Home Bancorp, Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Home Bancorp's First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Home Bancorp's Chairman, President and CEO, John Bordelon; and Chief Financial Officer, David Kirkley. Mr. Kirkley, please go ahead.

Thanks, Joel. Good morning, and welcome to Home Bank's first quarter 2024 earnings call. Our earnings release and investor presentation are available on our website. I'd 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 first quarter. John?

Thanks, David. Good morning, and thank you for joining Home Bancorp's earnings call today. We appreciate your interest in Home Bancorp as we discuss our strong quarterly results and describe our approach to creating long-term shareholder value. Home Bank delivered a solid first quarter performance with healthy loan and deposit growth and continued expense discipline. We are quite proud of our accomplishments in the first quarter as net income was $9.2 million or $1.14 per share, which generated a return on assets of 1.11%. Loans increased $40.1 million over the quarter or about 6% annualized, which is in line with our expectations for 2024. Houston was again a significant contributor to our loan growth as we relocated an acquired branch and opened a loan production office to house the commercial team we brought on board in the fourth quarter. We will be relocating an additional branch next week in Houston as we continue to invest in our markets and seek ways to drive additional activity. First quarter deposits increased $52 million, following a $73 million increase in the fourth quarter. Deposits have increased by 6.4% since March 31 of last year, which we feel very good about considering everything that has happened in the banking industry in the last 12 months. Our loan-to-deposit ratio came down slightly to 96.3, which is still a little above the upper end of our target range. As we indicated last quarter, we saw some additional pressure on the net interest margin, which decreased to 3.64% in the first quarter. While the last couple of weeks have made predicting rates challenging, we continue to expect them to stabilize around this level in the next two quarters. With that, I'll turn it back over to David, our Chief Financial Officer.

Thanks, John. Net interest income totaled $28.9 million in Q1, a slight decline of $381,000 from the previous quarter as deposit costs continue to put pressure on the net interest margin. The pace of deposit migration is certainly slowing, but we are still seeing customers move funds out of savings, checking and non-interest-bearing deposits to higher-yielding CDs and money market accounts. The 26 basis point increase in yield on interest-bearing deposits during the first quarter was less than the 40 basis point increase in the fourth quarter, and 54 basis point increase in the third quarter. So it does appear that the pace of increase is slowing. As deposit migration slows and the spread between new CD origination rates and the rate of the existing CD portfolio narrows, we should continue to see smaller increases in deposit costs. Page 11 and 12 of our investor presentation provide some additional detail on credit. Non-performing loans increased by $11.5 million in the first quarter to $20.3 million, primarily due to two relationships totaling $9.6 million. The first relationship has loans totaling $4.6 million and is secured by a portfolio of residential investment properties with a loan-to-value ratio in the 65% range, and we expect minimal, if any, losses. The other relationship is about $5 million and was included in the 90 days past due and still accruing bucket, which is not a category we utilize very often. It's a small multi-family construction project that was waiting for a certificate of occupancy, which we just received yesterday. We expect the sale of two units totaling $970,000 to close tomorrow and a couple more units to close this month. Our allowance for the loan loss ratio was 1.2%, down 2 basis points from the prior quarter. The decline in this ratio was due to the migration of CD loans into permanent loans and CECL. There were no changes in our qualitative factors during this quarter, and we feel confident in our reserve levels. Slide 16 has some detail on our historic net interest margin and its components. As John mentioned, the net interest margin declined by 5 basis points in the first quarter but appears close to stabilizing. Slide 17 has our current and historic deposit beta statistics and shows that our cost of total deposits in Q1 was 1.82%, with a cycle-to-date beta of 32%. At 1.95%, our cost of funding earning assets is 35% of the upper limit of the Fed funds target range of 5.5%. Loan growth picked up in the first quarter to $40.1 million with an average origination rate of 8.23% during the quarter. Our loan pipeline remains strong, and we continue to expect 4% to 6% growth in 2024 but recognize that Fed activity could impact both growth and yields. Slide 18 of the presentation has some additional details on non-interest income and expenses. Non-interest income was stable in the first quarter at $3.5 million. Non-interest expense increased slightly to $20.9 million but still came in below our forecast due to lower-than-expected compensation expenses and several property and equipment projects being pushed further into 2024. Annual salary increases took effect April 1, and we expect core non-interest expenses to be around $22 million to $22.5 million in the second and third quarters. Slide 19 summarizes the impact our capital management strategy has had on Home Bank over the last few years. We've grown adjusted tangible book value by 55% since 2018, increased our dividend by 67% since 2016, and repurchased 13% of our shares all while maintaining robust capital ratios. This positions us to be successful in any economic environment and to take advantage of opportunities as they arise. With that, operator, please open the line for Q&A.

