Home Bancorp, Inc.

Good morning, ladies and gentlemen, and welcome to the Home Bank Corps' fourth quarter 2024 earnings. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the store key, followed by a 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 Bank Course Chairman, President, and CEO, John Bardelon, and Chief Financial Officer, David Kirkley. Mr. Kirkley, please go ahead.

Thank you, Jennifer. Good morning and welcome to HomeBank's fourth 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 year and the fourth quarter. John?

Thanks, David. Good morning and thank you for joining the earnings call today from snowy Louisiana. We appreciate your interest in HomeBank as we discuss our results, expectations for the future, and our approach to creating long-term shareholder value. Yesterday afternoon, we reported fourth quarter net income of $9.7 million, or $1.21 per share, with net interest margin expanding for the third consecutive quarter to 3.82%. Fourth quarter's NIM expansion was driven by a 15 basis point decline in in the cost of interest-bearing liabilities, an increase in the average non-interest-bearing deposits, stable yields on interest-earning assets, and a slight increase in our loans-to-deposit ratio. After a slow October, loan growth picked up in November and December, resulting in fourth-quarter annualized loan growth of 7.5%, which helped push our 2024 loan growth to 5.3%. CRE, construction, and multifamily drove most of the $50 million of loan growth in the fourth quarter. Originations have remained strong in the first few weeks of January, but it's too early in the year to change our guidance. Therefore, we will continue to expect loans to grow between 4% and 6% in 2025. Deposits were flat from last year but grew by 4.1% in 2024, with most of the growth coming from customers moving into money market accounts and CDs. Noninterest-bearing deposits were down slightly in 2004, but make up a strong 26 percent of total deposits that year end. We continue to look at opportunities for strategic expansion, but as you probably know by now, we're not going to do a deal unless it checks all the boxes. We do plan to open a new branch in northwest Houston, which should help develop the valuable franchise we're building there. As a reminder, at the beginning of 2024, We hired a commercial team in northwest Houston, and they are making great progress developing relationships. As I said last quarter, we feel very good about HomeBank's outlook and our ability to perform. We think our success in 2024 demonstrates that. Our focus on customer service, expanding relationships with new and existing customers, and maintaining our solid credit culture continues to build shareholder value and demonstrates the strength of our bank. We remain confident in our outlook and think that NIM and earnings will continue to expand in 2025. With that, I'll turn it back over to David, our Chief Financial Officer.

Thanks, John. After increasing for the last two and a half years, we saw a 15 basis point decrease in the cost of interest-bearing liabilities in the fourth quarter, which, as John mentioned, supported a healthy 11 basis point increase in NIM. It also supported the third consecutive quarter of increasing net interest income, which was $31.6 million in the fourth quarter, an increase of $1.2 million or 4% from the previous quarter. We think we have an opportunity to bring funding costs down incrementally over the first half of the year, assuming the yield curve does not invert again. We have approximately $555 million or 76% of CDs maturing in the next six months with a weighted average rate of 4.48%. which is about 40 basis points above Q4 origination rates. As you can see on slide 18, we were able to reduce the weighted average CD rate by 26 basis points in the fourth quarter, so we're already making good progress there. It also shows we haven't reduced rates of non-maturity deposits as quickly, as their blended rate is already low at 1.73%. The bottom right table on slide 20 shows our cycle funding betas, and you can see that we are early in the process of easing deposit rates. We also replaced 135 million of 4.76 percent BTFP advances in the fourth quarter with lower cost short-term FHLV advances. Yields and earning assets were flat quarter over quarter at 5.82 percent, despite the 100 basis points of rate cuts by the Fed. Reported loan yields were also flat at 6.43% from the prior quarter. We did see a three-basis point boost in loan yield from the recognition of $189,000 of loan income on a non-performing relationship that paid off in December. Our loan portfolio is 61% fixed, which slowed asset yield increases when rates were rising, but now provides yield protection from Fed rate cuts and supports an expanding NIMH. The steepening of the yield curve has also provided some spread expansion and should offer prepayment protection. As John mentioned, loan originations picked up in November and December. The $50 million of fourth quarter originations had a blended yield of 7.75%, which is about 130 basis points higher than our current loan portfolio yield. The increase in originations contributed to a higher fourth quarter loan loss provision of $873,000, and increased the loan to deposit ratio to 97.8%. Slides 14 and 15 of our presentation provide some additional detail on credit. Credit remains very strong with net charge-offs of four basis points in 2024, which follows zero basis points in 23, and three basis points in 2022. Fourth quarter non-performing assets decreased $2.7 million to $15.6 million, or 0.45% of total assets. The decline was primarily due to an upgrade of a $3.2 million C&I loan. Our allowance for loan loss ratio was stable from the third quarter at 1.21%. Slide 21 of the presentation has some additional details on non-interest income and expenses. Fourth quarter noninterest income decreased slightly to $3.6 million and should be between $3.6 and $3.8 million over the next two quarters. Noninterest expense increased by $97,000 to $22.4 million, which was in line with expectations. We expect noninterest expenses to increase by 3.5% in 2025. Most of Most of the increases will be in compensation and technology-related and will be offset by some reductions in occupancy expenses. We only repurchased 2,000 shares in the fourth quarter, but we still have 312,000 shares on our 2023 repurchase plan and will be active buyers if market volatility warrants it. Slide 22 and 23 summarize the impact of capital management strategy has had on home banks. Over the last five years, we grew tangible book value per share at a 7.1 percent annualized growth rate, while growing tangible book value per share adjusted for AOCI at 9.2 percent. Over the same period, we also increased EPS at an 8.3 percent annualized growth rate. We've increased our dividends per share by 20 percent and repurchased 14 percent of our total shares. And we've done this while maintaining robust capital ratios. This positions us to be successful in varying economic environments and to take advantages of any opportunities that may arise. With that, operator, please open the line for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on a touch-down phone. If you are using a speakerphone, please pick up your phone set before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Your first question is from Joe Yonkunis from Raymond James. Your line is now open.

