Home Bancorp, Inc. Q2 FY2023 Earnings Call

Thank you, Paul. Good morning, and welcome to Home Bank's first earnings call. Our earnings release and investor presentation are available on our website. I ask that everyone please refer to the disclaimer regarding forward-looking statements in the investor presentation and our SEC filings. Now I'll hand it over to John to make a few comments about the quarter. John?

Thanks, David. Good morning, and thank you for joining Home Bancorp’s first live earnings call. We appreciate your attendance as we strive to give you a better sense of Home Bancorp and our approach to creating long-term shareholder value. For those of you that don't know me, my name is John Bordelon. I'm the Chairman, President, and CEO of Home Bank. The bank was founded in Lafayette, Louisiana as a thrift in 1908, 115 years ago. I haven't been here the whole time. By the 1980s, the banking industry had changed in recognizing the problems with the savings and loan model. We began transforming the balance sheet and the people we employ to become a commercial banking operation. In October 2008, as a 100-year-old company, we went public in an offering that was oversubscribed, and that was the day that the TARP bill was signed. We became the highest capitalized bank in the country with 25% capital assets. The next 15 years saw tremendous growth through organic expansion and through six acquisitions, which you can see on Page six of the earnings presentation. We believe our ability to successfully acquire banks is one of our core competencies, and we expect acquisitions will continue to play a part in our growth strategy going forward. We grew from $400 million in assets at the time of our IPO to $3.3 billion today, with 43 branches in seven regions in Louisiana, Texas, and Mississippi. We have 488 employees, who along with our directors, are the largest shareholders of Home Bank. Home Bank's motto is, 'one team creating exceptional customer experiences,' and we strive to live that motto every day. In order to uphold our motto and attain our goals, it's imperative that we invest in talented employees, technology, and the newest delivery systems. I'm very proud of what we've built here at Home Bank and think that we're very well positioned to continue to build shareholder value while serving the communities in which we operate. Now on to the quarter. The second quarter had significantly less volatility compared to the first quarter. Deposits were flat for the quarter, with approximately $93 million in core deposits moving to CDs. This movement brought the NIM down to 3.94% from the previous quarter of 4.18%. Year-to-date, deposits have declined by $81 million, of which only $6 million of the decline came in the second quarter. We are very proud of our balance sheet and very proud of our core deposits, which make up 82% of the total deposits, with non-interest bearing deposits making up 33% of total deposits. Assets grew by $30 million or just under 3.7% annualized, with loans growing by $46.4 million or 7.1% annualized. The majority of that loan growth was in CRE, residential, and C&D. Securities have declined by $37 million for the year and $17 million or 3.6% for the second quarter. The bank has $1.2 billion in additional borrowing capacity should the need arise in the future. Uninsured and uncollateralized deposits totaled $570 million or 23% of total deposits. And the duration of our securities portfolio is 4.5 years. On the management front, our Chief Operations Officer, Jason Freyou, has taken a position as President and CEO of another Louisiana bank. We wish Jason tremendous success in his new venture, and we hope to have his replacement announced by the end of the year. Secondly, Home Bank is very pleased to announce the hiring of our new Houston Market President, Jeff Dudderar. Jeff is a seasoned leader with 33 years of banking experience, the last nine spent in the Houston market with BBVA and Prosperity Bank. We're excited to have a leader of Jeff's quality in such an important market. With that, I'll turn it over to David Kirkley, our Chief Financial Officer.

