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| HOMB > SEC Filings for HOMB > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
The following discussion should be read in conjunction with our Form 10-K,
filed with the Securities and Exchange Commission on March 6, 2009, which
includes the audited financial statements for the year ended December 31, 2008.
Unless the context requires otherwise, the terms "Company", "us", "we", and
"our" refer to Home BancShares, Inc. on a consolidated basis.
General
We are a bank holding company headquartered in Conway, Arkansas, offering a
broad array of financial services through our three wholly owned bank
subsidiaries. As of March 31, 2009, we had, on a consolidated basis, total
assets of $2.59 billion, loans receivable of $1.97 billion, total deposits of
$1.84 billion, and stockholders' equity of $338.8 million.
We generate most of our revenue from interest on loans and investments,
service charges, and mortgage banking income. Deposits are our primary source of
funding. Our largest expenses are interest on these deposits and salaries and
related employee benefits. We measure our performance by calculating our return
on average equity, return on average assets, and net interest margin. We also
measure our performance by our efficiency ratio, which is calculated by dividing
non-interest expense less amortization of core deposit intangibles by the sum of
net interest income on a tax equivalent basis and non-interest income. Per share
amounts for March 31, 2008 have been adjusted for the 8% stock dividend which
occurred in August of 2008.
Key Financial Measures
As of or for the Three Months
Ended March 31,
2009 2008
Total assets $ 2,586,151 $ 2,571,145
Loans receivable 1,966,572 1,866,969
Total deposits 1,836,447 1,854,738
Net income 6,245 7,278
Net income available to common stockholders 5,679 7,278
Basic earnings per common share 0.29 0.37
Diluted earnings per common share 0.28 0.36
Diluted cash earnings per common share (1) 0.30 0.37
Annualized net interest margin - FTE 3.93 % 3.78 %
Efficiency ratio 62.16 51.94
Annualized return on average assets 0.97 1.15
Annualized return on average common equity 8.02 10.35
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(1) See Table 16 "Diluted Cash Earnings Per Share" for a reconciliation to GAAP for diluted cash earnings per share.
Overview
Our net income decreased 14.2% to $6.2 million for the three-month period
ended March 31, 2009, from $7.3 million for the same period in 2008. On a
diluted earnings per share basis, our net earnings decreased 22.2% to $0.28 for
the three-month period ended March 31, 2009, as compared to $0.36 (stock
dividend adjusted) for the same period in 2008. During March of 2008, the
Company sold its 20% interest in White River Bancshares, Inc for a $6.1 million
gain. Excluding the $3.8 million after-tax or $0.19 diluted earnings per common
share impact of White River during the first quarter of 2008, net income and
diluted earnings per common share for the first quarter of 2009 increased
$2.7 million and $0.11, respectively, when compared to the same period in 2008.
This first quarter of 2009 increase in earnings is primarily associated with a
$3.8 million decrease in the provision for loan losses, a 15 basis point
increase in net interest margin, organic growth of our bank subsidiaries offset
by the increase in FDIC and state assessment fees.
Our annualized return on average assets was 0.97% and 1.15% for the three
months ended March 31, 2009 and 2008, respectively. Our annualized return on
average common equity was 8.02% and 10.35% for the three months ended March 31,
2009 and 2008, respectively. Excluding the White River impact on first quarter
2008 earnings, annualized return on average assets and annualized return on
average common equity would have been 0.55% and 4.99%, respectively. This
improvement was primarily due to the previously discussed increase in earnings
for the three months ended March 31, 2009, compared to the same periods in 2008.
Our annualized net interest margin, on a fully taxable equivalent basis, was
3.93% and 3.78% for the three months ended March 31, 2009 and 2008,
respectively. Our ability to improve pricing on our deposits and hold the
decline of interest rates on loans to a minimum combined with the proceeds from
our issuance of $50.0 million of Fixed Rate Cumulative Perpetual Preferred Stock
Series A to the United States Department of Treasury under the Capital Purchase
Program allowed the Company to expand net interest margin.
