Home Bancorp - Q4 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Home Bancorp's fourth quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal the 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 (EVP and CFO)

Thank you, Ross. Good morning, and welcome to Home Bank's fourth 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)

Thank you, David. Good morning, and thank you for joining Home Bancorp's earnings call today. I hope your morning started off well. We appreciate your interest in Home Bancorp as we discuss our results and describe our approach to creating long-term shareholder value. Home Bank's strong performance in 2023 demonstrated our ability to successfully navigate a volatile market. During the fourth quarter, we grew both loans and deposits, improved credit, and reported strong profitability. For the quarter, loans increased $12 million, after increasing to $137 million in the first three quarters. Our 6.2% loan growth in 2023 was in line with expectations, and we saw contributions from all regions, including our newest Houston market, which grew 19%.

We are pleased with the performance in Houston, which we entered into two years ago with the acquisition with Texan Bank. We continue to invest in Houston, as it has outperformed expectations, and we believe there are still good opportunities for growth. We added a commercial banking team in the fourth quarter and plan to relocate branches in the first half of 2024. Fourth quarter deposits increased $73 million, following a $46 million increase in the third quarter. The strong second half deposit generation replaced outflows we saw in the first half, resulting in a year-over-year increase of 1.4%. This resulted in an end-of-year loan-to-deposit ratio of 96.7, which is slightly above the upper end of our target range.

Net interest margin, which decreased slightly to 3.69%, appears to be stabilizing as asset yields continue to steadily increase and the pace of deposit cost increases slows. With that, I'll turn it over to David, our Chief Financial Officer.

David Kirkley (EVP and CFO)

Thanks, John. Fourth quarter net income of $9.4 million, or $1.17 per share, declined by $369,000, or $0.05 per share from the third quarter. Return on assets was 1.13%, and return on average tangible common equity was 14.5%. Net interest income declined by $228,000, as increasing interest income was offset by the increasing deposit cost that John referenced. As expected, noninterest income decreased from the third quarter due to the decline in gains on SBA loan sales. We still expect the SBA business to generate approximately $600,000 in fees per year in the current rate environment, though it's difficult now to project the timing of those fees. As John mentioned, NIM declined by six basis points in the fourth quarter.

As you can see on slide 18, the margin bounced around a little bit during the quarter, and the December monthly NIM benefited two basis points from the recognition of loan fees from early payoffs. We expect some additional pressure on NIM, but we're cautiously optimistic that we're close to stabilizing. Slide 19 has our current and historic deposit beta statistics and shows that our deposit beta this cycle is 39%, compared to 38% over the last two rate cycles. At 2.24%, our cost of interest-bearing deposits is about 41% of the upper limit or the Fed funds target range of 5.5%. Although there is still some migration to higher-yielding deposits, non-interest DDAs still represent 28% of deposits, and our total cost of deposits in the Q4 was 1.58%.

As anticipated, loan growth slowed in the fourth quarter to $12 million or less than 1%, resulting in annual growth of 6.2%, which was in line with our expectations. Our loan pipeline remains strong, and we expect 4%-6% growth in 2024, but recognize that Fed activity could impact both growth and yields. Page 13 and 14 of our slide deck provide some additional detail on credit, which remains very strong. We recorded a provision expense of $665,000 in the fourth quarter, due primarily to loan growth, slower loan prepayment estimates, and net charge-offs of about $250,000.

Fourth quarter non-performing loans declined to 34 basis points of total loans from 47 basis points in the prior quarter, as we foreclosed on a $1.4 million loan and moved it into OREO. Based on a recent appraisal, the loan is adequately collateralized, and we have not and do not expect to recognize any losses. Criticized loans decreased by $4 million from the third quarter and are now 1.4% of total loans. The decrease was due to the loan that we moved into OREO, loan paydowns, and improved performance. Total non-performing assets declined $1.9 million during the quarter to $10.4 million, or only 31 basis points of total assets. Net charge-offs were $250,000 for the quarter, or about four basis points of loans annualized.