Thanks, John. Good morning again, everyone. Second quarter net income was $9.8 million or $1.21 per share. This was a decrease from last quarter's net income of $11.3 million or $1.39 per share, which was driven primarily by a 24 basis point decline in NIM due to higher deposit costs and a $1 million increase in non-interest expense. Despite some compression over the prior two quarters, our NIM remained very strong at 3.94% in the second quarter. We do expect some additional pressure on NIM due to increasing deposit costs over the next few quarters and possibly more depending on what the Fed does. Slide 19 includes our historic and current deposit beta statistics, which could help you provide some guidance about what to expect. As you can see, our current deposit beta for our interest-bearing deposits is 22% this cycle, but has averaged 38% in the last two rate cycles. Despite the pressure on NIM, we are quite pleased with our Q2 results. ROA and ROATCE were 1.21% and 15.5%, respectively, which we feel good about considering everything that's happened over the prior two quarters. Loans increased by $45 million in the quarter, which was a little bit above our 4% to 6% growth rate we expected this year, and loan yields ticked up 15 basis points to 5.83%. Pages 13 and 14 of our slide deck go into a little bit more detail on credit. Overall, credit quality remains very strong and credit metrics are at multi-year lows. We recorded a provision expense of $511,000 in the quarter due to loan growth, which kept our allowance to loan ratio at 1.22%. There was a $3.7 million increase in substandard loans this quarter, which was primarily related to a single acquired relationship. Non-interest expense increased by about $1 million from the prior quarter due to a $739,000 unexpected OREO recovery in the first quarter, as well as the increase in compensation expenses from annual raises that took effect in April. We expect non-interest expenses to be about $22 million in the third and fourth quarters. Finally, before we open it up for questions, I want to briefly discuss Slide 21, which highlights our recent capital management strategies. Since 2018, we've experienced an 8% annualized growth rate in adjusted tangible book value per share. During that time, we have deployed capital through a cash acquisition in 2022, we've increased our quarterly dividend per share from $0.15 to $0.25, and have repurchased about 13% of our outstanding shares. Since 2018, we have also grown assets at a 10% annualized growth rate, and the bank finished Q2 with a CET1 ratio of 12.8%. With our robust capital ratios, we really feel well positioned to succeed in any market and can capitalize on opportunities that may arise. Thank you for your time. And with that, Paul, please open the line for Q&A.

Thank you, sir. Our first question comes from Brett Rabatin from Hovde Group. Your line is open.

Hey, guys. Good morning.

Good morning, Brett.

I wanted to start with the funding costs and see if you might have the cost of deposits for the last month of the quarter or potentially the margin for the last quarter as well?

Yes, Brett, give me a moment. I have it on one of my pages right here. We had a cost of interest-bearing deposits of 1.49% in June, and I believe that reflected a 3.88% NIM.

Okay. And, David, can you talk maybe about your assumption on the deposit betas for the $1.3 billion-ish of savings checking and money market, where that might go from here?

I have no reason to think that this cycle will be any different or that our beta will be lower than in previous cycles. I fully expect that over the next few quarters, our non-maturity deposit betas will align with what we have seen in the last two cycles. Additionally, with the Fed potentially raising rates, I believe this cycle may see a slightly higher deposit beta than what we have acknowledged in the past.

Okay. And then on the lending side, can you talk maybe about where you're seeing new production come on and just the linked quarter change in loan yields? Given what you have from a variable rate perspective, it would seem like that would have moved a little faster. Any color on the current loan yield and where you see that headed?

Yeah. I think our loan yields have risen considerably, probably in the last part of the quarter. Competition has kind of pushed those slowly upward. But pretty much everything we're looking at now is in the range we're anticipating, and we would expect a slow rise in our loan yields across the board over the next probably four quarters.

Okay. And then just lastly for me on capital. I'm presuming you're going to finish the buyback. Would you be looking to re-up the authorization following that?

Yes to both.

Okay, great. Appreciate the color.

Thanks, Brett. Appreciate it.

And our next question comes from Christopher Marinac from Janney Montgomery Scott. Your line is open.

Thank you. And thanks for hosting the call this morning. We appreciate all the information. I wanted to ask about credit. With all the good information that you laid out last night from the criticized assets to reserves, what causes new criticized loans to come on? Whether it's in CRE or any of your categories, what's the cadence of decisions that lead to higher criticized if they occurred down the road or even the other way if you were to see reductions?