Our efficiency ratio (calculated by dividing non-interest expense less
amortization of core deposit intangibles by the sum of net interest income on a
tax equivalent basis and non-interest income) was 62.16% and 51.94% for the
three months ended March 31, 2009 and 2008, respectively. Excluding the White
River impact on first quarter 2008 earnings, the efficiency ratio would have
been 63.10%. This positive progress in our efficiency ratio was primarily due to
our ability to increase net interest margin and the continued improvement of our
operations.
Our total assets increased $6.1 million, a growth of 0.23%, to $2.59 billion
as of March 31, 2009, from $2.58 billion as of December 31, 2008. Our loan
portfolio increased $10.3 million, a growth of 0.53%, to $1.97 billion as of
March 31, 2009, from $1.96 billion as of December 31, 2008. Stockholders' equity
increased $55.8 million, a growth of 19.7%, to $338.8 million as of March 31,
2009, compared to $283.0 million as of December 31, 2008. Asset and loan
increases are primarily associated with the organic growth of our bank
subsidiaries. The increase in stockholders' equity is primarily associated with
the issuance of $50.0 million of preferred stock to the United States Department
of Treasury combined with retained earnings for the first quarter of 2009.
As of March 31, 2009, our non-performing loans decreased to $24.3 million, or
1.24%, of total loans from $29.9 million, or 1.53%, of total loans as of
December 31, 2008. The allowance for loan losses as a percent of non-performing
loans increased to 168% as of March 31, 2009, compared to 135% from December 31,
2008. Unfavorable economic conditions continue in the Florida market. The
primary decrease in our non-performing loans was associated with the foreclosure
against one of our Florida borrowers. This foreclosure resulted in $8.8 million
transferring from non-performing loans to foreclosed assets held for sale.
As of March 31, 2009, our non-performing assets increased to $39.7 million,
or 1.5%, of total assets from $36.7 million, or 1.4%, of total assets as of
December 31, 2008. The increase in non-performing assets is primarily the result
of the struggling economy, particularly Florida.
Critical Accounting Policies
Overview. We prepare our consolidated financial statements based on the
selection of certain accounting policies, generally accepted accounting
principles and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions. Our
accounting policies are described in detail in the notes to our consolidated
financial statements in Note 1 of the audited consolidated financial statements
included in our Form 10-K, filed with the Securities and Exchange Commission.
We consider a policy critical if (i) the accounting estimate requires
assumptions about matters that are highly uncertain at the time of the
accounting estimate; and (ii) different estimates that could reasonably have
been used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on our financial statements. Using these criteria, we believe that the
accounting policies most critical to us are those associated with our lending
practices, including the accounting for the allowance for loan losses,
investments, intangible assets, income taxes and stock options.
Investments. Securities available for sale are reported at fair value with
unrealized holding gains and losses reported as a separate component of
stockholders' equity and other comprehensive income (loss). Securities that are
held as available for sale are used as a part of our asset/liability management
strategy. Securities that may be sold in response to interest rate changes,
changes in prepayment risk, the need to increase regulatory capital, and other
similar factors are classified as available for sale.
Loans Receivable and Allowance for Loan Losses. Substantially all of our
loans receivable are reported at their outstanding principal balance adjusted
for any charge-offs, as it is management's intent to hold them for the
foreseeable future or until maturity or payoff, except for mortgage loans held
for sale. Interest income on loans is accrued over the term of the loans based
on the principal balance outstanding.
The allowance for loan losses is established through a provision for loan
losses charged against income. The allowance represents an amount that, in
management's judgment, will be adequate to absorb probable credit losses on
identifiable loans that may become uncollectible and probable credit losses
inherent in the remainder of the loan portfolio. The amounts of provisions for
loan losses are based on management's analysis and evaluation of the loan
portfolio for identification of problem credits, internal and external factors
that may affect collectability, relevant credit exposure, particular risks
inherent in different kinds of lending, current collateral values and other
relevant factors.
