Home Bancorp - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Home Bancorp Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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.

David Kirkley (CFO)

Thank you, Kenneth. Good morning, and welcome to Home Bank's second quarter 2024 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 second quarter. John?

John Bordelon (Chairman, President and CEO)

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 results, expectations for the future, and our approach to creating long-term shareholder value. We reported second quarter net income of $8.1 million, or $1.02 per share, and most importantly, a slight improvement in our net interest margin, which appears to have stabilized. The NIM came in at 3.66%, which was two basis points higher than the first quarter. We're cautiously optimistic that continued steady increases in asset yields and stabilization in our cost of funds will continue to support net interest income growth and improving margins, even without any Fed rate cuts.

We added $39.7 million of loans in the second quarter, with growth in all sectors except for construction and land loans, which declined slightly. Given the strong loan growth we had in the first half of the year, we're still anticipating that 2024 loan growth will be between 4% and 6%. The duration of higher rates appears to now be negatively impacting our loan pipeline, but we're optimistic that if forecasted rate cuts occur, we could see loan demand pick back up. Deposits, including demand deposits, were stable from the last quarter after very strong growth in the fourth and first quarters. We were pleased to see $12.6 million of core deposit growth in our Houston market as our teams there brought over the operating accounts of a number of new clients.

We relocated another one of our Houston branches and continue to look for opportunities to improve our coverage of the markets we serve by adding brick-and-mortar and talent. Despite all the negative headlines, we here at Home Bank are actually seeing improvements in credit. In the past few months, we have had a $5 million construction loan go from non-performing to performing with interest reserves after we worked with the borrower, who we've known for years, to manage through some delays and cost overruns. We also recently resolved a non-performing $3.4 million multifamily loan without any principal loss. We feel very good about a non-performing $4.7 million lending relationship that has about $2 million of equity behind it.

A year ago, David and I were in New York, and we were both struck by the number of high-rise buildings with empty floors. We just don't have that same problem in our markets, and I know most of our colleagues at other community banks feel the same way. We lend to people we know in markets we know. We're not making the loans that are being written about in the financial press. Community banking is about providing our shareholders with an attractive, risk-adjusted return. We are not in the business of making loans that could result in huge losses on relationships that aren't the right fit. Finally, before I turn it back over to David, I'd like to welcome Mark Herpin to the Home Bank team, where he joins as Senior Executive Vice President and Chief Operations Officer.

Mark has had a long and successful career in community banking, and we look forward to his contributions at Home Bank. I'd also like to congratulate Natalie Lemoine, our Chief Administrative Officer, and John Zollinger, our Chief Banking Officer, on their promotions to Senior Executive Vice Presidents of the bank. With that, I'll turn it back over to David.

David Kirkley (CFO)

Thanks, John. Net interest income totaled $29.4 million in Q2, up $492,000 from the previous quarter. Loan growth continued at a 6% annualized pace during the quarter, with new loans coming in at a rate of 8.25%, compared to the 6.28% we earned on our total loan portfolio in Q2. Deposits were essentially flat quarter-over-quarter, which increased our loan-to-deposit ratio to 97.7%. The pace of deposit migration has definitely slowed, and noninterest-bearing deposits actually increased by $4.3 million in the second quarter. We did experience declines in interest-bearing checking accounts and savings accounts, which were down about $25 million combined. This outflow is offset by an increase in money market and CD balances of $21 million.

The outflows that we did see mostly occurred in April, coinciding with taxes. The impact of the slowing deposit migration can be seen in the slower increases in the rates we are paying on our interest-bearing deposits, which increased by 17 basis points in the second quarter, after having increased by 28 basis points in the first quarter, 40 basis points in the fourth quarter, and 54 basis points in the third quarter last year. Pages 11 and 12 of our investor presentation provide some additional detail on credit, which John has already covered. Non-performing loans did decrease by $3.5 million in the second quarter to $16.8 million, or 0.63% of total loans. Provision expense for the quarter was $1.3 million, up $1.1 million from the prior quarter.

