Pandemic, Accounting Change Wipe Out Most of Home BancShares’ 1Q Earnings

(Home BancShares)

The coronavirus pandemic and a change in accounting standards forced Home BancShares Inc. of Conway to reserve an extra $77 million for potential loan losses, sending first-quarter earnings down by more than 99% compared to the first quarter of 2019.

The publicly traded holding company of Centennial Bank reported earnings of $507,000 for the quarter that ended March 31. That compared with $71.4 million a year ago and $73.3 million in the fourth quarter of 2019.

“The earnings power of HOMB has really shone through this quarter,” John Allison, chairman and CEO, said in a release announcing the quarterly results. “After $95 million of noise, most of which were non-cash expenditures, to still be profitable is remarkable.”

That “noise” included $76.7 million associated with a new accounting standard that took effect for large and publicly traded banks on Jan. 1. Called CECL — current expected credit losses — the order from the Financial Accounting Standards Board changes the way banks reserve for possible loan losses. Under normal circumstances, CECL would have been a $5 million hit on Home BancShares’ quarterly earnings; the pandemic increased that by $71.7 million.

“Our CECL provisioning model is significantly tied to projected unemployment rates,” the earnings release explained. “As a result of COVID-19, the unemployment rate projections significantly increased from January 1 to the end of March 2020, which resulted in the $71.7 million provision related to COVID-19.”

Other unusual items reflected in quarterly earnings include $10 million in expenses related to the acquisition of LH-Finance, a marine lending unit that Centennial Bank acquired from People’s United Bank of Bridgeport, Connecticut, at the end of February; a $7.8 million increase in unfunded commitment reserve; a $5.8 million write-down on the value of marketable securities; and a $842,000 million provision for credit losses on investment securities. 

Tracy French, president and CEO of Centennial, praised the company’s response to the federal government’s financial assistance program for small businesses called the Paycheck Protection Program, which consists of forgivable loans to small businesses. The bank approved thousands of PPP loans totaling almost $1 billion in the first 10 days of the program, French said.

Home BancShares had assets of $15.53 billion on March 31. Stockholder equity declined from $2.51 billion at the end of 2019 to $2.43 billion.

“The decrease in stockholders’ equity is primarily associated with the $65.1 million decrease in retained earnings and the repurchase of $23.9 million of our common stock during the first quarter of 2020 which were partially offset by the $4.8 million increase in accumulated other comprehensive income,” the company said.