We consider a loan to be impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms thereof. We apply this policy even if delays
or shortfalls in payments are expected to be insignificant. The aggregate amount
of impaired loans is used in evaluating the adequacy of the allowance for loan
losses and amount of provisions thereto. Losses on impaired loans are charged
against the allowance for loan losses when in the process of collection it
appears likely that losses will be realized. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When accrual of interest is discontinued,
all unpaid accrued interest is reversed.
Loans are placed on non-accrual status when management believes that the
borrower's financial condition, after giving consideration to economic and
business conditions and collection efforts, is such that collection of interest
is doubtful, or generally when loans are 90 days or more past due. Loans are
charged against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. Accrued interest related to
non-accrual loans is generally charged against the allowance for loan losses
when accrued in prior years and reversed from interest income if accrued in the
current year. Interest income on non-accrual loans may be recognized to the
extent cash payments are received, although the majority of payments received
are usually applied to principal. Non-accrual loans are generally returned to
accrual status when principal and interest payments are less than 90 days past
due, the customer has made required payments for at least six months, and we
reasonably expect to collect all principal and interest.
Intangible Assets. Intangible assets consist of goodwill and core deposit
intangibles. Goodwill represents the excess purchase price over the fair value
of net assets acquired in business acquisitions. The core deposit intangible
represents the excess intangible value of acquired deposit customer
relationships as determined by valuation specialists. The core deposit
intangibles are being amortized over 84 to 114 months on a straight-line basis.
Goodwill is not amortized but rather is evaluated for impairment on at least an
annual basis. We perform an annual impairment test of goodwill and core deposit
intangibles as required by SFAS No. 142, Goodwill and Other Intangible Assets,
in the fourth quarter.
Income Taxes. We use the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based upon
the difference between the values of the assets and liabilities as reflected in
the financial statements and their related tax basis using enacted tax rates in
effect for the year in which the differences are expected to be recovered or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Any estimated
tax exposure items identified would be considered in a tax contingency reserve.
Changes in any tax contingency reserve would be based on specific development,
events, or transactions.
We and our subsidiaries file consolidated tax returns. Our subsidiaries
provide for income taxes on a separate return basis, and remit to us amounts
determined to be currently payable.
Stock Options. In accordance with FASB Statement No. 123, Share-Based Payment
(Revised 2004) ("SFAS No. 123R"), the fair value of each option award is
estimated on the date of grant. The Company recognizes compensation expense for
the grant-date fair value of the option award over the vesting period of the
award.
Acquisitions and Equity Investments
On January 1, 2008, we acquired Centennial Bancshares, Inc., an Arkansas bank
holding company. Centennial Bancshares, Inc. owned Centennial Bank, located in
Little Rock, Arkansas which had total assets of $234.1 million, loans of
$192.8 million and total deposits of $178.8 million on the date of acquisition.
The consideration for the merger was $25.4 million, which was paid approximately
4.6%, or $1.2 million in cash and 95.4%, or $24.3 million, in shares of our
common stock. In connection with the acquisition, $3.0 million of the purchase
price, consisting of $139,000 in cash and 140,456 shares (stock dividend
adjusted) of our common stock, was placed in escrow related to possible losses
from identified loans and an IRS examination. In the first quarter of 2008, the
IRS examination was completed which resulted in $1.0 million of the escrow
proceeds being released. In addition to the consideration given at the time of
the merger, the merger agreement provided for additional contingent
consideration to Centennial's stockholders of up to a maximum of $4 million,
which could be paid in cash or our common stock at the election of the former
Centennial accredited stockholders, based upon the 2008 earnings performance.
The final contingent consideration was computed and agreed upon in the amount of
$3.1 million on March 11, 2009. We paid this amount to the former Centennial
stockholders on a pro rata basis on March 12, 2009. All of the former Centennial
stockholders elected to receive the contingent consideration in cash. As a
result of this transaction, we recorded total goodwill of $15.4 million and a
core deposit intangible of $694,000.
