Home Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the Home Bank Corp's third quarter 2024 earnings conference call. All participants will be enlisted in the room. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to HomeBank Corp's Chairman, President and CEO, John Bordelon, and Chief Financial Officer, David Kirkley. Mr. Kirkley, please go ahead.

Thank you, Eric. Good morning and welcome to HomeBank's third 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 third quarter. John? Thank you, David.

Good morning, and thank you for joining our earnings call today. We appreciate your interest in HomeBank as we discuss our results, expectations for the future, and our approach to creating long-term shareholder value. We reported third quarter net income of $9.4 million, or $1.18 per share, which was a nice improvement from last quarter's strong results. Net interest margin continued to expand, increasing five basis points to 3.71%. We're optimistic that the trend will continue as the Fed rate cuts reduce pressure on our cost of funds. Return on assets also increased and was 1.1%. in the third quarter, up 13 basis points from the second quarter. Loan growth slowed in the third quarter and was impacted by the paydown of a $19 million medical C&I loan. As we said last quarter, two-plus years of sustained higher rates has had a material impact on loan demand in our markets. We're optimistic that rate cuts and some clarity in November could lead to a pickup in loan demand and originations. Based on the soft demand we saw in the third quarter and are seeing in the fourth, we're expecting 2024 loan growth to finish at the lower end of our 4% to 6% guidance. Even in the current low-demand environment, which we don't expect to last, we think we have an opportunity to drive asset yields higher as our fixed-rate book naturally reprices. Deposits increased 55 million or 8% annualized, with most of the growth coming from money markets and interest-bearing checking accounts. In money market CD rates, we're quick to adjust lower after the rate cut in September, and we're optimistic that future rate cuts will have a similar impact. David will provide some more details on our asset and liability repricings to give everyone a sense of the potential to drive our asset yields higher and reduce our funding costs over the next few quarters. It has been frustrating over the last three years that HomeBank continues to perform well in the markets hasn't responded accordingly. This frustration exists because we continue to feel very good about HomeBank's outlook and have demonstrated strong performance in a variety of economic cycles. But we can't control the market, so we'll focus on the things that we can control, such as providing exceptional customer service, expanding relationships with new and existing customers, and maintaining our conservative credit culture. In the long term, we are confident that our approach will continue to build shareholder value at home bank. With that, I'll turn it back over to David, our Chief Financial Officer.