Our allowance for loan loss ratio increased 1 basis point to 1.21% in the second quarter. There were no changes in our qualitative factors during the quarter, and we feel confident in our reserve levels. We did have $510,000, or 8 basis points annualized in net charge-offs in the second quarter. These charge-offs were very much customer specific issues and not industry related. Slide 16 has some detail on our historic NIM and its components. As John mentioned, we're cautiously optimistic that NIM has bottomed out and should start to slowly increase from here. Loan yields have been steadily increasing due to a combination of loan growth and loan repricing, and with the reduced pace of increases in liability costs, our NIM has increased each month this quarter.

We have approximately $490 million of CDs maturing in the next six months. The majority of these CDs are in specials at rates a little north of 5%. So if rates and deposit mix remain unchanged, we could see flat to marginal declines in CD costs. We have opportunities for more meaningful cost reductions if we do see rate cuts. Slide 18 of the presentation has some additional details on noninterest income and expenses. Noninterest income increased by about $200,000 to $3.8 million and should be between $3.6 million and $3.8 million in the third and fourth quarters. Noninterest expense increased by $904,000 to $21.8 million, due primarily to annual salary increases that took effect April first. This was at the low end of our expectations.

We expect core non-interest expense to be between $22 million and $22.5 million in the third and fourth quarters. We were a little more aggressive with the buyback and repurchased about 77,000 shares at an average price of $37 per share in the second quarter, which equates to 92% of tangible book value, excluding AOCI. Slide 19 summarizes the impact of our capital management strategy has had on Home Bank over the last few years. We've grown adjusted tangible book value per share by 58% since 2018, increased our dividend by 67% since 2016, and repurchased 14% of our shares, all while maintaining robust capital ratios, which positions us to be successful in any economic environment and take advantage of opportunities as they arise.

With that, operator, please open the line for Q&A.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press the star key, then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the star key, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Feddie Strickland with Hovde Group. Please go ahead.

Feddie Strickland (Director of Equity Research)

Hey, good morning, John and David.

David Kirkley (CFO)

Good morning.

Feddie Strickland (Director of Equity Research)

John, you touched on this in your opening comments a little bit. I was just wondering if you can talk through a little bit more of the non-interest-bearing deposits. Obviously, a positive to see those grow. Is that really just success on the C&I side in Houston, or was that more footprint wide?

John Bordelon (Chairman, President and CEO)

Well, I, I think that, you know, what we're referring to there was mostly in Houston. We, we pulled out a team at the beginning of the year from another bank, and a lot of the efforts that happened in Houston came from that team. They're in a loan production office in the northwest section of Houston, and they've done a very good job of attracting new customers and our focus has been on the deposit side, so they've attracted some that are loan and deposit and some that are just deposit. So that was what we were highlighting there, was the success of that new team. We've also seen some growth in,

Feddie Strickland (Director of Equity Research)

Got it.

John Bordelon (Chairman, President and CEO)

We've also seen some growth in the DDA space and the Acadiana market, as that market has been focused more heavily on the C&I business as well.

Feddie Strickland (Director of Equity Research)

Along those same lines, I mean, as we think about the type of loan growth you're looking for going forward, it sounds like, you know, you're focused on bringing in more C&I, just given that it's more likely to come with deposits, correct?

John Bordelon (Chairman, President and CEO)

Absolutely.

Feddie Strickland (Director of Equity Research)

Got it. And one last question from me. Just on share repurchases, I mean, do you think we'll see that potentially slow down a little bit if, you know, the share price kind of keeps moving upwards here? Or do you think that, you know, you'll still have some level of repurchases going forward and just keep in mind some dry powder?

David Kirkley (CFO)

We'd probably slow it down at the elevated or the higher prices that we've experienced over the last week, and keep the dry powder.

Feddie Strickland (Director of Equity Research)

Got it. Thanks for taking the questions.