Yes. I think there are a lot of different reasons. In this particular quarter, we had one credit about $4 million, where the property that he has rented is being restructured — some of those tenants were kicked out, and he is trying to get some more profitable tenants in there. So he has been slow to pay. We anticipate that hopefully by the end of the third quarter, or at least by the end of the year, to be off of classified assets. Others are just as things happen; some improve their cash flow and are able to come off of substandard or nonperforming, while others aren't so lucky and stay on there a little bit longer. We have done a good job, I think, with our nonperforming assets of reducing those over the course of the last three years, and we'll continue to work hard to do that.

And John, even though those are slight changes this quarter, does the reserve typically just have a little bit higher level when you have a criticized loan come on?

Well, not necessarily. We don't anticipate any loss with the criticized loans that came on in this particular quarter. What we put on was due to the loan growth that we had in the second quarter. So we anticipated that when we budgeted for the year, we anticipated a little bit more problems than we're having. So, I anticipated increasing our loan loss reserve to maybe 1.26% to 1.27%, and we haven't had to do that at all. So it's totally due to the growth that we've expressed in the first two quarters.

Okay, great. Just next question for me just has to do with kind of lowering your uninsured deposits. Is that something that might be a goal or objective going forward? I know the coverage you have is great. Just curious if that's something that's of interest at this point?

So, Chris, I wanted to point out something to make sure that we're on the same page. On slide 17, I believe that you are looking at that approximately $570 million of uninsured deposits? That number is relatively unchanged from the prior quarter. I just want to ensure that everyone is hearing this and reading this graph understands that we're saying uninsured and under-collateralized. We have about 8% of our deposits are public funds, and a lot of those deposits are over the FDIC insurance limits, but are collateralized. We added this chart on Slide 17 to ensure that everybody can see the diversification. That was something that we didn't do prior quarter. So, that makes it seem if you look at the actual number it seems like there was a change, but when I break it out this way, you can clearly see what deposits are uninsured and under-collateralized. That number declined about $10 million quarter-over-quarter.

Part of the reason for that decline, especially on the retail side, we've been working with some of our customer base to change the account ownership a little bit. That has allowed us to reduce that number on the retail side. Also, I was just reading this morning again that the FDIC is continuing to look at potentially commercial accounts, at least payroll accounts being fully secured. So, that will help that 17% on the commercial side.

Got you. Okay. No, that's helpful. And thanks for the additional disclosure on that. Last question for me just goes back to securities portfolio. Are there any opportunities for you to buy bonds, swap out of other stuff to enhance yield and margin? I'm just curious kind of the opportunity cost and trade-offs that you see at this point?

So we did a little bit of this at the very end of March. I think we sold about $15 million of securities that had a very, very quick one less than one year payback. I think with rates bouncing around, those going to present them opportunities with the volatility in the markets. I think when rates went up a good bit, it was a little bit harder to justify it. As of right now, we are more looking to let the investment securities cash flow rather than buying new investments and replacing them essentially with overnight advances or higher-cost CDs right now.

Okay. And then we can obviously imply sort of national amortization given the duration information that you shared?

Yes, it does. You know, we have a 4.5-year effective duration on the portfolio, which is a little bit longer than we like to manage. But a lot of that you could see; the 2026 and 2027, if you're looking at Slide 15, have a lot of cash flows coming due and a lot of those — that cash flow is from bullet CMBS type products. So we expect to have a good bit of cash flow coming due starting in 2025, 2026, and 2027. We know that that unrealized loss position is going to be slowly reverting down to zero as those cash flows come due from those CMBS products.

Got you. Great. Thank you for the additional background. I appreciate it.

Thank you. Appreciate it.

Thanks, Chris.

And our next question comes from Kevin Fitzsimmons from D.A. Davidson. Your line is open.

Hey, everyone. Good morning.

Good morning, Kevin.

David, you mentioned earlier that additional margin pressure is expected. To provide some context, unless we assume the Federal Reserve will raise rates once more, is it reasonable to say that, considering that and the competition in deposit pricing, the margin decline will be slower, but perhaps not as significant as what we experienced this quarter, or could we see similar compression to what occurred in the second quarter?