Total net charge-offs for 2023 were less than 1 basis points of loans. Non-interest expense decreased $734,000 from the last quarter due to comp and benefits declining $1.1 million from the last quarter. This decline was mostly related to lower healthcare insurance costs during the year. Shares tax expense also came in lower than expected, with a reduction of about $410,000 from the prior quarter. We expect non-interest expense to be between $21.5 million and $22.5 million in the first and second quarters. Slide 21 summarizes our capital management strategy and the impact it's had on Home Bank. Since 2018, adjusted tangible book value per share has grown 8.6% annually, which includes the impact of a cash acquisition in 2022.

During that time, we've increased our dividend from $0.15 per share to $0.25 cents 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 the fourth quarter approved a 5% share repurchase plan, all while maintaining a consolidated CET1 capital ratio of 11.5%. We'd like to think that these actions demonstrate our commitment to creating long-term shareholder value. With that, Ross, can you please open the line for Q&A?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone, on your touchtone phone now. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw the question, please press pound then one. At this time, we will pause momentarily to assemble our roster. As a reminder, please press star one if you'd like to ask a question. Our first question comes from Graham Dick, from Piper Sandler. Please go ahead, Graham.

Graham Dick (VP, Equity Research)

Hey, good morning guys.

David Kirkley (EVP and CFO)

Good morning.

John Bordelon (Chairman, President and CEO)

Morning, Graham.

Graham Dick (VP, Equity Research)

I just wanted to start on the margin and looking at slide 18. David, I know you mentioned it just now, but did you say that the December margin of 3.7% benefited a little bit from some prepayment fees that were in there?

David Kirkley (EVP and CFO)

Yeah, Graham. You know, we like showing the monthly trend in NIM, but there was definitely some unexpected prepayments on some loans that generated a little bit over $50,000 of additional fee income that we weren't expecting. And so while it's not that big on a quarterly or annual basis, on a monthly NIM calculation, it does impact, and that's why I wanted to point it out. So it would have been about 368 in December without that fee recognition.

Graham Dick (VP, Equity Research)

Okay, that's great. And so excluding that, the margin, I guess, definitely showing some signs of stabilization, and, you know, even improvement, I guess, month-over-month there. What's sort of your outlook for, for the NIM over the next couple of quarters? I guess, kind of when you factor in, you know, any saves that might have been made on, on that BTFP transaction you all did, and then what looks to be some continued creep up in, in deposit costs, just as you, I guess, grow those a little bit faster than loans.

John Bordelon (Chairman, President and CEO)

Yeah, I think the biggest difference in 2024, we got a little bit more out of our securities portfolio maturing, so we'll be turning that over a little bit, which will help, help us, we think, in, in NIM. Also, a slowdown in the CD side. You know, we had a lot of growth on the CDs in 2023. We still think we'll see some growth there, but not to the pace that we did last year. So, with that and, and the loans repricing at much higher rates, in a lot of cases more than double what they were, two, three, five years ago. So, yeah, all, all told, we hope to have probably a slight decline in first quarter and then, hopefully stabilization, if not growth, in the latter part of the year.

David Kirkley (EVP and CFO)

Yeah, Graham, I think, John, I agree 100% with what John said. I think about a quarter or two ago, the expectation was that a lot of NIMs were going to start bottoming out and then starting to increase with the kind of recent change in rate expectations. Definitely are optimistic that it will bottom out, but instead of increasing right away, kind of flatline for a little bit for a couple of quarters, and then increasing towards the end of 2024 or into 2025.

Graham Dick (VP, Equity Research)

Okay, so that and that kind of goes into my next question, when it comes to rate cuts. So are you saying that the increase in rate cut expectations into the curve is actually not as beneficial to you as it would be in a higher for longer environment, I guess?

David Kirkley (EVP and CFO)

I think the difference is, there's still a big spread between the Fed Funds Rate and the Treasury curve or any yield curve that you want to pick. And so with the recent decline and the longer-term rates, it kind of lowers your loan spreads a little bit or your loan yields that you're going to be originating. And customers are still kind of thirsty for that 5, 5.5, 5.25 rates on CDs. So we're still going to have to fend that off for a little bit, so that will add some pressure. Until the Fed starts cutting, it's really hard to see a NIM that's going to change or increase rapidly or meaningfully in the next couple of quarters.

Graham Dick (VP, Equity Research)

Okay. I guess just to put a bow on it. In the event the Fed does cut rates, that should benefit you guys, right? You're pretty liability sensitive, I guess, per se, given how much of the book on the asset side is fixed rate, correct?

