Home Bancorp - Q3 2023
October 19, 2023
Transcript
Operator (participant)
Welcome to the Home Bancorp Incorporated Third Quarter 2023 Earnings Call. Our host for today's call is David Kirkley. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the call over to your host. Mr. Kirkley, you may begin.
David Kirkley (CFO)
Thank you, Ross. Good morning, and welcome to Home Banc's Third Quarter 2023 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 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 and describe our approach to creating long-term shareholder value. Home Bancorp has delivered exceptional results during this cycle of rapidly increasing interest rates. The third quarter was no exception, as we reported above-average profitability, loan and deposit growth, and strong credit quality. It's really a testament to the strength of our relationships, many of which we've built over the decades, that we were able to grow deposits in the third quarter without having to rely on wholesale funding. Like everyone, we're still seeing increases in the cost of our deposits, but most of that has been due to the remixing of our customers' deposit balances and not because we were forced to add brokerage fees.
To put numbers behind this, deposits grew by about $46 million, or 7% annualized in the third quarter, with most of that coming from existing customers moving funds into our CD offerings. The movement into CDs and out of savings, checking, and demand deposits brought the NIM down to 3.75% from second-quarter numbers of 3.94%. Assets grew $28 million, or about 3.4% annualized, with loans growing $58 million, or 9.3% annualized. Most of that growth was in construction and development, C&I, and residential mortgage. Securities continued to decline, and cash flows were utilized to fund loan growth. The duration of the securities portfolio was 4.5 years and is expected to generate about $50 million in principal payments over the next 15 months.
With that, I'll turn it back over to David, our Chief Financial Officer.
David Kirkley (CFO)
Thanks, John. Third quarter net income was stable from the second quarter at $9.8 million, or $1.22 per share. Deposit costs increased due to a combination of higher rates and the remixing that John referenced earlier. But the lower net interest income was offset by lower provisions, tight expense controls, and an increase in non-interest income. The increase in non-interest income was primarily due to a $640,000 gain on the sale of SBA loans, which were originated over the prior 12 months. While we expect our SBA business will generate approximately $600,000 in fee revenues per year in the current rate environment, it's difficult to project the timing of those fees.
As John mentioned, NIM declined in the third quarter, but as you can see on slide 18, the margin declined early in July and then stabilized at around 3.75% for each month of the third quarter. While there could be some additional pressure on NIM due to increasing deposit costs, we're cautiously optimistic that the pace of decline has slowed and we are close, close to the bottom. Slide 19 has our historic and current deposit beta statistics and shows that our current deposit beta for our interest-bearing deposits is 31% this cycle, but averaged 38% in the last two rate cycles. As John mentioned, we're pleased with our Q3 results.
Return on average assets was 1.18%, and return on average tangible common equity was 15.2%, which we think highlights the ability of Home Banc to perform well in a variety of economic environments. The 9% loan growth that John mentioned was, again, above our 4%-6% growth we were expecting this year, as the loan pipeline led to stronger than anticipated originations. Fortunately, deposits have kept pace and allowed us to grow profitably without having to rely on wholesale broker deposits. Based on the most recent pipeline, we expect loan growth in the fourth quarter and into next year to be a more moderate 4%-6% growth rate. Pages 13 and 14 of our slide deck provide some additional detail on credit, which remains very strong.
We recorded a provision expense of $351,000 in the third quarter due to loan growth, which resulted in an allowance to loan loss ratio of 1.21%. Criticized loans have increased about 50% on an absolute basis over the past 12 months, but are still relatively low at 1.56% of total loans. The increase in substandard loans in the third quarter is primarily due to two loans totaling $6.4 million, and we do not expect either loan to result in any losses. It's also worth noting that 60% of our substandard loans are paying as scheduled. Non-interest expenses increased by $379,000 from the last quarter, and we expect non-interest expense to be between $21.5 million and $22 million in the fourth and first quarters.