So I think in the prior couple of quarters, we were anticipating the Fed pausing or starting to decline in the latter half of 2023. I think that expectation is pretty much gone, with maybe some anticipation of one to two rate hikes for the remainder of the year and then flat till mid-2024. So, I could see another quarter to two quarters of NIM compression. Hopefully, not to the extent that we had. We don't expect the deposit runoff or the mix change from non-interest DDA to CDs as much as we experienced in the prior two quarters. We also don't anticipate the need to go out and borrow additional — increase our overnight advances from the FHLB. So, long answer, more NIM compression. I think it'll be on a slower pace, and it will probably bottom out around first quarter 2024 now.

I would add to that, Kevin, that it's also very dependent upon competition. It seems as though there's a big need by all banks to have deposit growth. So, I think that's kind of the asterisk that we have to put on this and say, we think, as David pointed out, that we'll have some NIM compressions third and fourth, but that could change based upon what happens with competition.

And on the comment about hoping that non-interest-bearing deposit outflow doesn't have the same amount or it abates. Have you started seeing that over the last month or two of the second quarter or throughout so far? Have you seen any evidence of that abating? Or is that really more just kind of a hope at this point?

It's still there. I'm not going to say it's not there, but it is slowing down from where it was in the first four or five months of the year.

Okay. And it’s at 33% today. Do you have an estimate on where that might stabilize at 33%?

It would be a very good guess if I could get that right. We don't see a tremendous amount of shrinkage in that portfolio. Some of that portfolio came from the Texas acquisition. So we're anticipating it staying above pre-COVID levels, closer to 30% than the 24% that we had in 2019. We may see a little bit more shrinkage there, but I would not think it would go below 31% or 32%.

Okay, and one last question for me, guys. You mentioned the leadership change in Texas. Should we anticipate any strategic or noticeable changes from the outside, or should we not expect that?

I think Jeff brings to the table knowledge of the market and knowledge of the people in the market. We do anticipate being able to expand in the Houston market with some talent that he's able to bring over. We were able to keep all of our commercial team throughout this transition period and are very excited about the future of that particular market. So, we'll probably be looking late third quarter, early fourth quarter to add some talent in that market.

Okay. Great. Thank you, guys.

Thank you.

Thank you.

Thank you. And our next question comes from Graham Dick from Piper Sandler. Your line is open.

Hi, guys. Good morning.

Good morning.

Good morning.

So, I just want to circle back to that non-interest-bearing deposit conversation and just trying to get a sense for how that portion of the deposit book has changed. I know like you said you did the deal in Texas, but who are the customers that make that up that give you confidence that we could be close to seeing the end of outflows from there for remix?

Well, I think our relationship managers have done a good job in all of our markets, going out and securing new clients and expanding existing clients. Some of those existing clients held balances in 2020 and 2021 that weren't putting in CDs because of the low yield on those CDs. Some of that has moved out already. In all categories, realistically, we've seen some shrinkage, but that one has shrunk the least of all. So we do anticipate that being pretty strong. Will there be a little bit more leakage? Possibly, yes. But for the most part, a lot of those large balances that were there because of low yields have moved into CDs at this point. We think there will be a lot less movement in the third and fourth quarter.

Okay, that's helpful. It makes sense. I'm trying to get a better understanding here. So that's good. I wanted to quickly address expenses. You mentioned $21 million or $22 million in each quarter for the latter half of the year. I'm curious about what is driving the increase. The merit increases have already been implemented, and we have to consider that the revenue environment is somewhat challenging. It seems like the accrual might not be as significant in the second half. Any insights you could share on what's leading to the increase in expenses would be appreciated.

Yes. There was probably a couple of random one-offs that individually in Q2 don’t really make sense to point out all the one-offs, but combined, about $300,000 of reduction in non-interest expense that we're not expecting to have in the next two quarters. That would be a little bit in data processing and a little bit in other. And then we have, like I said, the compensation that took place in the second quarter. We also expect a little bit more seasonality regarding some marketing expense.

