Home Bancorp, Inc. (NASDAQ:HBCP) Q4 2023 Earnings Call Transcript

Home Bancorp, Inc. (NASDAQ:HBCP) Q4 2023 Earnings Call Transcript January 23, 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 Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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: 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: Thank you, David. Good morning, and thank you for joining Home Bancorp’s earnings call today. I hope your morning is started off well. We appreciate your interest in Home Bancorp and as we discussed 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 volatile markets. 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 $137 million in the first three quarters. Our 6.2% loan growth in 2023 was in line with expectation, 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 of 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 the end of year loan-to-deposit ratio of 96.7%, which is slightly above the upper end of our target range. Net interest margin was 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: 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 costs that John referenced. As expected, non-interest 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, but 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 are 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 of 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 an annual growth of 6.2%, which was in line with our expectations. Our loan pipeline remains strong, and we expect 4% to 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 nonperforming 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 our 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 nonperforming 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 one basis points of loans. Noninterest 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 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?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Graham Dick from Piper Sandler. Please go ahead, Graham.

Graham Dick: Hi, good morning, guys.

David Kirkley: Good morning.

John Bordelon: Good morning, Graham.

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

David Kirkley: Yes, Graham. 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 we wanted to point it out. So, it would have been about 368 in December without that fee recognition.

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

John Bordelon: I think the biggest difference in 2024. We got a little bit more of our security portfolio maturing. So, we’ll be turning that over a little bit, which will help us, we think in the NIM, also a slowdown in the CD side, and 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 the loans repricing at much higher rates – in a lot of cases, more than double what they were two, three, five years ago. So yes, all told, we hope to have a probably a slight decline in first quarter and then hopefully stabilization, if not growth in the latter part of the year.

David Kirkley: Yes Graham, I think John, I agree with 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 flat lined for a little bit for a couple of quarters, then increasing towards the end of 2024 or into ’25.

Graham Dick: Okay. So – and that kind of goes into my next question. And 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: 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, that 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 quarters.

Graham Dick: Okay. And I guess just to put a bow on it. So in the event if 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?

John Bordelon: I would think so, yes.

Graham Dick: 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?

John Bordelon: Checking annual financial savings that – 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 permit them from being successful in making their payment and continuing in business. So not to say the longevity of a higher interest rate environment might cause that, but we’re not seeing in the financial statements we’re looking at. And even the new customers that we’re bringing on are still very strong. So, no signs of deterioration as of yet.

Graham Dick: Okay. All right. Thank you guys.

John Bordelon: Thank you.

Operator: And our next question comes from Brett Rabatin from Hovde Group. Please go ahead, Brett.

Brett Rabatin: Hi, guys. Good morning.

John Bordelon: Good morning, Brett.