Good morning, ladies and gentlemen, and welcome to the Home Bancorp second quarter 2025 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 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 Bancorp's Chairman, President and CEO, John Bordelon, and Chief Financial Officer, David Kirkley. Please go ahead, Mr. Kirkley.
Thank you, Ms. Osso. Good morning and welcome to Home Bancorp's second quarter 2025 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 filing. Now I'll hand it over to John to make a few comments about the second quarter. John?
Thanks, David. Good morning, and thank you for joining our earnings call today. We appreciate your interest in Home Bank as we discuss our results, expectations for the future, and our approach to creating long-term shareholder value. Yesterday afternoon, we reported second quarter net income of $11.3 million, or $1.45 per share, up $0.08 from the first quarter and $0.43 from a year ago. Net interest margin expanded for the fifth consecutive quarter to 4.04%, and our ROA increased by 2 basis points to 1.31%. The second quarter's margin expansion was primarily driven by an 8 basis point increase in earning asset yields, stable interest-bearing deposit costs, loan growth, and a 6% increase in noninterest-bearing deposits. Loans grew by $17.3 million in the second quarter, or about 3%. Second quarter growth was negatively impacted by slower commercial construction activity and paydowns, which was about $20 million in the second quarter.
We think growth will pick back up if we get one or two cuts in the second half of the year, but without those cuts, we think loan growth will come in at the lower end of our 4%- 6% guidance. We do expect loan yields to continue to tick higher as new originations come in around 7.4%, replacing maturing loans. We've maintained pricing discipline on new loans to ensure the bank receives a proper risk-adjusted return, which we prioritize over growth. Deposits increased at an 11% annual rate in the second quarter as we continue to focus on funding our loan growth with core deposits and reducing our loan-to-deposit ratio to get to our 90%- 92% target range. Noninterest-bearing deposits increased by $41.9 million and remained at 27% of total deposits at the end of the quarter.
Classified and nonperforming loans increased primarily due to four loans downgraded during the quarter totaling $18 million. We aren't expecting to incur any losses due to the relatively low loan to value, our comparative underwriting standards, and proactive credit management. As a reminder, you can see on slide 16, our net charge-offs have averaged about six basis points over the last 6+ years. M&A activity nationwide has picked up over the past couple of months, which is great to see. While we have not had a transaction since 2022, we have evaluated multiple opportunities and remain committed to finding partners that are a good long-term fit for Home Bank and its shareholders. Our solid capital levels, improving valuation, stellar relationship with our regulators, and successful experience in executing prior acquisitions puts us in position to capitalize when the right opportunity is built.
We feel very good about Home Bank's outlook and our ability to continue to deliver on our own high expectations. We have very talented leadership throughout the bank with decades of experience and a strong track record of performing above our peers in all economic environments. With that, I'll turn it back over to David, our Chief Financial Officer.
Thanks, John. Slide five in our investor presentation has a summary of the last six quarters. Net income totals $11.3 million, a 3% increase from the prior quarter, and a 39% increase from a year ago. NIM has continued to increase, and as John mentioned, is now above 4%. We posted a 4.04% NIM in Q2, which was a 13 basis point increase from the prior quarter. As a result of NIM expansion and earning asset growth, net interest income increased to $33.4 million in the second quarter from $31.7 million in Q1. Originations remain solid, but the pace of loan growth declined quarter over quarter to 3% annualized, due mainly to higher paydowns in the construction and CRE portfolios. As John mentioned earlier, we're seeing less volume in new construction projects.
The contractual rate on new loan originations was 7.44% in Q2, which continues to support an expanding NIM as lower yielding loans reprice. Slides 14 and 17 provide additional details on cash flows from our loan and investment securities portfolio. We expect to see margin and revenue growth here, as close to half of our investment portfolio is projected to be paid off over the next three years with a roll-off yield of 2.56%. Slides 15 and 16 of our investor presentation provide some additional detail on credit. We had $335,000 in net charge-offs in the quarter related to smaller consumer and C&I loans, with the largest being about $150,000. Year to date, our net charge-offs for loans is very low, three basis points. Second quarter nonperforming assets increased $4 million to $25.4 million, or 0.73% of total assets.
