Home Bancorp, Inc. (NASDAQ:HBCP) Q1 2024 Earnings Call Transcript

Home Bancorp, Inc. (NASDAQ:HBCP) Q1 2024 Earnings Call Transcript April 18, 2024

Home Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator Instructions] After the 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: 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?

John Bordelon: 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 big contributor to our loan growth as we relocated an acquired branch and opened an LPO 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’s 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 has been — has 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.

David Kirkley: 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 NIM. 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 and are 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 increase in deposit costs.

Page 11 and 12 of our investor presentation provides 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 an LTV 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 of more units to close this month.

Our allowance for 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 NIM and its components. As John mentioned, NIM 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 P&E 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 a 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.

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Q&A Session

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

Graham Dick: Hey. Good morning, guys.

John Bordelon: Good morning, Graham.

Graham Dick: Okay. I just wanted to start on — called out 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 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?

John Bordelon: Well, the first credit that David described is a situation where there are five partners, and one of the partners has kind of turned against the other four. There are, I think, 15 properties. I’m not exactly sure how many properties in a very, very strong location next to Tulane University, and they’re all leased and such, but they stop paying us for some dispute that they’re having internally. We have sent a 30 day letter, we have started foreclosure proceedings. The four individuals on one side are trying to find a way to not lose the $2.2 million of equity that they have in the project. As far as our concern is if they don’t update this and bring it current, we’ll probably — third quarter, into third quarter.

So have a share of sale in which time, I think will have no trouble selling it. So it’s really about a dispute. It’s not — the properties aren’t bad. They’re all in very good shape. They’re all leased. It’s just a problem with the partners. The second project really was a situation where cost overruns and such, the borrower ran out of funds for the most part. The project is finished. It has its ability to sell. We have two sales tomorrow for $970,000, that will bring all the interest current and also reduce principal by about $750,000. There are two additional sales that will happen before the end of the month. So we feel as though that one will take care of itself now that they’ve gotten their certificate of occupancy and can start selling the properties.

So I would anticipate one of those being off of classified by next quarter, the large one being off. The other one is just going to take until they decide to work together or until a share of sales, but no losses on year one.

Graham Dick: Okay. It sounds good. All right. And I just wanted to kind of turn to the NIM, I think last quarter, you guys had hoped that, obviously, there’d be maybe a little downside this quarter but then stabilize into 2Q 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 in one, two to maybe no rate cuts this year?

David Kirkley: Yeah. I think, Q2 is probably going to be a much more stable NIM for Home Bank. Our deposit costs are kind of starting to peak out where I mentioned earlier on the call that the way 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 kind of the migration from customers — retail customers specifically that have been moving funds out of checking accounts in the money markets and CDs over the past couple of quarters. And that pace has slowed significantly. So it’s almost as if the people that we’re looking for rates are have found them and that outflow into higher yielding deposit products is slowing and 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 NIM in Q2.

Graham Dick: 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 NIM could still tick higher, I guess, in the back half of the year? Is that a possibility?

David Kirkley: I think the pace would be slower, but yeah, I think it’s a possibility that it could take higher for sure.

Graham Dick: Okay. Great. And then I guess just one more for me is on loan growth. Came in with inside 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.

John Bordelon: I think all the markets will slow as the year goes on somewhat, especially if rates stay where they are. The treasury going up, I think, yesterday, 4.6 or whatever, but — so there is a slowdown, but we’re — we have a lot that’s in the pipeline right now, some C&D that’s starting to build out a little bit. So I think you’ll — at the end of the day, I don’t know that we’ll finish fourth quarter if rates are where they are today with the type of quarter that we had in the first. I think you’ll see a diminishing growth rate. Now this is does reduce rates 2 times or 3 times that could change a lot.

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

John Bordelon: Thanks, Graham.

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

Brett Rabatin: Hey, guys. Good morning.

John Bordelon: Good morning, Brett.