Thanks, John. We continue to see increases in asset yields outpace increases in funding costs in the third quarter. The yield on average interest earning assets increased by 12 basis points to 5.82%, while the yield on average interest-bearing liabilities increased by nine basis points to 3.02%. This dynamic continued to benefit net interest income, which increased to $30.4 million, up $989,000 from the previous quarter. As John mentioned, loan growth slowed during the quarter to $7 million, or about 1% annualized, and that contributed to a lower loan loss provision of $140,000. The slower loan growth combined with the $55 million increase in deposits reduced our loan-to-deposit ratio to 96.1%. Despite the slower loan growth, we believe we have near-term opportunities to pick up some spread as loans reprice. The origination market is competitive and the rate environment is volatile, but we're continually originating loans with yields above 7.5%, which compares favorably to our fixed-rate loan portfolio. 62% of our loan portfolio is fixed rate and yields a weighted average rate of 5.27%. So while our mix of fixed to floating rate loans, slowed asset yield increases when rates are climbing, we think it should provide some downward protection on yields and NIM now that we appear to be in a decreasing rate environment. We also think we have an opportunity to stabilize or reduce our liability costs in the next few quarters, depending, of course, what happens with market rates. We have approximately $500 million or 70% of CDs maturing in the next six months with a weighted average rate of about 4.75%. New CD origination rates from October are at least 35 basis points lower. We also have $135 million of 4.76% BTFP borrowings maturing in January. Slide eight breaks down our loan portfolio composition and you may notice some changes. The increase in the percentage of one-to-four family mortgages and the decrease in CRE was due to updates to our loan coding systems as opposed to actual shifts in collateral or origination activity. Slides 9 through 12 are new and provide additional details on our CRE and C&I portfolios. Slides 14 and 15 of our investor presentation provide some additional detail on credit. Non-performing loans increased by $1.3 million in the third quarter to $18.1 million, or only 0.68% of total loans. Our allowance for loan loss ratio was stable from the second quarter at 1.21%. Slide 21 of the presentation has some additional details on non-interest income and expenses. Third quarter non-interest income decreased slightly to $3.7 million and should be between $3.6 and $3.8 million over the next two quarters. Non-interest expense increased by $450,000 to $22.3 million, which was in line with expectations. We expect core non-interest expenses to be between $22 and $22.5 million during the next two quarters. We repurchased 24,000 shares at an average price of $38.50 in the third quarter, which equates to 94% of tangible book value excluding AOCI. We also increased our dividend by a penny to $26.5 26 cents per share, which gets us close to the midpoint of our target dividend payout ratio of 20 to 25.5% of earnings. Slide 22 summarizes the impact our capital management strategy has had on home bank over the last few years. Over the last five years, we grew adjusted tangible book value per share at a 9.1% annualized growth rate, and over the same period, we also increased EPS at a 7.9% annualized growth rate. We've increased our dividends per share by 20% and repurchased 14% of our shares during the same time period. And we've done this while maintaining robust capital ratios, which positions us to be successful in a varying economic environment and to take advantage of any opportunities as they arise. With that, operator, please open the line for Q&A.

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

Hey, good morning, guys. Morning, Eddie.

Just wanted to start with loan growth. John, I think you touched on this a little bit in your opening comments. But, I mean, if we start to get a series of rate cuts as Fed funds future for showing, I mean, can we see loan growth maybe return to something more like a mid to high single digit annualized rate as we get into 25 if we see, you know, a series of 25 basis point cuts throughout the year?

Absolutely. I think the most obvious one is the 1-4 portfolio. That's begun to shrink as new originations have slowed significantly. With the 10-year going up, mortgage rates have climbed into the higher sixes. And so I think that's had a negative impact with the builders not wanting to put too much product out there. So I know that will, with the rate cuts on the long end, that would definitely help the mortgage industry. As far as just other commercial loans. I do believe that many of our customers have paused momentarily just to see where rates are going, where they're going to stop, what's going on economically throughout the United States. I think it's prudent that they do kind of hesitate shortly, but I'm anticipating first, second quarter that they should pick that back up, assuming that we've dropped at least 100 base point rates.

Got it. That's helpful. And then just graphically, I mean, do you expect that New Orleans and Houston still drive a good bit of the commercial growth going forward, or is there some opportunities maybe in other parts of the footprint that you haven't touched yet?

Surely the strongest markets are Houston, New Orleans, and Lafayette. Other markets periodically come in with some improvement, but the strength of the company is in those three markets, no questions.

And just shifting the credit for a second, I was wondering if you could talk a little bit more about the relationships that were put on non-approval this quarter. And I wanted to ask, those are the same ones that seem to migrate into substandard in the construction category.

Yeah, so we have one credit in the New Orleans area where it is, I think, 15 different rental properties. And this stems from a disagreement with the partners. And the properties are still being rented. It's off of St. Charles Avenue around Tulane University. And so there's no problems with the property. It's just a disagreement with the owners. We are heading for sheriff sale. I think there are five different sheriff sale dates for all these properties. And I think the first ones are at the end of this month and then November and then January. So we should be ready. completely free of that. There's about $2 million of equity in all the properties, so we anticipate being taken out at sheriff's sale on all those.

Gotcha. That's it for me. I'll step back in the queue. Thank you, Freddie.

Your next question comes from the line of Joe Yancunas. Please go ahead.

Good morning. Good morning, Joe.