Slide 21 summarizes our capital management strategies and the impact they've had on Home Banc. Since 2018, we've had an 8.4% growth in adjusted tangible book value per share, which includes the impact of a cash acquisition last year. During that same time, we've increased our dividend from $0.15 per share to $0.25 per share on a quarterly basis and generally try to target a dividend payout ratio of 20%. We've repurchased about 13% of our shares outstanding since 2017 and just approved the new 5% share repurchase plan all while maintaining a consolidated CET1 capital ratio of 11.1%. We'd like to think that these actions demonstrate our commitment to creating long-term shareholder value.
We continue to believe our relationship-based approach to banking and conservative credit culture position us to succeed in any market, and that our results over the last couple of years demonstrates that. With that, Ross, please open the line for Q&A.
Operator (participant)
If you would like to ask a question, please press star one on your telephone keypad now, and you'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. Our first question comes from Graham Dick from Piper Sandler. Please go ahead, Graham.
Graham Dick (VP - Investment Banking)
Morning, gentlemen.
John Bordelon (Chairman, President, and CEO)
Morning.
Graham Dick (VP - Investment Banking)
Just wanted to kind of start on the balance sheet. I know you said loan growth is kind of going to return to that 4%-6% pace that you all have been guiding to. But, you know, growth was impressive this quarter, you know, on both fronts. So I'm just wondering how you're thinking about managing the balance between loans and deposits going forward, and maybe how that relates to where you'd like to see the loan-to-deposit ratio go in the near term.
John Bordelon (Chairman, President, and CEO)
Well, on a longer-term basis, we'd obviously like it somewhere between 90 and 95. That's where we feel we're most comfortable. But, I think in the short term, we're seeing consistent movement back into the bank on the deposit side, most of that coming in the form of CDs, but at least moving back in. Earlier in the year, we were down about $130 million in deposits, all deposits, and we're closing in. I think surely by the end of the fourth quarter, we will have recovered all that $135 million. So, deposits are continuing to grow. I think on the loan front, it's going to be more and more difficult with rising rates. 10-year continues to go up, approaching 5%.
So we're just anticipating that loan growth will continue to slow down, as more and more people decide to just hold off on new projects.
Graham Dick (VP - Investment Banking)
Okay, so it sounds like you think, I mean, at least over the immediate future, that the recapture of some of those deposits and general growth in customer accounts could offset loan growth and maybe see the loan-to-deposit ratio move a little bit lower from here. Is that fair?
John Bordelon (Chairman, President, and CEO)
We are anticipating that. And part of the reason we think that's going to happen, we were a little bit slow in 2022 to raise our rates. We drug our feet there, and so that caused us to lose some deposits. We didn't lose customers, we lost deposits. And now we're seeing some of those deposits coming back in, so a very positive movement there as our rates are very competitive in the markets that we serve.
David Kirkley (CFO)
We've also have not purchased any investment securities this year. We anticipate our investment securities portfolio to continue to pay down, which will assist in the, the, to fund loan growth in the future.
Graham Dick (VP - Investment Banking)
Great. That's a, and, you know, John, it's a good segue into my next question. Just on deposit costs, maybe David could help with this as well, but you guys closed the gap a fair amount to your deposit beta guidance. I think it was 36%-40% that you guys gave last quarter. You're a lot closer now, but it sounds like you think the NIM is close to a bottom. Is there any update to that deposit beta guidance? Do you think you might be able to come in slightly below that?
David Kirkley (CFO)
You know, I think we're at 31% for our interest-bearing deposit beta, and we were, we said right around 38%. So you're right on that range. I don't see that stopping, but I do see it slowing, the pace slowing and getting up to that 38%. But on the flip side, you also have your loans repricing offsetting that repricing going forward. So we think that we're getting close to the bottom of NIM. We're optimistic that it has slowed down, and we feel like we're in a good spot right today.
Graham Dick (VP - Investment Banking)
Okay, great. And then just the last thing for me is on that loan repricing front. Do you guys have like a, I guess, the duration's two and a half years, but how many loans are maturing, say, during 2024, I guess, or repricing, renewing during 2024? Do you guys have an estimate of that?