David Kirkley (EVP and CFO)

I would think so, yes.

Graham Dick (VP, Equity Research)

Okay, great. And then if I could just sneak one more in, I just had a question around credit. John, I know you tend to be pretty cautious on this front, but it looks like a lot of the metrics have improved pretty substantially this quarter. I know you moved some to OREO, but generally, everything else looks pretty good. What are you seeing on that front from your borrowers in terms of their financial health and just the markets that you're operating in?

David Kirkley (EVP and CFO)

You know, checking annual financial statements and such, we're not seeing a significant decline, even though borrowing costs have been high for all of 2023. So I'm not seeing a negative impact, anything that would prevent them from being successful in making their payments and continuing business. So, not to say the low longevity of a higher interest rate environment might cause that, but we're not seeing it in the financial statements we're looking at. And even the new customers that we're bringing on are still very, very strong. So, no signs of deterioration as of yet.

Graham Dick (VP, Equity Research)

Okay. Yeah. All right, thank you, guys.

Operator (participant)

Our next question comes from Brett Rabatin from Hovde Group. Please go ahead, Brett.

Brett Rabatin (Managing Director, Head of Equity Research)

Hey, guys. Good morning.

David Kirkley (EVP and CFO)

Morning, Brett.

Brett Rabatin (Managing Director, Head of Equity Research)

I wanted to start on expenses. If I heard you correctly, 21.5-22.5 was the first quarter guide. You know, I assume some of that is, you know, FICA and what have you, merit increases in the first quarter. Can you talk to me about that increase quarter-over-quarter and then an outlook for the full year? Could that be a little bit of mid-single-digit in terms of expense growth?

David Kirkley (EVP and CFO)

There's been a little bit of pressure on compensation, the last couple of years with inflation and such. We will be right-sizing some of our areas where we've had a little bit higher turnover, so we're trying to remain competitive in those areas. So that's going to create a little bit more on the comp side than normal. But yes, that's probably the biggest number in 2024 as far as the increase is concerned, is increase in comp. Not significant additions. We did add a team in Houston, five people. We've added three other relationship managers in other markets. So those came on in late in the year. So a part of the comp expense is the full year effect of the people that we've added.

We have some other people that, we have some positions that are empty right now, and I'll be meeting with those team leaders to make sure that we have to fill those positions in 2024. So Brett, we also had some moving parts in Q4, which lowered the non-interest expense a little bit. As we mentioned, comp and benefits was down about $1.1 million, I believe. A big chunk of that was group health insurance came in much lower than anticipated this year. Our HR director, we switched healthcare plans and pharmaceutical plans, and our health insurance expense for the bank came in about $500,000 less than last year and about flat with 2021.

So we were taken a little bit back by some rebates in Q4. So that lowered Q4 expenses a good bit. Also, Shares Tax expense came in about $400,000 less, as that tax expense comes in for the Louisiana-based banks in end of Q3 and into Q4. And so that was a little bit lower than we anticipated for the year. So that kind of lowered our noninterest expense run rate in Q4. We are expecting about $21.5 million-$22 million in Q1, and then raises go into effect April first for our employees. And so you'll see an uptick in that. So that'll increase that range to that $21.5 million range in Q2.

Brett Rabatin (Managing Director, Head of Equity Research)

Okay.

David Kirkley (EVP and CFO)

I'm sorry. $21.5 million-$22 million in Q1, and then $22 million-$22.5 million in Q2. Sorry.

Brett Rabatin (Managing Director, Head of Equity Research)

Ah, okay. Perfect. Yeah, no worries. And then you mentioned the 5% share buyback and your capital ratios are a little higher. You know, what's the right and I assume we're going to target CET1, but what's the right level for capital relative to the buyback plan? And then any thoughts on possible M&A? Sounds like some people are getting a little more optimistic. You know, it seems like there's, there's possibilities if we get the marks figured out. Any thoughts on capital? Thanks.

David Kirkley (EVP and CFO)

Yeah, let me take the first part of that question. We really significantly pared down the buyback in Q4. I think we're only buying back 10-15,000 shares, and that was at a weighted average cost of $33. With the run-up in the share price, we backed off of the buyback program during the year, and feel comfortable with growing capital in this environment. If share prices do decline, we are poised to take advantage of it and will take advantage of it if the pricing comes down a little bit.