We will now begin the question-and-answer session. Your first question comes from Graham Dick with Piper Sandler. Please go ahead.

Hey. Good morning, guys.

Good morning, Graham.

Okay. I just wanted to start on those two credits in the press release that moved to non-accrual this quarter. It doesn't sound like you guys are expecting much loss there. But I just wanted to know a little more color around the industry type of credit? And what sort of gives you confidence that you might be able to move these out of the bank without having to really charge anything else?

The first credit David mentioned involves a situation with five partners, where one partner has opposed the other four. There are around 15 properties in a prime location next to Tulane University, all of which are leased. However, payments have stopped due to internal disputes. We have sent a 30-day notice and initiated foreclosure proceedings. The four partners are looking for a way to protect their $2.2 million equity in the project. If the situation isn't resolved and payments aren't updated, we may see a share of sale by the third quarter, which we believe will sell without issues. The properties themselves are in excellent condition, it's solely an issue with the partnerships. The second project faced cost overruns, leading to the borrower exhausting their funds. The project is complete and ready for sale. We have two sales scheduled for tomorrow amounting to $970,000, which will bring the interest current and reduce principal by about $750,000. Additional sales are anticipated before the month's end. We expect this project to resolve itself now that they have obtained their certificate of occupancy and can begin selling. I expect one of these to be classified as non-accrual by next quarter, while the other may take longer, depending on whether the partners choose to collaborate or if a share of sales occurs; however, we do not expect any losses in the first year.

Okay. It sounds good. All right. And I just wanted to kind of turn to the net interest margin. I think last quarter, you guys had hoped that there'd be maybe a little downside this quarter but then stabilize into Q2 and sort of drift higher from there. How do you feel about the way that outlook might be evolving, given what you're seeing on the rate outlook from the Fed right now if we would only get one or two or maybe no rate cuts this year?

Yeah. I think Q2 is probably going to be a much more stable net interest margin for Home Bank. Our deposit costs are starting to peak out where I mentioned earlier on the call that the spread between our CD portfolio and the rate at which we're putting on CDs right now is narrowing very quickly. So you're not going to see that rapid rise in deposit costs that we have been experiencing. We've also looked at the migration from retail customers specifically who have been moving funds out of checking accounts into money markets and CDs over the past couple of quarters. That pace has slowed significantly. So it's almost as if the people that we're looking for rates have found them, and that outflow into higher yielding deposit products is slowing. The pace at which CDs are pricing higher has slowed significantly. On the flip side, we are seeing some success in our loan portfolio. As I mentioned, the weighted average rate of new originations was 8.23%. So that's starting to offset the increase in liability costs as well. So we feel good about a slight decline to stability in net interest margin in Q2.

Okay. And then as you just sort of look ahead, do you think that there's a chance that as these deposit costs continue to top off and new loan yields come on at higher rates? Given no change to the Fed funds rate, do you think the net interest margin could still tick higher in the back half of the year? Is that a possibility?

I think the pace would be slower, but yeah, I think it's a possibility that it could tick higher for sure.

Okay. Great. And then I guess just one more for me is on loan growth. It came in within your guidance of mid-single digit, but still a good start to the year. Do you expect the Houston team to continue to do the heavy lifting there for the rest of the year? And if so, what are you sort of seeing in your legacy markets that are maybe holding back growth there a little bit?

I believe that all markets will experience some slowdown as the year progresses, particularly if interest rates remain stable. The treasury yield was around 4.6 yesterday, indicating a slowdown. However, we currently have several projects in the pipeline, with construction and development beginning to ramp up. Ultimately, I think it will be challenging to achieve the same performance in the fourth quarter as we had in the first quarter if rates stay at current levels. I anticipate a decrease in the growth rate, but if the Federal Reserve lowers rates two or three times, that could significantly alter the situation.

Right. Understood. Okay. That’s it from me. I appreciate it.

Thanks, Graham.

Your next question comes from Brett Rabatin with Hovde Group. Please go ahead.

Hey, guys. Good morning.

Good morning, Brett.

Wanted to go back to credit, and if I look at Slide 11, the total substandard and granted, your criticized assets are still at very low levels, but I saw that the substandard bucket moved up about $7 million linked quarter. I was just curious what you were seeing in terms of migration in or out of the substandard bucket in particular? And then just any industries or things that you're seeing incrementally where maybe there's pressure either on revenue or just overall sales?

I think the general thought for Home Bank is that 2024 will continue as '23 did in reducing classified assets. These two one-offs that we discussed momentarily are really not because of the economy as much as they are just due to mismanagement in the project. So I don't anticipate that continuing throughout '24. I would expect those classified assets to come down as they did towards the end of the year. So we're not seeing any signs that there's a wave of bad assets coming our way.