This increase was primarily due to the downgrade of four relationships and partially offset by paydowns. The largest is a $3.9 million acquired CRE relationship in Houston with an approximate 50% loan to value that was previously categorized as substandard. We feel we have sufficient collateral on these loans and do not anticipate any material principal losses as we work to resolve them. Total criticized loans at quarter end were $51.6 million, an increase of $14.4 million, or 1.87% of loans, up from 1.36% in the first quarter. Three CRE loans located in New Orleans and Houston made up the majority of these increases. The highest loan to value of these three credits is 68%. Our allowance for loan loss ratio was stable for the first quarter at 1.21%.
The cost of interest-bearing liabilities decreased 3 basis points to 2.71%, as strong deposit growth allowed us to pay down more expensive short-term advances. Interest-bearing deposit costs increased 1 basis point in Q2 due to changes in deposit mix, and we think they'll stabilize at this level until we get some Fed rate cuts. The cost of CDs declined 14 basis points to 3.86%, even as balances increased $64 million during the quarter. We are keeping CD terms short with 58% of our CD portfolio maturing in the next six months and 95% over a one-year period, so we will have the opportunity to react quickly if and when rates decline. Noninterest-bearing deposits, which comprise 27% of total deposits, increased $42 million in Q2 and $50 million year to date. Our overall cost of deposits in Q2 was 1.84%, a decline of one basis point quarter over quarter.
Slide 22 of the presentation has some additional details on noninterest income and expenses. First quarter noninterest income was $3.7 million, which was in line with expectations. We expect noninterest income to be between $3.6 and $3.8 million over the next two quarters. Noninterest expenses increased by $828,000 to $22.4 million, primarily due to compensation-related expenses. Comp and benefits were up $670,000 in Q2 as annual raises took effect April 1. Other noninterest expense increased $980,000 due to a $987,000 write-down of SBA receivables acquired from Texan Bank. We have been working through the SBA procedure for recovery and are still in the appeals process, but the timing and probability of recovery are unknown at this time. We have no further SBA receivables from acquisitions, and there were no loan charge-offs as the loans associated with these receivables were foreclosed and sold prior to the acquisition.
That expense was offset by a $970,000 reversal in provision for unfunded commitments. This reversal was due primarily to a reduction in construction commitments as several projects paid off or went permanent and a reduction in the average life of our loan portfolio. Noninterest expenses are expected to be between $22.5 million and $23 million per quarter for the remainder of the year. We took advantage of share price volatility earlier in the quarter to repurchase 147,000 shares at an average price of $43.72. We have about 391,000 shares remaining on our buyback plan that was approved by the board in April. Slides 23 and 24 summarize the impact our capital management strategy has had on Home Bank. Since 2019, we grew tangible book value per share at an 8% annualized growth rate, while growing tangible book value per share adjusted for AOCI at 9.4%.
Over the same period, we also increased our annual EPS at a 10.2% growth rate. We've increased our dividends per share by 0.7% and repurchased 17% of our shares. We have done this while maintaining robust capital ratios. This positions us to be successful in varying economic environments and to take advantage of any opportunities as they arise. With that, operator, please open the line for Q&A.
Thank you. All right. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing a key. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our rosters. The first question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hi, good morning, guys.
Hey, welcome to you.
On loan growth trends, can you give a little more color about what you're seeing in terms of existing loan pipelines, kind of how that compares maybe to earlier in the year, and how you're thinking about the need for rate cuts to drive incremental demand? Is it just a lot of projects that are just waiting on the sidelines, waiting for 50 basis points or 100 basis points to cut, or what kind of gives you confidence there from a loan demand perspective?
