Home Bancorp Q4 2023 Earnings Call Transcript

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January 23, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Home Bancorp's 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. 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's Chairman, President and CEO, John Bordelone and Chief Financial Officer, David Kirkley.

Operator

Mr. Trickley, please go ahead.

Speaker 1

Thank you, Ross. Good morning, and welcome to Home Bank's Q4 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 CC filings. Now I'll hand it over to John to make a few comments about the quarter.

Speaker 1

John?

Speaker 2

Thank you, David. Good morning, and thank you for joining Home Bancorp's earnings call today. I hope you're holding and starting 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 volatile markets.

Speaker 2

During the Q4, we grew both loans and deposits, Include credit and reported strong profitability. For the quarter, loans increased $12,000,000 Increasing $137,000,000

Operator

in the 1st 3 quarters.

Speaker 2

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 We entered into 2 years ago with the acquisition of Texas and Vineyards. We continue to invest in Houston as it has outperformed our expectations, We believe there are still good opportunities for growth. We added a commercial banking meeting in the 4th quarter and plan to relocate branches in the first half of twenty twenty four. 4th quarter deposits increased $73,000,000 following a $46,000,000 increase in the 3rd quarter.

Speaker 2

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 the year loan to deposit ratio of 96.7%, which is slightly above the upper end of our target range. The interest margin, which decreased slightly to $3,600,000 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.

Speaker 3

Thanks, John.

Speaker 1

4th quarter net income of $9,400,000 or $1.17 per share declined by 369,000 or $0.05 per share from the Q3. 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, non interest income decreased from the Q3 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.

Speaker 1

As John mentioned, NIM declined by 6 basis points in the 4th quarter. As you can see on Slide The margin bounced around a little bit during the quarter and the December monthly NIM benefited 2 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%.

Speaker 1

Although there are still some migration to higher yielding deposits, non interest DBAs still represent 28% of deposits And our total cost of deposits in Q4 was 1.58%. As anticipated, Loan growth slowed in the 4th quarter to $12,000,000 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% 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 4th quarter due primarily to loan growth, slower loan prepayment estimates and net charge offs of about $250,000 4th 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 $1,400,000 loan and moved it into OREO.

Speaker 1

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 $4,000,000 from the 3rd quarter and are now 1.4% of total loans. The decrease was due to the loan that we moved into OREO, loan pay downs and improved performance. Total non performing assets declined $1,900,000 during the quarter to $10,400,000 or only 31 basis points of total assets. Net charge offs were $250,000 for the quarter or about 4 basis points of loans annualized.

Speaker 1

Total net charge offs for 2023 were less than 1 basis points of loans. Non interest expense decreased 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 $21,500,000 $22,500,000 in the 1st and second quarters. Slide 21 summarizes our capital management strategy and the impact it's had on Home Bank.

Speaker 1

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 $0.25 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 4th 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 creating long term shareholder value. With that, Ross, can you please open the line for Q and A?

Operator

We will now begin the question and answer session. And our first question comes from Graham Dyck from Piper Sandler. Please go ahead, Graham.

Speaker 3

Hey, good morning, guys.

Speaker 2

Good morning.

Operator

Good morning, Graham.

Speaker 3

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

Speaker 1

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 I wanted to point it out. So it would have been about 3.68% in December without that fee recognition.

Speaker 3

Okay. 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 sort of your outlook for the NIM over the next couple of quarters? I guess kind of when you factor Any saves that might have been made on that BTFP transaction you all did?

Speaker 3

And then what looks to be some continued creep up in deposit costs just as you,

Speaker 1

I guess, grow those

Speaker 3

a little bit faster than loans.

Operator

Yes.

Speaker 2

I think the biggest difference in 2024, we got a little bit more Security portfolio maturing. So we'll be turning that over, Jose, which will help us, we think, in NIM. Also a slowdown in the CD side, we had a lot of growth on 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 Much higher rates, in a lot of cases more than double what they were 2, 3, 5 years ago.

Speaker 2

So Yes. All told, we spoke to have a probably a slight decline in Q1 and then Hopefully, stabilization, if not growth in the latter part of the year.

Speaker 1

Yes. Graham, I think John I agree with 100% what John said. I think about a quarter or 2 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 line for a little bit for a couple of quarters and increasing towards The end of 2024 or into 2025.

Operator

Okay. So that and that kind

Speaker 3

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

Speaker 1

think the difference is there's still a big spread between the Fed funds rate And treasury curve, 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.

Speaker 1

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.

Speaker 3

Okay. And I guess just to put a bow on it. So 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?

Speaker 2

I would say so, yes.

Operator

Okay. Great.