Yeah, so I want to circle back on loans for a minute, and I appreciate the color on the reclassification of the loan categories. I'm curious to know, what was gross loan production in the quarter? And just trying to get an idea of kind of payoffs here, and if, you know, kind of CRE payoffs are to accelerate, you know, that would be a headwind to loan growth, but, you know, it would also lead to better lending opportunities if rates fall. Just kind of trying to get a little more color on that.

We're looking that up. We were about $80 million in new originations in Q3, which is about equal or a little bit less than prior quarter. A weighted average rate coming in around 785 on those new originations. We did have higher levels of principal paydowns and payoffs during the quarter. Probably the highest since... Q1, it's 23, so higher paydowns than we've experienced, which stymied some of our growth this past quarter. Joe, I'm sorry, was there another question in that one as well?

Well, I was just kind of wondering how you see kind of payoffs kind of behaving as we, you know, kind of move into a rate-cutting environment. Yeah, I think that nice incremental lending opportunities will, you know, offset, you know, that headwind.

The $19 million payoff in C&I came about, basically it's a major hospital that opened up a new line of manufacturing gloves and other PPE. And that has not, they have not really performed as well as they wanted. So they had the excess cash. They just paid us off instead of paying us, you know, 7 or 8%. So That's kind of a one-off that we don't expect anymore. But we are seeing, in fact, I'm betting two new opportunities this afternoon. So I do think that with lower rates, there's going to be more projects done. The two we're looking at this afternoon, one is construction and the other is an existing facility. So it's hard to really predict. I do think, having not had that $19 million payoff, we would have probably look very similar to first and second quarter, but it has slowed, there's no question. Our construction book is slower than where it was in first and second quarter, and we anticipate as rates go down, as the new presidency takes over, that things will settle down probably in second quarter and take off again.

Got it. And just kind of flipping over to deposits, can you talk about, you know, deposit pricing? What does competition look like in your markets? And kind of how do you believe betas will behave on the way down? And kind of piggybacking off that, you know, if loan demand remains relatively muted in the near term, as you've alluded to, and you do continue to see kind of pressure around deposit pricing, you know, how should we think about the NII trajectory, you know, moving forward?

I'll make a comment and let David follow up on that. I do believe that most all of the banks in our markets have followed suit and dropped their rates. We are seeing some people pull out a little bit of their CDs in search for other rates. Those may be with brokerage houses or whatever, but not necessarily banks. We're not seeing that. Most of the players are doing as we're doing and trying to lower their deposit costs. So I think with additional cuts by the Fed, we should see the ability to continue to bring down our costs. Our highest rate today is at 4.75 for three months, and we would anticipate that coming down significantly, if not throughout the remainder of this year, surely in the first quarter.

Yeah, Joe. If you look at our cost of funds on slide 18, you'll notice cost of CDs were flat quarter over quarter. If you look at the spot rate from June compared to the spot rate of September, we're actually down about 25 basis points on CD yields, so you'll see that play out in Q3. And if you look at our NIMS slide on slide 19, you'll see an uptick in yields in September. So we are seeing the ability to lower our CD pricing a good bit. And as John pointed out, our competitors have mostly been aggressive in CD rate cuts and money market rate cuts after the Fed announcement. As I talked about earlier, our loan rates, we have less variable rate loan in our portfolio than some of our competitors, so our loan yields should not be as negatively impacted as some of our other competitors as rate cuts continue down the next couple of quarters. To give you a little bit more context on that, spot rate on loans from June to September was actually up six basis points despite the 50 basis point rate cut in September. So we have a lot of fixed rate loan opportunities coming due and they're coming due at lower rates so being able to reprice some of those loans a bit higher should offset some of the rate cuts in the future.

I appreciate that. I'm just kind of sticking with slide 19 here. You know, you have the BTFP funding that's going to mature in January. Do you have a plan to kind of backfill that?