Good morning. Good morning. Good morning, Joe.

So I was hoping you could dig a little more into your thoughts on your expectation for kind of the NIM to expand throughout 2025. You know, is that inclusive of a, you know, a static rate environment, or does that include any – any rate cuts. I know that your balance sheet shift is being more neutral in posture. Just any kind of color you could give on that would be appreciated.

Yeah, I mean, both in the base case and a slight rate cut environment, we do expect NIM to continue to expand as loans reprice higher, and our CD portfolio has the opportunity to reprice a little bit lower. As we mentioned, we really weren't overly aggressive on cutting much of our money market rates in Q4. We still have the opportunity to lower some of those costs a little bit. The bottom line is it's the mix of our loan portfolio and the fact that we don't have as many variable rate loans, so we don't have as much pressure on declining loan yields from Fed rate cuts. We just have the opportunity to reprice higher and get a little bit of pickup with some higher yields in the investment portfolio, but not a significant amount from the investment portfolio pickup. But bottom line, it's just a mix of our maturing liabilities and being able to reprice loans higher than we have on the balance sheet right now.

Okay, I appreciate that. And then, you know, in your response, you talked about, as well as in your prepared remarks, that you didn't really cut your money market rates on 4Q. You know, kind of given that uptick in your loan-to-deposit ratio, how should we think about, you know, kind of downrate betas and, you know, the cadence as we move throughout the year?

Yeah, I think, once again, our deposit betas may be a little bit slower on the non-maturity deposit side just because we didn't really raise them as high as some of our competitors and had a little bit maybe higher CD rates towards the back half of 2024. We still have the ability to reduce some of our money market rates, and we're actively managing them. We do have some pockets here and there that we can incrementally lower those money market rates without having really a significant impact on deposit runoffs. In December, we did see a decline in non-interest DDA accounts. That was more of a function of timing. as opposed to customers leaving the bank. So we are optimistic that we're going to right-size the loan-deposit ratio a little bit better than what ended at year-end. And we may have to be a little bit more aggressive, perhaps, on money markets. We are seeing a little bit more CD competition, market prices rising a little bit in the CD space, so we are cognizant of that. Even with an uptick in – new CD originations, we still are pretty confident that NIM will be expanding throughout 2025.

All right. I appreciate that. And just one more from me here. So when is your Northwestern Houston branch expected to open? And I assume that's baked into your non-interest expense outlook of the growth of 3.5%. Yes. Sorry, Mark. Why would opening that other branch, you know, lead to a decrease in occupancy expense?