Speaker 3

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

Speaker 1

it looks like a lot of the

Speaker 3

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?

Speaker 2

Checking annual financial statements and such, we're not seeing Let's say, we've never been declining 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 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 small. So no signs of deterioration as of yet.

Speaker 3

Okay. All right. Thank you, guys.

Operator

And our next question comes from Brett Rabatin from Hovde Group. Please go ahead, Brett. Hey, guys. Good morning. Good morning, Brett.

Operator

I just wanted I wanted to start on expenses. I'm just if I heard you correct, 21.5% to 22.5% was the 1st quarter Got it. I assume some of that is FICA and what have you merit increases in the Q1. Can you talk maybe about that increase linked quarter? And then an outlook for the full year, could that be low to mid single digit in terms of expense growth?

Speaker 2

There's been a little bit of pressure on the conversation over the last couple of years with inflation and such. We will be rightsizing 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, it is increased in comp, not significant Additions, we did add a team in Houston, 5 people. We've added 3 other relationship managers in other markets.

Speaker 2

So those came on late in the year. So as far as the comp expense is the full year effective with people that we've added. We have some other people that we have positions that are empty. Right now, I'll be meeting with those team leaders to Make sure that we have to fill those positions in 2024.

Speaker 1

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 point $1,000,000 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.

Speaker 1

Also, shares tax expense came in about $400,000 less, as those as that tax expense comes in for Louisiana based banks 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 non interest expense run rate in Q4. We are expecting about $21,500,000 to $22,000,000 in Q1 And then raises go into effect April 1 for our employees. And so you'll see an uptick in that.

Speaker 1

So that'll Increase that range to the $21,500,000 range in Q2.

Operator

Okay.

Speaker 1

I'm sorry, dollars 21,500,000 to $22,000,000 in Q1 and then $22,000,000 to 22.5% in Q2, sorry.

Operator

Perfect. Yes, no worries. And then you mentioned the 5% share buyback and your capital ratios are a little higher. 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 and A?

Operator

It sounds Sounds like some people are getting a little more optimistic.

Speaker 3

It seems like there's possibilities

Operator

to get the marks figured out, any thoughts on capital? Thanks.

Speaker 1

Yes. 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 10000 to 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 running capital in this environment. If share prices do decline, we are poised to take advantage of it and we'll take advantage of it if the pricing comes down a

Operator

little bit.

Speaker 4

Sure. We would

Speaker 1

look forward to getting back to potential M and A. I'm not sure first half of the

Speaker 2

year is We're very heavy in that, in the MRO. We're hoping if that 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 We'd like to team up with, it's just a matter of making sure that they like us as much as we like them. So Yes. I think end of 'twenty four and 'twenty five should be pretty heavy in the

Speaker 3

Okay, great. Appreciate all the color.

Speaker 2

Thank you.

Operator

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

Speaker 4

Good morning. Good evening, my question.

Speaker 2

Good morning, Joe. Yes.

Speaker 4

So 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 trying to put a finer point on it, how should we think how the margin will behave with each rate cut?

Speaker 1

So what we budgeted for was 3 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 economics 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 twenty twenty four with a start increasing with deposit pressure deposit costs starting to decline in Q3 and Q4. So we think NIM has can be positive ending up in the 2024. I think an important factor with that is

Speaker 2

it seems based upon the behavior of other banks reasons that they are Short of deposits also. So I don't think we can see any outliers that keep their rates really high. And 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, even if they don't move, we may see a slight decline in CD costs in anticipation of a move Perhaps sometime during the year.

Speaker 3

Got it. Then just

Speaker 4

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

Speaker 1

We have a lot

Speaker 2

of different specials that we put out there. We had 17 months and we had 11 months, 7 months, 5 months, 9 months. So We've kind of moved it around a little bit, changing maturity. I would think that the remainder of 'twenty four, we would stay relatively short, Meaning that, probably wouldn't have anything longer than maybe 7 or 9 months. So we're not going to put all our eggs in 1 basket, so we're trying to spread that out between the 5 11 month period.

Speaker 2

Hope that helps.

Speaker 4

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

Speaker 2

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, all C and I lenders, and we moved C and 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 not have a whole lot of CRE, expect to be at higher rates. We think that's where our decline is going to come in, in that area. But very optimistic about the growth that we had in 'twenty three in C and I And eventually, LifeGroup maintaining itself for 2024 to 2025.

Speaker 4

Understood. Thank you very much.

Speaker 2

Thank you.

Operator

Today, this concludes our question and answer session. Now I'd like to turn the call back over to John for closing remarks.

Speaker 2

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

Operator

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

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Earnings Conference Call
Home Bancorp Q4 2023
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