David Kirkley (CFO)

Thank you. Thanks.

Operator (participant)

Again, if you have a question, please press the star key, then one. The next question comes from Joe Yanchunis with Raymond James. Please go ahead, sir.

Joe Yanchunis (Equity Research)

Good morning.

David Kirkley (CFO)

Morning. Hey, Joe.

Joe Yanchunis (Equity Research)

So with the NIM expansion, you know, appearing to occur, you know, a little bit ahead of schedule, can you provide some of the puts and takes on what will drive the NIM in the second half of the year?

David Kirkley (CFO)

... So one of the driving factors is, of course, loan growth and loan repricings. You can see on our slide deck on Slide 16, we've been consistently raising our loan yield by about 10 basis points each quarter, and still expect that to continue as we still have, you know, a weighted average rate of our loan portfolio at 6.28%, compared to what we're bringing on loans at 8.25%. So that's one component of it. Second component of it is you're really seeing a slowdown in opportunities for deposits to reprice higher. There is still some deposit migration, but the vast majority of our CD portfolio has already repriced higher.

We touched up on it a little bit on the call when we said, you know, the CDs are already a little bit north of 5%, and our CD special rates are actually a little bit lower in some cases. So there's not as much repricing opportunities to occur on the CD and deposit space. So we think that the pace of loan yield increases is gonna more than offset deposit cost increases.

John Bordelon (Chairman, President and CEO)

Not to mention, any movement by the Fed this year will contribute to the ability to bring on these deposits or maintain these deposits at a little bit lower rate. So, we feel very comfortable in the fact that our CD rates should stabilize or head downward based upon what the Fed does.

Joe Yanchunis (Equity Research)

Understood. And, you know, we've heard from your peers, noting some increased competition on deposits. Is that something you've experienced? And kind of how should we think about the near-term trajectory of deposit costs?

John Bordelon (Chairman, President and CEO)

We haven't seen that much pressure. There are some one-offs here or there, that we obviously, take care of. But for the most part, most everyone in our market, I think there was one bank in the Houston market that, was in the, you know, 5.25, 5.375, area. But for the most part, we have not, had any problem attracting deposits.

Joe Yanchunis (Equity Research)

Okay. And then if I could just sneak in one more here.

John Bordelon (Chairman, President and CEO)

Yep.

Joe Yanchunis (Equity Research)

So asset quality metrics improved, you know, pretty nicely in the quarter, though you elected to increase your reserve ratio. Can you discuss what really drove this thought process? And secondly, perhaps it's too early to call, but, you know, if we get a couple rate cuts and the economy doesn't deteriorate, would it be fair to say that, you know, criticized NPAs might have already peaked?

David Kirkley (CFO)

Let me take the CECL question first. We really didn't decide to increase our allowance. It's just a mixture of the mix change in our loan portfolio quarter-over-quarter and the duration perhaps of new loans. That's really it. Then we didn't change any qualitative factors. We didn't adjust or make any adjustments with regards to any industry-specific qualitative factors. So it's just a function, really, of our loan portfolio changing.

John Bordelon (Chairman, President and CEO)

As it relates to the remainder of the year, I'm very optimistic that there could be a little bit of issues as far as credit, but we're not really seeing it in any one particular industry or just individually. We've had a couple of one-offs here and there that have gone bad. It had really nothing to do with the economy, it had more to do with the operators themselves. So we're feeling as though the economy is going to actually improve, possibly in 2025, because of a lower rate environment.

Joe Yanchunis (Equity Research)

All right. Well, thank you for taking my questions.

John Bordelon (Chairman, President and CEO)

Thank you.

Operator (participant)

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

John Bordelon (Chairman, President and CEO)

Once again, thank you all for joining us today. Very excited about the position the bank has gotten to at this point, and look forward to the rest of the year and speaking to many of you in the next day or so. Thank you very much for attending. Have a good day.

Operator (participant)

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