In our continuing evaluation of our growth plans for the Company, we believe
properly priced bank acquisitions can complement our organic growth and de novo
branching growth strategies. The Company's acquisition focus will be to expand
in its primary market areas of Arkansas and Florida. We are continually
evaluating potential bank acquisitions to determine what is in the best interest
of our Company. Our goal in making these decisions is to maximize the return to
our investors.
Branches
We intend to continue to open new (commonly referred to de novo) branches in
our current markets and in other attractive market areas if opportunities arise.
During 2009, we opened a branch location in the Arkansas community of Heber
Springs. Presently, we are evaluating additional opportunities but have no firm
commitments for any additional de novo branch locations. Existing branches are
being evaluated for cost saving opportunities under our efficiency study.
Charter Consolidation
In July 2008, management of Home BancShares, Inc. approved the combining of
all six of the Company's individually charted banks into one charter. All of the
banks will adopt Centennial Bank as their common name.
In the fourth quarter of 2008, First State Bank and Marine Bank consolidated
and adopted Centennial Bank as its new name. Community Bank and Bank of Mountain
View were completed in the first quarter of 2009, and Twin City Bank and the
original Centennial Bank will finish the process in June of 2009. All of the
banks will, at that time, have the same name, logo and charter allowing for a
more customer-friendly banking experience and seamless transactions across our
entire banking network.
This decision is based in part on our continuing efforts to improve
efficiency and the results of a study conducted for us by a third party. This
structure will improve product and service offerings by the combined banks plus
provide a greater value to customers in pricing and delivery systems across the
Company. We remain committed to our community banking philosophy and will
continue to rely on local management and boards of directors.
Holding Company Status
During the second quarter of 2008, we changed from a financial holding
company to a bank holding company. Since we were not utilizing any of the
additional permitted activities allowed to our financial holding company status,
this will not change any of our current business practices.
Results of Operations
Our net income decreased 14.2% to $6.2 million for the three-month period
ended March 31, 2009, from $7.3 million for the same period in 2008. On a
diluted earnings per share basis, our net earnings decreased 22.2% to $0.28 for
the three-month period ended March 31, 2009, as compared to $0.36 (stock
dividend adjusted) for the same period in 2008. During March of 2008, the
Company sold its 20% interest in White River Bancshares, Inc for a $6.1 million
gain. Excluding the $3.8 million after-tax or $0.19 diluted earnings per common
share impact of White River during the first quarter of 2008, net income and
diluted earnings per common share for the first quarter of 2009 increased
$2.7 million and $0.11, respectively, when compared to the same period in 2008.
This first quarter of 2009 increase in earnings is primarily associated with a
$3.8 million decrease in the provision for loan losses, a 15 basis point
increase in net interest margin, organic growth of our bank subsidiaries offset
by the increase in FDIC and state assessment fees.
Net Interest Income
Net interest income, our principal source of earnings, is the difference
between the interest income generated by earning assets and the total interest
cost of the deposits and borrowings obtained to fund those assets. Factors
affecting the level of net interest income include the volume of earning assets
and interest-bearing liabilities, yields earned on loans and investments and
rates paid on deposits and other borrowings, the level of non-performing loans
and the amount of non-interest-bearing liabilities supporting earning assets.
Net interest income is analyzed in the discussion and tables below on a fully
taxable equivalent basis. The adjustment to convert certain income to a fully
taxable equivalent basis consists of dividing tax-exempt income by one minus the
combined federal and state income tax rate.
The Federal Reserve Board sets various benchmark rates, including the Federal
Funds rate, and thereby influences the general market rates of interest,
including the deposit and loan rates offered by financial institutions. The
Federal Funds rate, which is the cost to banks of immediately available
overnight funds, began in 2008 at 4.25%. During 2008, the rate decreased by 75
basis points on January 22, 2008, 50 basis points on January 30, 2008, 75 basis
points on March 18, 2008, 25 basis points on April 30, 2008 and 50 basis points
to a rate of 1.50% as of October 8, 2008. The rate continued to fall 50 basis
points on October 29, 2008 and 75 to 100 basis points to a low of 0.25% to 0% on
December 16, 2008.