I definitely think there is some demand that's waiting for lower interest rates. It's hard to gauge exactly what that volume will be. In the first and second quarter, we had some paydowns of loans, which hurt our growth rate. We thought it would be closer to 5% or 6% instead of maybe 4% or 3% even in this quarter. Paydowns are a great thing for the customer. They're not exactly the best thing for the bank. It's been consistent. I wouldn't say it's been robust, but it's been very consistent through the quarter. I think if there's any hope of growing that, I think it's going to be based upon a lower interest rate, no question.
Okay, got it. For you guys, from an NII dollars perspective, how do you think about the best-case scenario from a rate environment perspective? You're still slightly asset-sensitive, so theoretically, NII should tick down a little bit when rate cuts, presuming it happens that way in reality. Potentially, it sounds like better growth. How do you think about the best-case scenario for you guys from a rate environment?
The best case is a little bit more steepness in the rate curve if we get 25 basis points, 50 basis points of rate cuts. We're still able to generate a growing NIM in this rate environment. The ability for us to price loans where we're pricing them today and raise funds at where we're raising them today still supports an expanding NIM, albeit at a slower pace than we've been growing the past couple of quarters. We still see earning asset yields repricing, the investment portfolio being able to add some new higher yielding investments, as well as just repricing loans. I think net interest income will continue to increase a little bit further down the road, as well as NIM has the opportunity to increase if rates stay where they are today.
A couple of other points to that is we have maintained our bulk of our CD portfolio in very short-term CDs. The turnover of that and reduction based upon rate cuts will come relatively quickly. The other side, which David alluded to, is as we have a considerable amount of loans that are repricing from maybe the fours or fives, though even with rate cuts, they'll still be going up in rates. We should be able to offset the decline in some assets by the increase in the others.
Yeah, I'd like to add on top of that to John. If you look at slide 20 of our slide deck, when rates started being cut by the Fed back in Q3 of 2024, our loan yield was 6.43%. Despite the amount of rate cuts that we had, we were able to offset the reduction in our loan yield that are variable by having new repricings come on. We had three quarters of stable loan yields despite 100 basis points in rate cuts. We're still able to reprice our loan portfolio in a manner, given albeit a 50- 75 basis points of rate cuts. We still have the ability to reprice our overall loan portfolio yield higher, which offsets some rate reductions.
Got it. All very helpful color. Just last thing for me, new CDs versus the CDs as they roll off, what's kind of the spread there between the on-off yields you see?
The weighted average renewal/new CD rate is around 3.85%. New customer CDs are coming in around 4.1%.
Okay. What's the balance of what you see from a, I mean, I would assume new CDs are a much smaller percentage versus what's renewing every quarter. Is that the right way to think about it?
I'm sorry to hear that.
Yeah, definitely the bulk of that is renewal. We're maintaining about 90% of our existing CDs at renewal.
Okay, great. Thanks for all the color and the time this morning, guys. Appreciate it. Great quarter.
Thank you, Scouten.
Thanks.
Thank you. The next question comes from Joe Yanchunis with Raymond James. Please go ahead.
Good morning.
Hey, good morning, Joe.
Hey, Joe.
The Houston franchise continues to be a growth driver for the company, and at the same time, you discussed plans to upgrade your branch footprint. In the aggregate, how much more productive do you think these new branch locations will be?
It's going to be hard to tell on the deposit side. The group that we pulled out of another bank has already been productive. If nothing changes except for the location, I think they'll be considerably productive. Our hope is that with the full-service branch, we're able to attract more deposits, especially from the commercial customers, who right now are very difficult because we have to travel halfway across Houston to be able to make the deposit. It will be very, very convenient for our team to bring in much more on the deposit side while they're also looking out to bring in some loan customers.
I appreciate that. Just kind of sticking with deposits there, deposit growth is really strong in the quarter, particularly on the EDA front. Several banks that have reported earnings so far have noted increased competition for deposits. Can you talk about if there's been any change in strategy to growing EDA balance that may have led to the success of this quarter?
