Earnings Call Transcript - HBCP Q1 2026

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Home Bancorp's First Quarter 2026 Earnings Conference Call. 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. Please go ahead, Mr. Kirkley.

David Kirkley, CFO

Thank you. Good morning, and welcome to Home Bank's First Quarter 2026 Earnings Call. Our earnings release and investor presentation are available on our website, please refer to the disclaimer on 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 and outlook for 2026. John?

John Bordelon, CEO

Thanks, David. Good morning, and thank you for joining our earnings call today. We appreciate your interest in Home Bancorp as we discuss our results, expectations for the future, and our approach to creating long-term shareholder value. Yesterday afternoon, we reported first quarter net income of $11.4 million or $1.45 per share. Earnings per share were down $0.01 from the fourth quarter, but increased 6% from a year ago and represented a good start to the year. Net interest margin expanded to 4.16%, which was 10 basis points higher than the fourth quarter and 25 basis points higher than a year ago. Return on assets also increased to 1.3% in the first quarter. This quarter, margin expansion was driven by a 22 basis point decline in our cost of funds, which contributed to a 25 basis point decline in our overall cost of funds. Loans declined by 1% in the first quarter as paydowns continued to outpace new production. We continue to see customers delay projects and transactions while they wait for additional clarity on interest rates. Despite the low balances, we maintained pricing and structure discipline and continue to generate new loan originations at attractive spreads and risk-adjusted returns. Our loan pipeline has improved in recent months, although the timing and pace of future loan growth remain difficult to predict, given continued market volatility and uncertainty around interest rates. Total deposits increased by $54 million in the quarter or 7% annualized as core deposits increased $118 million and were offset by noncore CD declines of $64 million. Noninterest-bearing deposits increased $37 million and continue to represent 27% of our total deposits. As a result of our success on the deposit front, our loan-to-deposit ratio declined to approximately 90%, positioning us well for future growth. The strength of our franchise is especially evident when you consider how we performed despite a challenging rate and economic environment. Over the past 2 years, diluted earnings per share have increased by more than 25%. Return on assets has improved by nearly 20%. Net interest margin has expanded by more than 50 basis points and our cost of deposits has declined by more than 100 basis points. We also continue to have success in Texas with loans that are growing to approximately 21% of our total portfolio compared to 15% when we entered the market through an acquisition in 2022. The new Northwest Houston branch opened during the quarter and gives us a full-service presence in one of the fastest-growing areas in the market. The branch's square footage allows for significant growth in the region and will help our well-established commercial team continue to build our franchise. Several organizations have already requested to utilize the branch meeting rooms for their companies. The combination of the branch, its location, and our team of bankers should make the Tomball region very successful. Credit remains manageable. Nonperforming assets increased during the quarter by $3.8 million primarily due to the downgrade of 3 relationships. However, we continue to believe losses from these credits will be immaterial given the collateral protection and guarantor support. Our net charge-offs remain extremely low at just 6 basis points annualized. Finally, we're in the middle of our annual business to all markets and hosting our crawfish boils, as we've done in previous years, executives are engaging with all the fixes and refreshments, reflecting our culture of servant leadership that is such an important driver of our success. These gatherings are a great way to embrace that culture and generate enthusiasm. The time at the branches also gives management an opportunity to answer questions from frontline staff and meet customers both big and small. With that, I'll turn it back over to David, our Chief Financial Officer.

