Conway-based Home BancShares Inc., parent company of Centennial Bank, reported Thursday (April 16) earnings declined 99.3% as it completed an acquisition and remained profitable amidst the COVID-19 pandemic that contributed to “net income noise” in the first quarter.
Before the markets opened Thursday, the company reported net income fell to $507,000, or 0 cents per share, from $71.35 million, or 42 cents per share, in the same period in 2019. Revenue declined narrowly to $162.65 million, from $163.14 million.
Return on average assets (ROA) fell to 0.01% in the first quarter, from 1.92% in the same period in 2019. ROA was 1.94% in the fourth quarter of 2019. Net interest margin (NIM) fell to 4.22% in the first quarter, from 4.30% in the same period in 2019. Return on average common equity (ROE) declined to 0.08% in the first quarter, from 12.34% in the same period in 2019. Over the same period, the allowance for credit losses to total loans increased to 2.01%, from 0.97%.
“The earnings power of HOMB has really shone through this quarter,” said Chairman John Allison. “After $95 million of noise, most of which were non-cash expenditures, to still be profitable is remarkable.”
Over 10 days, Centennial Bank provided thousands of loans totaling nearly $1 billion to assist customers through the Paycheck Protection Program, said Tracy French, president and CEO of Centennial Bank.
Under the $2.2 trillion relief package that Congress and President Donald Trump approved in March, the Small Business Administration’s Paycheck Protection Program will offer $350 billion in loans through banks and credit unions to businesses employing less than 500 people. Banks started to receive applications for those loans on April 3.
The COVID-19 pandemic has impacted global markets as a result of supply chain and production disruptions, workforce and travel restrictions, retail closures and decreased consumer spending and sentiment. Home BancShares is monitoring the crisis as the global and economic impacts change rapidly.
The company experienced a large amount of “net income noise” in the first quarter compared to previous periods, and most of the noise was attributed to the pandemic, according to a news release.
As a result of COVID-19, the company recorded a $71.7 million provision for credit losses, a $7.8 million expense for the increase in unfunded commitment reserve, an $842,000 provision for credit losses on investment securities and a $5.8 million write-down for the fair value adjustment on marketable securities. The company’s loan provision rose $5 million as a result the company starting to account for credit losses under Accounting Standards Codification 326, Financial Instruments – Credit Losses. The company had $10 million of expense related to its LH-Finance acquisition that was completed on Feb. 29 and included $9.3 million for the provision for credit losses and $711,000 of acquisition expenses. The acquired loan portfolio is in its Shore Premier Finance division. The company also had $1.1 million of expense for outsourced special projects and $7 million of special dividend income from an equity investment.
The previous items contributed to a net additional expense of $95.2 million, or $70.3 million after tax. Excluding the previous items, first-quarter earnings would have been $70.8 million, or 43 cents per share, compared to $73.1 million, or 44 cents per share in the fourth quarter of 2019.
On Jan. 1, the company adopted the Accounting Standards Codification 326 that led to a $44 million increase in the opening balance for the allowance for credit losses. The new accounting standard requires a discount on an allowance for credit losses to be recorded on loans during an acquisition. This is commonly referred to as double accounting.
In the first quarter, the company completed the acquisition of $406.2 million of loans from LH-Finance. As a result, the company recorded a $6.2 million loan discount and a $9.3 million rise in the allowance for credit losses for the double accounting for this acquisition.
Also in the first quarter, the company recorded $86.8 million of total credit loss expense. This expense comprised the following: investment securities, double accounting for LH-Finance, loan provision and COVID-19 loan provision. The company recorded $842,000 for credit losses on investments as a result of sales tax bonds with lower coverage ratios. The double accounting for LH-Finance was $9.3 million. The normal loan provision was about $5 million and the COVID-19 loan provision was nearly $71.7 million. The provisioning model is tied to projected unemployment rates. Because of the pandemic, unemployment rate projections rose significantly in the first quarter, leading to the $71.1 million provision.
Net interest margin was down two basis points, from 4.24% in the fourth quarter of 2019. The yield on loans fell 11 basis points to 5.79%, from $5.90% in the fourth quarter, while average loans rose from $10.87 billion to $11.01 billion, respectively. The rate on interest-bearing deposits fell 13 basis points to 1.08%, from 1.21% in the fourth quarter, with average balances of $8.99 billion and $8.82 billion, respectively.