John Bordelon (Chairman, President, and CEO)
That's on, I forgot what page that is, but it's about 10%.
David Kirkley (CFO)
That's the investment portfolio.
John Bordelon (Chairman, President, and CEO)
Are you sure? You're right, that is an investment portfolio.
David Kirkley (CFO)
I'll have to get you that number later on today.
Graham Dick (VP - Investment Banking)
Yeah, no problem. Okay, that's all for me. Thanks, guys.
John Bordelon (Chairman, President, and CEO)
Thank you, Graham.
Operator (participant)
Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead, Kevin.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
Hey, guys. Good morning.
John Bordelon (Chairman, President, and CEO)
Good morning, Kevin.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
On the margin, given, I appreciate the monthly chart here on the NIM. So that coupled with a slowing rise in deposit costs and the fixed rate loans repricing, all that kind of speaks to you getting closer to a bottom. But looking further beyond that, in a higher for longer, is it just- is it going to be more of a, not struggle, but is it going to be more fighting to kind of just keep that stable? Or do you think at a certain point in 2024, the fixed rate loan repricing starts to overtake and you, you actually see the margin go higher?
John Bordelon (Chairman, President, and CEO)
Yeah, it's very hard to predict, you know, with the Fed potentially tightening more than what they have that would put a little more pressure on the, on the NIM, we think. Other banks in our region that, and their ability to attract deposits. So there are a lot of variables that could cause us to go a little bit longer before our NIM settles, but we do feel as though in the early part of 2024, we'll see, we'll see a turnaround in the NIM. It's just very hard to predict. David and I have a bet on when that's going to happen, and we're pretty far apart on it, so we're about five months apart.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
Okay. Let me ask, it sounds like, David, given your comments about the securities portfolio continuing just to cash flow, that's probably going to be the course of action. I'm wondering if there's any possibility of you guys looking at a more of a restructuring type transaction where you do something a little more meaningful, in a quicker way?
David Kirkley (CFO)
You know, we sold some bonds in the first quarter, not a significant amount. We look if it makes sense, we'll do it. It's not in the pipeline for us that we're definitely, it's gonna happen. There no immediate plans for that happening. We would be open to it if it made sense to us.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
Great. Let me just so within expenses, was there anything unusual in the run rate this quarter that helped? I just remember, I just thought coming out of last quarter's earnings report and call that the expenses were going to be, were going to ramp up quicker. You obviously did better than that, but maybe I just misheard that last quarter.
David Kirkley (CFO)
I believe we suggested non-interest expenses are going to be in the $21.5 million to $22 million range. So it is a little bit below that. We didn't have any provision for unfunded commitments this past quarter, which was $151,000 the previous month, and compensation expense is running a little bit lower than we anticipated. Marketing expense is also one of those areas that tends to ramp up towards the end of the year. It will increase a little bit in the fourth quarter. But no, there were no one-time items that really altered our non-interest expense for Q3.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
David, I just want to clarify your comment on the gain on the SBA loans. That was like a full year's worth of selling, and how should we think about that amount going forward?
David Kirkley (CFO)
That's a little bit of a tough one. We started up our program about a year ago, and we have originated 12 SBA loans over that time period over the course of the year. We're almost attained our PLP status. And what happened was we originated the loans throughout the past 12 months. We sold them all in Q3, and we recognized that gain of about $640,000. We think that over the course of the year, we'll recognize about $600,000-$700,000 in income related to gain on those loan sales, but it could be choppy quarter-over-quarter.
I can't. I don't feel comfortable saying exactly what each quarter is going to be because it's not very stable right this second. And also with regards to the high rates, SBA loan originations are still a little bit lower than they would be if rates were a little bit lower. So we're still working through that, but we think 600-700 on an annual basis. On a quarterly basis, it'll be a little bit up and down.
