Home Bancorp, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Home Bancorp is a Louisiana bank holding company whose subsidiary is Home Bank, N.A. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are primarily against December 31, 2018. Dollar figures below are in millions unless otherwise noted.
Financial performance and condition
- Earnings: Net income was $7.89 million, up 5.7% year over year; diluted EPS was $0.85 versus $0.81. Income before taxes declined to $9.21 million from $9.43 million. The effective tax rate fell to 14.3% from 20.9%, including a $514,000 tax benefit related to stock-option exercises.
- Revenue and net interest: Total interest and noninterest income was $28.53 million versus $28.21 million. Net interest income declined 3.5% to $21.72 million: interest income rose 2.6%, but interest expense increased 64.3% to $3.65 million, principally due to higher deposit costs. Tax-equivalent net interest margin was 4.41% versus 4.49%; spread was 4.11% versus 4.32%.
- Expenses and credit provision: Noninterest income decreased 9.1% to $3.17 million, partly because Q1 2018 included a branch-sale gain. Noninterest expense fell 1.9% to $15.29 million. The loan-loss provision was $390,000 versus $964,000.
- Balance sheet and lending: Total assets were $2.20 billion, up 2.3% from year-end. Loans were $1.649 billion, essentially flat; commercial real estate loans grew $20.9 million, offset by declines in other categories. Deposits rose 2.5% to $1.818 billion, including an 8.0% increase in certificates of deposit.
- Credit quality: The allowance for loan losses was $16.57 million, or 1.00% of loans, versus 0.99% at year-end. Net charge-offs were $168,000 versus $1.5 million in Q1 2018. Nonperforming loans increased to $26.57 million, or 1.61% of loans, from $24.41 million, or 1.48%, at year-end; nonperforming assets were $29.05 million, or 1.32% of assets, versus $25.97 million, or 1.21%.
- Cash flow, liquidity and debt: Operating cash flow was $11.46 million versus $19.77 million in Q1 2018. Cash and cash equivalents ended at $103.8 million. Available-for-sale securities were $267.3 million. Deposits were the main funding source; long-term FHLB advances were $57.9 million and other borrowings were $5.5 million. The company reported $709.3 million of additional FHLB borrowing capacity. Certificates of deposit totaling $221.4 million mature within 12 months.
- Capital and shareholder returns: Shareholders’ equity was $308.9 million. The Bank’s reported capital ratios were 14.24% CET1, 14.24% Tier 1 risk-based, 15.27% total risk-based, and 10.93% Tier 1 leverage; management said capital was well above regulatory requirements. The company repurchased 134,005 shares for $4.8 million and declared a $0.20-per-share dividend.
Material changes versus comparable periods
- Net income and diluted EPS increased year over year despite lower net interest income. Q1 2018 included $694,000 of after-tax merger expenses related to the St. Martin Bancshares acquisition; none were recorded in Q1 2019.
- Deposit interest expense rose substantially, compressing net interest spread and margin. Management attributed the lower loan-loss provision mainly to portfolio paydowns and modestly improved economic conditions; Q1 2018 charge-offs were elevated by deterioration in two loan relationships.
- From year-end, assets and deposits expanded, while loans were nearly unchanged. Commercial real estate was the principal loan-growth category; certificates of deposit increased following rate specials.
- Available-for-sale securities had a net unrealized loss of $1.0 million at March 31, 2019, improved from $2.8 million at year-end. Management did not consider the identified unrealized losses other-than-temporary.
Outlook, risks and unusual items
- The filing gives no specific earnings or growth guidance. Its interest-rate model estimated projected net interest income changes of +0.8% for immediate, sustained increases of 100 or 200 basis points and +0.5% for a 300-basis-point increase; actual effects may differ.
- Management expects adoption of the current expected credit losses standard (CECL), effective for the company in 2020, could increase the allowance and provision. The amount of the impact was not known; implementation work was ongoing.
- Credit risks include a loan portfolio concentrated in real estate, nonperforming asset growth, acquired loans with credit deterioration, and the possibility that economic or collateral conditions require additional loss provisions. Acquired loans accounted for $11.7 million of nonaccrual loans; certain acquired credit-deteriorated loans are excluded from that reported total.
- Funding and liquidity considerations include higher deposit pricing, $221.4 million of certificates maturing within a year, and reliance on deposit retention and available borrowing capacity. Management anticipated that a significant portion of maturing certificates would be renewed.
- The company disclosed ordinary-course claims and litigation, but management did not expect their disposition to materially affect financial condition or results. No material change to previously disclosed risk factors was reported.
- The lower tax rate benefited from the $514,000 option-exercise tax benefit, and Q1 2019 earnings also compare against prior-year merger costs; these items affect year-over-year comparability.
Important facts for investors to verify
- Whether deposit costs continue to rise and net interest margin stabilizes or contracts.
- Trends in nonperforming loans and assets, especially commercial real estate and acquired-loan exposures, and the adequacy of the allowance.
- The eventual CECL impact on allowance, provision and retained earnings.
- Deposit retention and pricing as the $221.4 million of certificates mature over the next 12 months.
- How earnings perform excluding the option-exercise tax benefit and prior-year merger-related expenses.
- Whether the reported interest-rate sensitivity and available FHLB capacity remain consistent with actual liquidity and funding conditions.