David Kirkley, CFO

Thanks, John. Please feel free to refer to the investor presentation we have provided as I discuss the company's first quarter financial results. Net interest income totaled $34.5 million in the first quarter, an increase of $434,000 from the fourth quarter and $2.8 million from a year ago. This was the highest quarterly net interest income in Home Bank's history and was driven by both lower funding costs and materially improved balance sheet structure. Slide 20 of the presentation has a 2-year history of the yields that drive net interest income and NIM. And you can see the progress we've made bringing funding costs down while keeping loan yields relatively stable. The cost of interest-bearing liabilities peaked in the third quarter of 2024 and has come down 64 basis points as we proactively reduced our exposure to higher cost funding. Over the same period, disciplined underwriting and a loan portfolio comprised of 56% fixed rate loans have enabled us to maintain our loan yield within 12 basis points of the peak reached in the third quarter last year. And we're still making progress. In the first quarter, the average cost of interest-bearing deposits declined 22 basis points to 2.29%, while our overall cost of deposits declined by 16 basis points to 1.68%, which is less than half of the current Fed funds target rate. During the quarter, we had strong deposit growth of $54 million or 7% annualized despite a $64 million reduction in CDs, of which 70% were noncore CD customers. The decline in CD funding was offset by growth in lower-cost, relationship-based nonmaturity deposits. Seasonal fluctuations in public deposits of $43 million contributed to the $118 million growth in non-maturity deposits during the quarter. We had solid growth in noninterest-bearing deposits, which increased $37 million quarter-over-quarter and $75 million year-over-year and represent 27% of total deposits. Finally, due to our success in growing core deposits, we were able to repay all of our more expensive FHLB advances, which showed a minor improvement of $3 million in quarter-over-quarter with a material improvement compared to the $175 million in advances we carried at year-end 2024. Given our lower cost of funds and the repricing opportunities in earning assets, we continue to have additional opportunity for NIM expansion. Slide 14 details expected repricing opportunities from our loans and investments over time. We continue to see a positive spread of approximately 40 basis points on new loan originations versus pay downs. New investment yields were north of 4% in Q1 versus expected roll-off yield of 2.43% over the next 12 months. Slide 15 and 16 of the presentation provide some additional detail on credit. Nonperforming loans increased $1.6 million to $35.8 million or 1.31% of total loans. This was primarily due to the downgrade of 3 relationships, with the largest being $1.4 million, partially offset by the foreclosure of a $2.6 million property in Houston. We recorded a provision expense of $922,000 in the quarter compared to $480,000 in the fourth quarter. The increase was primarily due to changes in individual declared reserves associated with these downgraded credits. Our allowance for loan losses increased to $33.1 million or 1.23% of loans and we continue to feel very confident in our reserve levels. Slide 22 of the presentation has some additional detail on noninterest income and expenses. Noninterest income decreased by $260,000 to $3.7 million, which was slightly below expectations due to lower other income and bank card fees. We continue to expect quarterly noninterest income to be in the range of $3.8 million to $4 million. Noninterest expense declined by $106,000 to $22.9 million and was in line with expectations. We continue to expect noninterest expense to increase modestly beginning in the second quarter as annual raises take effect and technology investments ramp up. For the remainder of 2026, we expect quarterly noninterest expenses to be between $23.3 million and $23.7 million. Slides 23 and 24 summarized the impact our capital management strategy has had on Home Bank. Since 2019, we have increased adjusted tangible book value per share at an annualized rate of approximately 9.7%, increased EPS at more than 11% annualized rate, increased our quarterly dividend by more than 50%, and repurchased approximately 17% of our shares. Tangible book value per share increased to $46.04 this quarter, up almost $5 or 15% from the first quarter of 2025. And with that, operator, please open the line for some Q&A.

Operator, Operator

Please feel free to submit your questions.

Stephen Scouten, Analyst

I'm curious, and I apologize if I missed any information you provided earlier, David. Regarding the NIM trajectory from this point forward, if we don't see any cuts, how does that impact your earlier expectations of expansion for the remainder of 2026? Does that raise your outlook or make you more optimistic considering your asset-sensitive position? How do you view the NIM in light of the current rate environment?

David Kirkley, CFO

I believe there are significant opportunities for repricing in both our loan and investment securities portfolios. This is reflected in our stable loan yield and slightly increasing investments. Even without rate cuts, we are experiencing an expansion in our loan yield, gaining about 40 basis points on cash flow compared to new originations. I expect deposits are likely at their floor without further rate cuts. Therefore, I still see opportunities for expanded net interest margin despite the absence of major cuts.

John Bordelon, CEO

I would just add that the deposit side probably will dictate the pace of the growth of that NIM. We know that we have loans repricing. But assuming rates stay where they are, I'm not sure exactly where deposit rates are going to have to go for us to sustain the level that we have today.

Stephen Scouten, Analyst

Yes, that makes sense. And then could you give a little bit of color on kind of what you saw from a production standpoint on the loans, on maybe customer demand throughout the quarter? I know you mentioned the strength in the Texas market. I think you said 3% growth there, but kind of how maybe that demand segmented by time of the month as well as those different markets?

John Bordelon, CEO

Yes. The demand over the last three quarters of the previous year was significantly impacted by some paydowns and companies selling off businesses. This first quarter resembled typical trends from earlier periods, except for the last three years. Generally, first quarters tend to be relatively flat as people find their footing. However, the past three years saw much more productivity in the first quarter. Therefore, this year appears to follow a more natural trend, and while we hope for lower interest rates, the realization is that we may not see that. We could witness increased demand in the second and third quarters, provided that geopolitical issues around the world do not hinder that demand.

Stephen Scouten, Analyst

That makes sense. I have one last question. Given that the stock has performed well over the past five years, do you think this opens up opportunities for merger and acquisition discussions, or if no progress is made, do you consider partnering with a larger institution?

John Bordelon, CEO

Absolutely. I think M&A will come a little more into focus. What we did look at over the last 3 years were smaller transactions because we did not have the capability to utilize our stock. So I think with our stock price trading at most of the 140 of tangible, we think we can do a deal this year. So potentially something a little more sizable than what we've been looking at for the last 3 years.

Operator, Operator

And your next question comes from the line of Joe Yanchunis from Raymond James.

Joseph Yanchunis, Analyst

So a pretty good quarter on the deposit front. And as you discussed in your prepared remarks, the lowered cost improved funding mix, can you talk about what you're seeing in the market from a competitive standpoint?

John Bordelon, CEO

Going back to Q4, when we began seeing rate cuts, many banks lowered their deposit rates, and we did the same. We experienced an outflow of CDs, and I previously mentioned that dollar amount, which led us to reduce our CD rates. Consequently, we saw some runoff of CDs from noncore customers. Analyzing competitive peer data, we identified a few outliers in the 4% range, prompting us to slightly adjust our CD rates from 3.65% to 3.85% in most markets. This adjustment helped to curb the outflow of CDs somewhat. However, as rate expectations change and cuts are no longer anticipated, we’ve noticed that some competitors in Houston have become more aggressive, offering rates between 4% and 4.25%.