Okay. Great. That's helpful. And then I guess just the last thing I wanted to hit on would be the reserve level, the level of ratio. Just you guys thinking about keeping it around this 1.22% of loans? Or are you seeing anything on the credit front that might make you want to build it conservatively, I guess, as you look out into the economy?

Absolutely, we'll be right in that area, whether it's 1.20% to 1.25%, but definitely in the 1.22% area. I think that's going to be dependent upon what we see coming down the road regarding bad credit or deteriorating credit. So, we'll just have to keep an eye on that and see where it goes. Right now, our credit metrics are mostly improving. So yes, I would say for probably the foreseeable future, 1.22% to 1.23% is going to be where we hang out.

Okay. Great. And then the last thing I wanted to hit on, I guess, would be just something with credit. I saw on that, I guess, it's Slide 11, the office exposure. I know you guys have a pretty small average balance here. But I just wanted to get some color around what the office portfolio in Houston looks like? In particular, given that's the biggest geographic exposure. So if you could just provide any color on what the typical project looks like there and what you guys are going after in that market, that would be helpful?

I think it's a wide array of office buildings. I don't think there are any high rises that we have. I think our largest credit is about $9.8 million in Baton Rouge. So Baton Rouge and Houston are our two biggest markets for office buildings, and most all of those are $6 million or less, except for the one in Baton Rouge. So they're not big high-rises; they're just smaller buildings. Don't have a significant number of — I think two in Baton Rouge or three and five or five, whatever. I think those are government-occupied buildings, so pretty safe as far as that goes. We've had those credits for some time, and that's about $4.5 million in a $5.5 million credit. The rest of that is all in Houston. Yes, that's one of the top, right. All the rest of those are in Houston. For the most part, real estate in Houston is a lot more expensive than it is in Louisiana. I think we've got some good credits there, and these are doing very well.

Okay. Great. I appreciate it. Thank you, guys.

Thank you. Appreciate it.

And our next question comes from Joe Yanchunis from Raymond James. Your line is open.

Good morning.

Good morning.

Thank you for taking my questions. I was hoping to go back to the Houston market. Can you discuss your expectations over the near term? Do you think this current momentum can continue to drive mid-single digit loan growth for the balance of the year?

Well, surely, the Fed and what they do with interest rates is going to control some of that. I think most people that were taking loans out in the early part of the year were thinking that they would have a high loan rate maybe for a year or so, and then it would come back down. I think that is slowing down what volume we will see. But Houston has been very, very strong, and it's slowing down, but it's still better than most markets. So, we anticipate probably — we had 7% growth in the second quarter; we probably anticipate something below 6% or 5%, somewhere in the mid-single digits again.

Yes, Joe, I'd like to point out that since we acquired Texan Bank, as John said earlier, we've been able to maintain all our commercial bankers, and since then, we've grown that loan portfolio by 25%. We are also, as we pointed out, have the new market president. We believe that he'll be able to expand in that market a little bit more to carry some more momentum. We're also evaluating some retail offices. We're moving some branches into much higher traffic, better locations. So we feel pretty optimistic about the future of the Houston franchise being able to help the loan growth over the next couple of quarters, two years.

Perfect. And I appreciate the commentary. And then is there any color you can provide on the rate and the overall duration of the CDs you had in the quarter?

So they are relatively — they're not super long. I would say the majority of the CDs were the 11 to 12 month CDs that we added. We have a couple of options out there, and a lot of customers are trying to stay a little bit short. So we have some five-month CDs out there as well, which is not really a term that we've ever really offered before. But like I said, we have a five-month CD, but the majority of them are going into the 11 and 12 month buckets right now.

Perfect. That was all the questions I had. Thank you very much.

Thank you.

Thank you.

The meeting has now concluded. Thank you for joining, and have a pleasant day.