared with June 30, 2014, loan and deposit balances expanded with the Bank of Commerce acquisition. Excluding acquired loans, net loans increased $25.8 million. Nonperforming assets fell from $62.7 million, or 3.02% of assets, at June 30.
- Cash flow from operations changed from positive $5.9 million in the prior-year quarter to negative $2.9 million. Cash and cash equivalents were also lower than the $92.9 million reported at September 30, 2013; the filing describes the current-quarter decline as driven by lending and investment uses of cash, partly funded by increased borrowings.
Outlook, commentary, risks and unusual items
- No quantified earnings or margin guidance is provided. Management described economic recovery in its markets as modest and uneven, while expressing confidence in its customer growth and improved risk profile. It expects further cost savings from acquisitions, but says these are not included in its pro forma figures; integration and systems-conversion costs were expected to continue in fiscal 2015.
- The Bank expected to complete its purchase of ten Bank of America branches on November 17, 2014, subject to customary conditions. The branches were expected to add approximately $504 million in deposits and a small amount of loans.
- Management identified risks including credit deterioration, real estate values, interest-rate and funding changes, deposit competition, acquisition integration and realization of synergies, regulatory actions, litigation, and technology or third-party service disruptions. It noted that approximately $597.5 million of loans had interest-rate floors, potentially limiting income benefits from rising rates until market rates exceed those floors.
- A pending lawsuit alleges failure to detect a customer’s Ponzi scheme. Plaintiffs seek $12.5 million in compensatory damages plus punitive or treble damages. The company disputes the claims and says management does not expect a material effect, but counsel could not assess the likely outcome while the case remained in discovery.
- Other notable items include $1.42 million in merger-related costs, $4.0 million of goodwill and $0.64 million of core deposit intangibles recorded for Bank of Commerce, and a quarterly repurchase of 142,760 shares for approximately $2.2 million.
Important facts for investors to verify
- Whether acquisition integration costs decline and projected savings and synergies are achieved, including after the pending branch purchase.
- Whether asset quality continues to improve, particularly nonaccruing, impaired, classified, and delinquent loans, and whether the allowance remains adequate.
- How the $504 million expected branch-deposit addition affects funding costs, liquidity, and capital after closing.
- Whether loan growth and net interest margin persist as purchase-accounting effects fade and interest-rate floors constrain repricing.
- Developments in the $12.5 million lawsuit and any material change in management’s assessment of its potential impact.