Joseph Yanchunis, Analyst

I appreciate that. And David, just kind of going back to your expense guide. It sounds like you lowered your out-quarter expense guide from what you said on the prior quarter. Just wondering what's driving that decrease?

David Kirkley, CFO

Joe, I feel like I didn't change the guidance for the rest of 2026. I'll have to follow up with you individually on that. I feel like I didn't change that guidance at all. So I'll have to connect with you.

Joseph Yanchunis, Analyst

And just to be clear, you had said 23.3% to 23.7% is the kind of go-forward number?

David Kirkley, CFO

Yes.

Joseph Yanchunis, Analyst

Got it. And then I kind of want to hit on the loan book a little one more time. So in your prepared remarks, you mentioned that the pipeline has improved. I guess I was wondering, are you able to quantify the change in the pipeline versus the end of the December quarter? And then additionally, it looks like C&I utilization dipped about 400 basis points this quarter. In your view, what needs to happen to see some recovery there?

John Bordelon, CEO

Yes. For the past two years, we have focused on our strategy regarding non-owner occupied properties. In the first quarter of 2026, we observed a decrease in those types of loans. There are competitors offering very attractive rates, which allowed us to retain some of these loans related to rental properties. This is the primary reason for our loan reduction. Although we have a reasonable pipeline, we've lost track of the exact number in those two categories. We expect the reduction to slow down, which should support our balance in the second and third quarters, and possibly in the fourth quarter, depending on potential rate cuts. These rate cuts might further enhance our position, especially in the oil sector.

Joseph Yanchunis, Analyst

Okay. I appreciate that. Then last one for me here. David, the pipeline increased about $30 million as of March compared to December.

David Kirkley, CFO

Yes, to about $122 million.

Joseph Yanchunis, Analyst

That's great, certainly from a percentage standpoint. And then last one for me. While relatively small, it looks like SBA volume has ticked higher this year, while the average deal size has been cut in half versus 2025. Can you talk about your SBA strategy and how it's evolved?

John Bordelon, CEO

Yes. It's been a very slow process. We've looked at many commercial and industrial loans on the SBA side. Many brokers are taking some of the loans. I don't think we've originated any loans in the last couple of years. It's been very tough; either they don't align with our appetite or the bidding is very competitive, and the prices are such that we can't participate. However, this is something we're discussing in our strategy for SBA. It won't be a significant part of our portfolio. To make it a major part of our portfolio, we would need to invest in numerous lenders in that space. We want it to be a reliable option, but we are not necessarily aiming for substantial success.

Operator, Operator

Please feel free to submit your questions.

Feddie Strickland, Analyst

Just wanted to touch on loans first. David, I think you mentioned a 40 basis point pickup on loan yields, kind of the stuff is renewing. But I was curious, what's the average rate on new production today?

David Kirkley, CFO

About 7%.

Feddie Strickland, Analyst

Okay. And then on the credit side, I was wondering if you could just walk through a little bit more of kind of maybe what's maybe in workout and maybe some changes that we could see later this year just as you kind of work through the credit. So I appreciate that you've mentioned in the release that the losses should be immaterial, but just curious if we could maybe see a directional change in NPAs later this year.

John Bordelon, CEO

Well, I think the biggest issue that we've seen probably in the last 2 or 3 years is the time it's taking to run these special assets through the process. We had some that were working on in New Orleans that filed bankruptcy the day before the foreclosure. And so we're in year 2 of collections on that. Our oldest classified asset is trying to refinance outside and hopefully, that happens. But that's been a bad asset for 7 years. So the longevity of these and our ability to get them and work them seems to be the biggest problem because once we get them, we can work them, whether we take a loss or we're able to recover our load is irrelevant. We want to work and get them out and get that money back to work. And it's just been a very slow process over the last couple of years in getting that done. So that's why we're having a little bit more accumulation. It's not like we had that much in the quarter, $3 million additional, but we didn't have $3 million of runoff. That's the problem.

Feddie Strickland, Analyst

Got it. And just another question on the deposit side. It was good to see solid DDA growth. Just curious, I know that's kind of tough in this environment with where you're sitting. Do you think there's an ability to continue to grow? Do you see anything on the horizon that could lead that number to continue to climb higher?

John Bordelon, CEO

Yes. I think the biggest change for us has been attracting bankers that are more C&I-driven and so we're getting total relationships. Some of those relationships come with very healthy deposits. And so as long as we continue to do that, for a long period of time, we were a CRE bank, and our focus changed about 4 years ago away from that to more of a C&I customer. I think that's what you're seeing here is the influx of deposits, not necessarily big loan amounts.

Operator, Operator

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

John Bordelon, CEO

Thank you all for joining us today. We appreciate your questions and your concern for Home Bancorp. We look forward to speaking to many of you in the coming days and weeks, and hope everyone has a wonderful week. Thank you very much.

Operator, Operator

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