We're looking into options. I think given two rate cuts, we're going to be kind of in the money on that with really no impact if we have to go out and borrow overnight. We're looking at some options to divvy that up between maybe some overnight advances as well as some term funding.

And we've been carrying a little bit of excess cash over the quarter, just not knowing exactly what's going to happen with deposit flow.

Okay, and if I could just slip in one more here. I know it's early for 2025, but Some banks, you know, over the past week have talked about generating positive operating leverage next year. Is that something you believe will occur?

Yeah, look, Joe, we think there's the opportunity. I think we're in a good spot with our loan book and our deposit book that you should – we should see at the very least stabilization in NIM. We expect, based off of deposit behavior and the ability for us to reprice some loans, that we're going to be able to tick up on NIM over the next couple of quarters as well.

The severity of the cuts, or the speed of the cuts, I think is what would cause us the most damage to our NIM. If they methodically throughout 2025 reduce rates, then I think our loan yields will be able to exceed the deposit costs. If they drop 50 basis points in November and 50 in December, then it may take, to David's point, a couple of quarters for our NIM to start back up again.

Well, perfect. I appreciate you taking my questions.

Thanks, Joe. Great. Thank you, Joe.

Again, if you have a question, please press star, then one. The next question comes from Fetty Strickland with HUB Group. Please go ahead.

Hey, John, just a quick follow-up after your last question or that last comment on the margins. it sounds like the difference between your rate sensitivity disclosure saying that if we have down 100, NII goes down, is basically all of that happening at once in that shock scenario versus what, you know, appears to be the current reality, which is potentially having that gradually happen over time. And it's kind of the put and take there that you're able to react. You've got some deposits repricing, loans repricing, and you can actually manage it versus all that getting at once and it just getting some of your floating great loans. Is that sort of the puts and takes between what the rate sensitivity disclosures are and what we could actually see happen over the course of 2025?

Yeah, you know, the big problem right now that I think we're having as the home bank as well as other banks is figuring out deposit behavior with rate cuts. I think this past rate cut when they announced 50 basis points, the market expected basically another 100 basis points of rate cuts by the end of 24 and continued into 25. I think a lot of people reacted and were able to lower their CD rates with that expectation. And since then, rate cut expectations have moderated a little bit. And so finding that right balance where we're able to retain our CD customers and grow our deposits. It's really dependent on how much cuts that we're going to be expecting, when they're going to occur, and how our competitors react to those cuts. I feel like there may be some upward pressure on deposit prices over the next couple of months with regards to maybe there was too much rate reductions on deposit rates across the market with the expectations of rapid rate cuts. So I think there may be some stabilization or the beta is not being as high when further rate cuts are announced.

That drove pretty much our decision on how we're pricing our CDs right now. We have a rate on a three-month that is one of the higher in all of our markets. So we wanted to stay a little bit high because of David's comments here that we're not sure exactly what's going to happen in November. Do we do 50? Do we do 25? Do we not do anything? So we do anticipate the ability to be able to move that rate down. We're just going to measure the market and see how far we can go.

Got it. That's helpful. Thanks, guys. And just one last follow-up for me, too, on expenses. Appreciate the near-term guidance there. Just curious if there's anything on the horizon down the road that maybe later in 2025 that could cause any sort of acceleration, you know, whether it's merit increases or investment in, you know, new technology or new core system or something. Just curious if there's anything on the horizon that could cause expenses to materially take up a little bit in the back half of 2025.

Yeah, we generally have annual raises that take effect April 1, so you'll see an uptick in competent benefit expense during that time period. We are going through the budget process right now and evaluating those things. There are no material objects that are jumping out that are out of the course of the ordinary right now for a capital expenditure standpoint.

But I am looking for cost saves so those merit raises aren't as impactful as they would be normally.

Got it. Thanks. That's helpful. That's it for me. Thank you very much.

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

Once again, thank you all for joining us today. We look forward to speaking to many of you in the coming days and hope you have a wonderful weekend. Thank you.

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