Outside of the two credits that we mentioned, there was a little bit of a migration in from a mix between some residential properties, some small commercial real estate, some very small commercial and industrial as well as some outflows that basically were the exact same thing, some residential, some small commercial real estate and some various pay-offs. So they are kind of washing each other out right now.

Okay. And then from a capital perspective, our ratios are building a little bit. You bought back a little bit of stock. Any thoughts on the level of buyback activity from here? And then are you going to keep some powder dry for potential M&A or do you kind of feel like M&A is less likely with higher marks given where the 10-year has moved?

We're going to be picking up our buybacks a little bit more in Q2. We did start a little bit in earlier part of Q1. But it's kind of a balancing act of one, keeping the powder dry and two, buying back at the levels that our stock is trading at today.

One other point in that regard. We had pulled back on buybacks. We were engaged in a potential purchase of some branch locations from another bank. That was very much in line to be announced yesterday, but unfortunately, another bank came in and what we felt was a little high price-wise, but anyway, the seller basically reneged on us three days before closing and took another bank. So that was one of the reasons that we stopped the buybacks about 60 days ago for the most part.

That's helpful. Lastly, do you have any comments on your intention to lower the loan-to-deposit ratio? How do you plan to fund loan growth from this point? Is it through CDs? It's reassuring to see that the DDA remained stable this quarter. What are your thoughts on funding growth?

Well, I think our focus completely is on commercial and industrial customers. And with that comes their deposit relationship. We're trying to move away from non-owner occupied commercial real estate, just from the standpoint that it doesn't bring in the deposits. So bringing in the whole customer is extremely important to us, and that's going to help us maintain the DDA level that we have acquired and/or attained up until this year. So even though some of those balances moved when rates started going up into CDs, we are still ahead of where we were pre-pandemic as a percentage of total deposits in demand deposit accounts and savings accounts. So we're going to continue to drive the commercial and industrial portfolio much more so than anything else, and that will help with that deposit mix. We'd love to get that down to 92%, 93%, something like that.

Okay. Appreciate all the color, guys.

Yeah.

Thank you, Brett.

Your next question comes from Joseph Yanchunis with Raymond James. Please go ahead.

Hi, there.

Good morning, Joe. How are you doing?

I’m doing well. So something to start with, kind of, it sounds like the cost of interest-bearing deposits may have peaked based on what you said earlier. So if we assume the forward curve, do you have a sense for how deposit betas will behave when the Fed starts cutting rates?

So I don't want to use the word peak because I still think that's going to continue to drift up a little bit, but just at a much slower pace. So there is still some low-hanging fruit out there. So there's still going to be some upward migration in deposit costs, but it's slowing. The pace of increase is slowing quickly. As far as the deposit betas, when rates start ticking down, I think a lot of banks are going to be eager to lower rates. But a lot of loan to deposit ratios are not where banks want them to be. And customers are getting used to five handles on their CDs, which will force those customers to shop more. So I think a 25 basis point or 50 basis point rate cut is going to, the beta is eventually going to work its way out to a normalized beta. But I think it might take a little bit longer to play out as customers continue to fight for higher rates.

I appreciate that. The Houston market continues to show strong loan growth, so with 18% of loans being in Texas, do you have a medium-term target for how large you would like to grow that portfolio?

No, we do not. We think it's a tremendous market, and the people that we have there, including the new group that we've pooled out in the fourth quarter, are doing a great job of staying in the arena that we want to play in. So I know a lot of banks complain about going to Texas and you have to play big to get anything. We're not seeing that. The talent that we have there is keeping it in the type of portfolio type of loans that we're searching for and doing a very good job and doing it at a high volume. So we're very excited about what's going on there. And unfortunately, we didn't get the M&A deal that we wanted to help us expand in the Houston market, but I'm sure there will be other opportunities in that market to come.

Okay. And then last one for me here. So we heard from a lot of banks this earnings call that their outlook called for an acceleration in loan growth throughout 2024. But based on your reiterated outlook, it seems like for it to reach the high end of your guidance, loan growth would remain stable? Do you have a sense for why there's a disconnect there?

No. I really don’t. I think if we probably wouldn’t be so optimistic without our Houston franchise. Things are slowing a little bit more in Louisiana than they are in Texas. But I do believe every market is slowing to some degree, but Texas is keeping it propped up. So that’s the only explanation I can find.

Okay. Great. Well, thank you for taking my questions.

Thank you, Joe. Have a good one.

This concludes our question-and-answer session. I would like to turn the conference back over to John Bordelon for any closing remarks.

Once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Thank you for your interest in Home Bancorp. Hope you have a wonderful day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.