Investment premium amortization fell $672,000 in the first quarter, from the fourth quarter, as a result of the change in prepayment speeds. The decline positively impacted the net interest margin by two basis points.
Event interest income rose to $558,000, from $549,000 in the fourth quarter. Total net accretion for acquired loans and deposits declined to $7.6 million, from $9.1 million in the fourth quarter. The decline contributed to a 4.5-basis point decrease in net interest margin.
Purchase accounting accretion fell to $7.6 million, from $9.1 million, and the average purchase accounting loan discounts declined to $69.4 million from $91.9 million in the fourth quarter. Net amortization of time deposit premiums was $30,000 per quarter, and the net average remaining CD premiums fell to $236,000, from $266,000 in the fourth quarter.
Net interest income on a fully taxable equivalent basis fell 0.11%, or by $153,000, to $141 million, from $141.1 million in the fourth quarter. The decline in net interest income was attributed to a $3.1 million decrease in interest income that was partially offset by a $2.9 million decline in interest expense. The $3.1 million decrease in interest income was a result of the $3.1 million decline in loan interest income and a $126,000 net decrease in investment income that was partially offset by a $167,000 rise in income on deposits with other banks. The $2.9 million decrease in interest expense was a result of a $2.6 million decline in interest expense on savings and interest-bearing transaction accounts and a $1 million decrease in interest expense on time deposits.
Non-performing loans to total loans rose three basis points to 0.53%, from 0.50% in the fourth quarter. Non-performing assets to total assets increased one basis point to 0.44%, from 0.43% in the fourth quarter. Net charge-offs rose to $3.5 million, from $2.2 million in the fourth quarter.
Non-interest income fell to $22.9 million, from $28 million in the fourth quarter. The components of this income in the first quarter included $7 million in dividends related to a special dividend from an equity investment and a $5.8 million adjustment for the decline in fair market value of a marketable securities.
Non-interest expense rose to $78.2 million, from $71.3 million in the fourth quarter. Non-interest expense for the first quarter included $7.8 million in unfunded commitments expense because of the adoption of Accounting Standards Codification 326, $1.1 million in other professional fees related to outsourced special projects and $711,000 in merger and acquisition expense. The company’s efficiency ratio was 46.82% in the first quarter.
Total loans receivable rose to $11.38 billion as of March 31, from $10.87 billion at the end of the fourth quarter. Over the same period, total deposits rose to $11.51 billion, from $11.28 billion. Total assets increased to $15.53 billion, from $15.03 billion.
Organic loan growth was $109 million in the first quarter. Centennial had $167.9 million in organic loan growth and loans of $1.76 billion as of March 31. The company’s legacy footprint had $58.9 million in organic loan decline in the first quarter.
Non-performing loans at the end of the period were $16.9 million, $39.5 million, $518,000, $3 million and zero in the Arkansas, Florida, Alabama, Shore Premier Finance and Centennial markets, respectively, for a total of $59.9 million. Non-performing assets as of March 31 were $20.6 million, $44.4 million, $552,000, $3 million and zero in the Arkansas, Florida, Alabama, Shore Premier Finance and Centennial markets, respectively, for a total of $68.5 million.
The company’s allowance for credit losses was $228.9 million, or 2.01%, at the end of the first quarter, compared to the allowance for loan losses of $102.1 million, or 0.94%, at the end of the fourth quarter. Over the same period, the company’s allowance for credit losses and allowance for loan losses rose to 369.7%, from 186.2%, of its total non-performing loans. The increase in the allowance for credit losses can be attributed to the company’s adoption of Accounting Standards Codification 326 and the effects of COVID-19 and the loans acquired from LH-Finance.
The company has 77 branches in Arkansas, 78 branches in Florida, five branches in Alabama and one branch in New York City.
Shares of Home BancShares (NASDAQ: HOMB) were trading Thursday morning at $11.12, down 68 cents, or 5.76%. In the past 52 weeks, the stock has ranged between $21.04 and $9.71.