Yeah, I think you know just the group we're talking about that we pulled out 18 months ago in Houston. We told them we don't care if you don't bring a loan in. You know our focus needs to be on core deposit growth. We have focused on that. We've changed our incentive plan over the last three years to pay more out for core deposits than we pay for loan growth. The third aspect of that, which I think is helping also, is we are slowing down our loan growth in the non-occupied CRE, which are big transactions, low deposits. That has been something that's really eaten up our deposits. If we're going to attain our 90%- 92% loan-to-deposit ratio, we're going to have to slow down a little bit on some of those larger loan relationships that don't carry much in deposit.
I appreciate that. Just kind of the last one for me here, shifting to the NIM. You know, were there any one-timers that might have accelerated NIM expansion in the quarter? Do you have a sense of what the NIM was for the month of June?
NIM was right at 404, I believe, 405 in June.
I see that stuff, guys.
I'm sorry. The first question was?
You know if there was any one-timers that might have accelerated.
No, there was not. You know when loans slip to non-accrual, you have a little bit of a reversal. That was a little bit of a negative to NIM. There was no one-time adjustments that really impacted NIM in any capacity in the upward trajectory.
All right, perfect. I appreciate you taking my question.
No problem.
Joe.
Thank you. Again, if you have a question, please press star then one. The next question comes from Feddie Strickland with Hovde Group. Please go ahead, Feddie.
Hey, good morning, John, David. I just wanted to check, I'm coming in to discuss a little more time. Is the new expansion from repricing loans maybe a little slower next quarter, just given I'm looking at slide 14 of your deck, and you have a weighted average rate, I think it's 7.42%. I think you said 7.44%, so it was what was going on this quarter. Does that maybe slow down a little bit in the third quarter, but maybe pick back up in the fourth quarter when you've got, I think, 5.82%?
Yeah, I think I need to update this slide a little bit to segregate variable rate loans that are kind of the lines that are maturing and take out and segregate those into just variable versus fixed. We are going to see a little bit of a slowdown in repricing. I think you're actually going to, in Q4, you're going to see a good bit more repricing opportunities come through. You might have a little bit of a slowdown in Q3, but I think Q4 and beyond, you're going to have more repricing opportunities for fixed-rate loans that are maturing.
I got it. I appreciate the clarification. That makes sense on the fixed versus adjustable on that column there.
Yeah, the way we looked at it, Feddie, is you know we made a lot of rate drops in 2020 and 2021. That's when we did a lot of five-year balloons. Most of those should be worked through at the lower rates and increasing their rates by the end of 2026.
If you flip through the slide deck, you can see a little bit more color on the loan segments. You can see the C&I portfolio on slide 12. A good chunk of that is repricing, and that's once again mostly revolving lines that are just going to renew.
Understood. Just shifting gears to capital here, you increase the dividend, you execute share repurchases at a pretty good price, particularly considering where the stock is today. It seems like M&A conversations are picking up a little bit here. Can you refresh us on your criteria for M&A? What size are you looking for, geographies, any particular characteristics for potential partners?
Yeah, I think the last couple of years we've been kind of hamstrung as far as what we could look at. Pretty small because it was probably going to be a cash deal without stock trading at 105% of tangibles. Now that we're moving up to 140%, if we can sustain that, I think it opens up the door for us to look at a little bit larger. Our mindset has been pretty much like $350 million to $1 billion, but we've not really looked at a whole lot of banks over $500 million in the last few years. This would open up that door a little bit, maybe get us up to $1 billion or in that area.
Is it mostly in Texas, John?
I'll tell you, we've had conversations in Louisiana and Texas. I'd say the bulk were in Texas, yes.
Perfect. I'll step back. Thanks for taking my question.
Thank you.
Thanks, folks.
Thank you. This concludes our closed-community announcement section. I would like to turn the conference back over to John for any closing remarks.
Thank you all for joining us today. We look forward to speaking to many of you in the coming days and weeks. Hope you have a wonderful week, and thank you for looking into Home Bancorp. Have a good day.
full conference has now concluded. Thank you for attending today's presentation. You may now disconnect.