Brett Rabatin (Managing Director, Head of Equity Research)

Sure, we would look forward to getting back to and potentially M&A. I'm not sure, you know, the first half of the year is going to be very heavy in that realm. We're hoping if Fed does make some moves, that that will spur on some discussions. But, we're definitely ready, prepared to look at some opportunities that are out there. We have a target list of people that we would like to team up with. It's just a matter of making sure that, that-

John Bordelon (Chairman, President and CEO)

... they like us as much as we like them. So, yeah, I think end of 2024 and 2025 should be pretty, pretty heavy in there. Okay, great. Appreciate all the color. Thank you.

Operator (participant)

And our next question comes from Joe Yanchunis from Raymond James. Please go ahead, Joe.

Joseph Yanchunis (Senior Equity Research Associate)

Good morning. Can you hear me?

John Bordelon (Chairman, President and CEO)

Morning, Joe. Yes.

Joseph Yanchunis (Senior Equity Research Associate)

Certainly back to the margin. The forward curve has a decent amount of rate cuts coming up over the next couple of years. How many cuts have you baked into your model? And kind of to put a finer point on it, how should we think how the margin will behave with each rate cut?

John Bordelon (Chairman, President and CEO)

So what we budgeted for was three rate cuts throughout 2024. I'm not saying I necessarily believe that's going to happen, but that's what, I guess, general consensus is from economists that pay a lot more attention to that than I do. So we went with the general consensus. We generally think that the forward curve will provide ability to keep our margin flat for the first half of 2024, with a start increasing with deposit pressure, deposit costs starting to decline in Q3 and Q4. So we think NIM can be positive ending up in 2024.

I think an important factor with that is, it seems based upon the behavior of other banks in our regions, that they are short of deposits also. So I don't think we're going to see any outliers that keep their rates really high. Once Fed moves, that's going to be a good indication for banks to lower their CD rates and bring their costs down. So I do anticipate once Fed does move or even if they don't move, we may see a slight decline in CD costs in anticipation of a move, perhaps in sometime during the year.

Joseph Yanchunis (Senior Equity Research Associate)

Got it. Then just kind of piggyback off that comment. It looks like 85% of your CDs are set to mature in 2024. So any color you can provide on the maturity schedule in terms of balances and at what rate they're kind of running off at?

John Bordelon (Chairman, President and CEO)

We have a lot of different schedules that we put out there. We've really had a 17-month, and we've had an 11-month, a seven-month, a five-month, a nine-month. So we've kind of moved it around a little bit, changing maturity. I would think that the remainder of 2024, we would stay relatively short, meaning that we probably wouldn't have anything longer than maybe seven or nine months. So we're not going to put all our eggs in one basket, so we're trying to spread that out between the five and the 11-month period. Hope that helps.

Joseph Yanchunis (Senior Equity Research Associate)

Absolutely. And then kind of the last one for me here. I heard you reiterate your mid-single-digit loan growth outlook in 2024. So over the past week or so, we've heard a number of management teams have talked about a mild recession occurring this year. And if that were to occur, where would you expect that loan growth to come from?

John Bordelon (Chairman, President and CEO)

Well, I think you have to look back at 2023 and some of the people that we hired. The people we hired in Houston and the ones we hired here in our main office in Acadiana are all C&I lenders, and we grew C&I about 8% last year. So we do think that that's an area where even in a declining economy, we may still be able to grow a little bit there. Probably, you know, not have a whole lot of CRE, especially at high rates. We think that's where declines can come in that area. But very optimistic about the growth that we had in 2023 in C&I and potentially that growth maintaining itself for 2024 and 2025.

Joseph Yanchunis (Senior Equity Research Associate)

Understood. Thank you very much.

John Bordelon (Chairman, President and CEO)

Thank you.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your phone now. Okay, this concludes our question and answer session. I would like to turn the call back over to John for closing remarks.

John Bordelon (Chairman, President and CEO)

Thank you. Once again, thank you all for joining us today. We look forward to speaking with many of you in the coming days and weeks, and look forward to an outstanding 2024. Have a great day.

Operator (participant)

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.