So there's two parts to that. We actually got out of our lease, our last lease from the Texan Bank acquisition in September of 24, and that was their corporate headquarters. So that was a sizable chunk, which is going to help reduce occupancy expense in 25. And we're looking at northwest Houston. We're evaluating options. We're evaluating locations. And we don't anticipate that opening until more towards the back half of 25. And that's why we see a reduction in occupancy expense in 25.

I appreciate it. Thanks for the questions.

Thank you.

And just to be clear, the Northwest Houston, we do currently have an LPO there, and we're going to convert that to a full service branch.

Thank you. Once again, if you have a question, please press star, then one. Your next question is from Fadi Strickland from OptiGroup. Your line is now open.

Hey, good morning. Just wanted to continue the expense question here. Appreciate the overall guide and the detail you just gave. But beyond the April 1 salary adjustments and that branch opening later in the year, which sounds like it may not be a huge expense since you already have the LTO there, is there any lumpiness to account for throughout the year on the expense side?

Not specifically. As we said, raises take effect April 1st, so you're going to see an uptick in Q2. We do have some projects that are planned throughout the year, but really I don't foresee or expect any lumpiness. I'm sure something will come up, but we don't have anything baked in right now that is going to appear to be a significant impact any quarter.

One of the initiatives that we're bringing on, actually going on late fourth quarter and focusing on 2025, is changing customer behavior. And the end result of changing that behavior of utilizing branches to the degree that they do, we have two branches that we're analyzing right now where 90% of the transactions are depositing a check or cashing a check. So if we can change the behaviors of our customer base, then surely that will have a positive impact on our expense base as we can reduce staff and potentially close some branches. So that's an initiative that we're working hard on. Not sure how far we'll get in 2025, but we're going to work very hard to change the habits of our customers to utilize more technology.

Gotcha. Now that's helpful. Just wanted to switch to loans. Just wondered if you could talk about what kind of loans you have in the pipeline. Will it be a sort of similar mix to what you did this quarter? In longer term, where do you see the most opportunity for growth?

Well, we're focusing a lot on C&I. We have done in 2024 probably a little more multifamily than we historically have done, but our leadership is dedicated towards C&I. more C&I loans and less non-owner occupied. So I think that's going to be the focus going forward in all of our markets. If you look at the last four years, the relationship managers that we've brought in have all been C&I type lenders. So that's where we want to focus because it brings in the whole relationship. It's not a deposit eater. It's a deposit provider and has a wide variety of opportunities in the lending space. So That's going to be our focus.

Understood. That makes sense. And then on the loan side as well, I mean, it sounds like you guys think you can – Keep pushing yields up some here, given some of the back book repricing and new production. But we're just wondering if you could talk about what you're seeing from the competition, competitive pricing pressures on the loan side, you know, whether there's any incremental changes quarter to quarter or any new entrants or anything like that that we need to keep in mind.

I think there was a little bit of pressure when rates were dropping in third quarter. Then as long term, the side of the yield curve kind of went back up in the fourth quarter. Pricing has somewhat stabilized a little bit. So, you know, if we're pricing off a prime, we do, I think we have baked in 2025 to 2025 base point rate cuts. So we'll see rates come down a little bit there. But for the most part, as David pointed out in his script, that we're still anticipating what's going to mature in 2025 and 2026. will have a higher yield for us than what it has currently. So we're still looking for that loan rate expansion.

Understood. And last question for me, appreciate the guide on the non-interest income growth. Can you talk a little bit about how much you expect in core fees versus gain on sale over time? I know it's a little tougher environment for gain on sale stuff, but Just wondering if you can talk about pipelines there and kind of where maybe we see that mix of fee income coming from in future quarters.

Yeah, that's a little difficult from the standpoint of most of our fee income probably comes from the deposit side. We're not sure what CFPB is going to push down, what OCC is going to push down from CFPB on that regard. So there's potential problems and in some of those fees, but you have any other comments?

Yeah. So some of the fee income that has been volatile is the SBA loan sales and mortgage loan sales. We do anticipate some uptick in that from 2024. We've been pretty successful at increasing our treasury management fees. As John pointed out, there's been a C&I focus and hiring the C&I lenders that are getting a lot more operating accounts, and we've increased our treasury management platform over the past couple of years, and that has driven nice increases year over year over the past couple of years, and we continue to expect further development from that space as well.

Got it. Thanks for taking my questions. I'll step back.

Thank you.

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

Once again, thank you for joining us today. We look forward to speaking with many of you in the coming days. And thank you for your interest in Home Bank Corp. Have a great day.

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