Net interest income on a fully taxable equivalent basis increased
$1.1 million, or 5.2%, to $22.7 million for the three-month period ended
March 31, 2009, from $21.5 million for the same period in 2008. This increase in
net interest income was the result of a $5.1 million decrease in interest income
combined with a $6.3 million decrease in interest expense. The $5.1 million
decrease in interest income was primarily the result of organic growth of our
bank subsidiaries offset by the repricing of our earning assets in the declining
interest rate environment. The higher level of earning assets resulted in an
improvement in interest income of $1.4 million, and our earning assets repricing
in the declining interest rate environment resulted in a $6.5 million decrease
in interest income for the three-month period ended March 31, 2009. The
$6.3 million decrease in interest expense for the three-month period ended
March 31, 2009, is primarily the result our interest bearing liabilities
repricing in the declining interest rate environment.
Net interest margin, on a fully taxable equivalent basis, was 3.93% and 3.78%
for the three months ended March 31, 2009 and 2008, respectively. Our ability to
improve pricing on our deposits and hold the decline of interest rates on loans
to a minimum combined with the proceeds from our issuance of $50.0 million of
preferred stock to the United States Department of Treasury allowed the Company
to expand net interest margin. The issuance of the preferred stock increased net
interest margin by approximately 5 basis points for the first quarter of 2009
Tables 1 and 2 reflect an analysis of net interest income on a fully taxable
equivalent basis for the three-month period ended March 31, 2009 and 2008, as
well as changes in fully taxable equivalent net interest margin for the
three-month period ended March 31, 2009, compared to the same period in 2008.
Three Months Ended March 31,
2009 2008
(Dollars in thousands)
Interest income $ 33,108 $ 38,396
Fully taxable equivalent adjustment 865 716
Interest income - fully taxable equivalent 33,973 39,112
Interest expense 11,297 17,565
Net interest income - fully taxable equivalent $ 22,676 $ 21,547
Yield on earning assets - fully taxable equivalent 5.89 % 6.86 %
Cost of interest-bearing liabilities 2.29 3.50
Net interest spread - fully taxable equivalent 3.60 3.36
Net interest margin - fully taxable equivalent 3.93 3.78
Table 2: Changes in Fully Taxable Equivalent Net Interest Margin
Three Months Ended
March 31,
2009 vs. 2008
(In thousands)
Increase in interest income due to change in earning assets $ 1,371
Decrease in interest income due to change in earning asset yields 6,510
Decrease in interest expense due to change in interest-bearing
liabilities 67
Decrease in interest expense due to change in interest rates paid on
interest-bearing liabilities 6,201
Increase in net interest income $ 1,129
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Table 3 shows, for each major category of earning assets and interest-bearing
liabilities, the average amount outstanding, the interest income or expense on
that amount and the average rate earned or expensed for the three-month period
ended March 31, 2009 and 2008. The table also shows the average rate earned on
all earning assets, the average rate expensed on all interest-bearing
liabilities, the net interest spread and the net interest margin for the same
periods. The analysis is presented on a fully taxable equivalent basis.
Non-accrual loans were included in average loans for the purpose of calculating
the rate earned on total loans.
Table 3: Average Balance Sheets and Net Interest Income Analysis
Three Months Ended March 31,
2009 2008
Average Income / Yield / Average Income / Yield /
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
ASSETS
Earnings assets
Interest-bearing
balances due from
banks $ 8,604 $ 12 0.57 % $ 5,397 $ 55 4.10 %
Federal funds sold 13,846 7 0.21 22,701 166 2.94
Investment securities
- taxable 230,762 2,653 4.66 324,101 3,762 4.67
Investment securities
- non-taxable 117,082 2,064 7.15 109,314 1,826 6.72
Loans receivable 1,966,934 29,237 6.03 1,831,338 33,303 7.31
Total interest-earning
assets 2,337,228 33,973 5.89 2,292,851 39,112 6.86
Non-earning assets 261,009 257,680
Total assets 2,598,237 $ 2,550,531
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