John Bordelon (Chairman, President, and CEO)
We do anticipate, however, the fourth quarter receiving our certification from the SBA.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
What happens when you get that? Does that just boost to what you can do?
John Bordelon (Chairman, President, and CEO)
Basically, it's a reduction of scrutiny by the SBA in underwriting, where we're charged with doing the underwriting ourselves, so it allows for a faster pace to get from beginning to end of that process.
Kevin Fitzsimmons (Managing Director, Senior Research Analyst)
Got it. Okay, guys, that's all I have. Thank you.
David Kirkley (CFO)
Thank you.
John Bordelon (Chairman, President, and CEO)
Thank you.
Operator (participant)
Our next question comes from Joe Yanchunis from Raymond James. Please go ahead, Joe.
Joe Yanchunis (Senior Equity Research Associate - Investment)
Morning. Thank you for taking my questions.
John Bordelon (Chairman, President, and CEO)
Morning.
Joe Yanchunis (Senior Equity Research Associate - Investment)
You called out a couple of downgrades in your prepared remarks. I was hoping you could provide more color on those sectors or geographies, and separately, if you could touch on where you're seeing any potential cracks in the portfolio at this time.
John Bordelon (Chairman, President, and CEO)
Yeah, these are a couple of one-offs. They're both multifamily, and one is a situation where construction costs ran a little bit heavy, and so there's a shortfall. Construction is on pace, but there's a shortfall. So, what we're trying to do is help the borrower utilize other collateral that he has to borrow. I think the shortfall is about $380,000 to finish the project. So we took a conservative approach to move this to substandard, but it is, I think, going to probably come off of that within the next three or four months as it finishes the project and the lease is up. The other one is about $1.5 million in participation with another bank on a kind of a micro apartment, if you will.
Multi-use. We've got some commercial on the first floor, and that one is loan-to-value-wise in very, very good shape. We don't anticipate any losses on that either, but hopefully it's going to receivership, and we're planning to get it out of the foreclosure so that we can either sell the collateral as is or finish the collateral to sell it. So we don't anticipate losses on either one of those properties.
Joe Yanchunis (Senior Equity Research Associate - Investment)
Got it. And then, you know, you mentioned one was a participation. What is your exposure or what is your SNC exposure?
John Bordelon (Chairman, President, and CEO)
We participated that loan that John was discussing out. It was not a purchased participation. We had very minimal exposure to purchased loans.
Joe Yanchunis (Senior Equity Research Associate - Investment)
Got it. I appreciate that. And then just one more kind of question from me here. So how should we think about, you know, at this time, non-interest expense growth in 2024? Do you guys have any large projects planned that would impact that growth rate? And kind of in that same vein, you previously discussed bringing on additional talent to the Houston market. I know it's kind of early in the budgeting process, but is there any way to quantify how many new hires you're looking to add over the next, say, 12-18 months?
John Bordelon (Chairman, President, and CEO)
I think we're getting closer as far as a buildout in the Houston market. We don't really know that number because when you do a buildout like that, not everybody jumps on board. But we are interested in Houston's such a huge market that the people that we have can't cover it all. We're very excited about having other talent in that market. And more than likely, what we'll start off with is a small LPO office, and eventually looking at creating more of a retail setting for that team to be able to perform. Our plan in the next three or four years, is to continue to grow the talent base in that Houston market so as to continue to grow.
We've had great success since acquiring Texan Bank, and we think that's going to continue in 2024.
Joe Yanchunis (Senior Equity Research Associate - Investment)
Very well. I, I hope everyone's okay over there. And that's all the questions for me.
John Bordelon (Chairman, President, and CEO)
Thank you. We hope we're okay also.
Operator (participant)
As a reminder, if you would like to ask a question, please press star one on your phone now. At this time, there appear to be no further questions. I'd like to turn it back over to David for closing remarks.
David Kirkley (CFO)
Hey, once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks about Home Bancorp. Have a great day. Thank you for attending.
Operator (participant)
This concludes today's conference call. Thank you for attending.