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. Good morning, and welcome to Home Bank's first quarter 2026 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 first quarter and outlook for 2026. 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 first quarter net income of $11.4 million, or $1.45 per share. Earnings per share were down a penny from the fourth quarter but increased 6% from a year ago and represented a good start to the year. Net interest margin expanded to 4.16%, which was 10 basis points higher than the fourth quarter and 25 basis points higher than a year ago. Return on assets also increased to 1.30% in the first quarter. This quarter margin expansion was driven by a 22 basis point decline in our cost of funds, which contributed to a 25 basis point decline in our overall cost of funds.
Loans declined by 1% in the first quarter as paydowns continued to outpace new production. We continue to see customers delay projects and transactions while they wait for additional clarity on interest rates. Despite the low balances, we maintain pricing and structure discipline, continue to generate new loan originations at attractive spreads and risk-adjusted returns. Our loan pipeline has improved in recent months, although the timing and pace of future loan growth remain difficult to predict, given continued market volatility and uncertainty around interest rates. Total deposits increased by $54 million in the quarter, or 7% annualized, as core deposits increased to $118 million and were offset by non-core CD declines of $64 million. Non-interest-bearing deposits increased $37 million and continued to represent 27% of our total deposits.
As a result of our success on the deposit front, our loan-to-deposit ratio declined to approximately 90%, positioning us well for future growth. The strength of our franchise is especially evident when you consider how we've performed despite a challenging rate and economic environment. Over the past two years, diluted earnings per share have increased by more than 25%. Return on assets has improved by nearly 20%. Net interest margin has expanded by more than 50 basis points and our cost of deposits has declined by more than 100 basis points. We also continue to have success in Texas, with loans there growing to approximately 21% of our total portfolio compared to 15% when we entered the market through an acquisition in 2022. The new Northwest Houston branch opened during the quarter and gives us full service presence in one of the fastest-growing areas in the market.
The branch square footage allows for significant growth in the region and will help our well-established commercial team continue to build our franchise. Several organizations have already requested to utilize the branch meeting rooms for their companies. The combination of the branch, its location, and our team of bankers should make the Tomball region very successful. Credit remains manageable. Non-performing assets increased during the quarter by $3.8 million, primarily due to the downgrade of three relationships. However, we continue to believe losses of these credits will be immaterial given the collateral protection and guarantor support. Our net charge-offs remain extremely low at just six basis points annualized. Finally, we're in the middle of our annual visits to all markets and hosting our Cajun-style crawfish boils.
As we've done in previous years, executives serve our employees delicious crawfish with all the fixings and refreshments, reflecting our culture of servant leadership that is such an important driver of our success. These gatherings are a great way to embrace that culture and generate enthusiasm. The time in the branches also gives management an opportunity to answer questions from frontline staff and meet customers, both big and small. With that, I'll turn it back over to David Kirkley, our Chief Financial Officer.
Thanks, John. Please feel free to refer to the investor presentation we have provided as I discuss the company's first quarter financial results. Net interest income totaled $34.5 million in the first quarter, an increase of $434,000 from the fourth quarter and $2.8 million from a year ago. This was the highest quarterly net interest income in Home Bank's history and was driven by both lower funding costs and materially improved balance sheet structure. Slide 20 of the presentation has a two-year history of the yields that drive net interest income and NIM, and you can see the progress we made bringing funding costs down while keeping loan yields relatively stable.
The cost of interest-bearing liabilities peaked in the third quarter of 2024 and has come down 64 basis points as we proactively reduce our exposure to higher cost funding. Over the same period, disciplined underwriting and loan portfolio comprised of 56% fixed rate loans have enabled us to maintain our loan yield within 12 basis points of the peak reached in the third quarter last year. We're still making progress. In the first quarter, the average cost of interest-bearing deposits declined 22 basis points to 2.29%, while our overall cost of deposits declined by 16 basis points to 1.68%, which is less than half of the current Fed funds target rate. During the quarter, we had strong deposit growth of $54 million or 7% annualized despite a $64 million reduction in CDs, of which 78% were non-core CD customers.
The decline in CD funding was offset by growth in lower cost relationship-based non-maturity deposits. Seasonal fluctuations in public deposits of $43 million contributed to the $118 million growth in non-maturity deposits during the quarter. We had solid growth in non-interest-bearing deposits, which increased $37 million quarter-over-quarter and $75 million year-over-year, and represent 27% of total deposits. Finally, due to our success in growing core deposits, we were able to repay all of our more expensive FHLB advances, which is a minor improvement of $3 million quarter-over-quarter, but a material improvement compared to the $175 million in advances we carried at year-end 2024. Given our lower cost of funds and the repricing opportunity within earning assets, we continue to believe that additional opportunity for NIM expansion.
Slide 14 details expected repricing opportunities from our loans and investments over time. We continue to see a positive spread of approximately 40 basis points on new loan originations versus payouts. New investment yields were north of 4% in Q1 versus expected roll-off yield of 2.43% over the next 12 months. Slide 15 and 16 of the presentation provide some additional detail on credit. Non-performing loans increased $1.6 million to $35.8 million, or 1.31% of total loans. This was primarily due to the downgrade of three relationships, with the largest being $1.4 million, partially offset by the foreclosure of a $2.6 million property in Houston. We recorded a provision expense of $922,000 in the quarter, compared to $480,000 in the fourth quarter.
The increase was primarily due to changes in individually required reserves associated with these downgraded credits. Our allowance for loan losses increased to $33.1 million or 1.23% of loans, and we continue to feel very confident in our reserve levels. Slide 22 of the presentation has some additional detail on non-interest income and expenses. Non-interest income decreased by $260,000 to $3.7 million, which was slightly below expectations due to lower other income and bank card fees. We continue to expect quarterly non-interest income to be in the range of $3.8 million-$4 million. Non-interest expense declined by $106,000 to $22.9 million and was in line with expectations.
We continue to expect non-interest expense to increase modestly beginning in the second quarter as annual raises take effect and technology investments ramp up. For the remainder of 2026, we expect quarterly non-interest expenses to be between $23.3 million and $23.7 million. Slides 23 and 24 summarize the impact our capital management strategy has had on Home Bank. Since 2019, we have increased adjusted tangible book value per share at an annualized rate of approximately 9.7%, increased EPS at more than 11% annualized rate, increased our quarterly dividend by more than 50% and repurchased approximately 17% of our shares. Tangible book value per share increased to $46.04 this quarter, up almost $5 or 15% from the first quarter of 2025. With that, operator, please open the line for some Q&A.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. If you wish to ask a question, please press star followed by the one on your telephone keypad. If you would like to withdraw your question, please press star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please, for your first question. Thank you. Your first question comes from the line of Stephen Scouten from Piper Sandler. Please go ahead.
Hey, thanks guys. Good morning.
Good morning.
I'm curious, and apologies if I missed any color you gave already, David, but in terms of the NIM trajectory from here, if we were to get no cuts, how does that affect kind of, I think, some of your previous statements of expecting expansion for the remainder of 2026? Does that actually improve that expectation or make you a little more bullish given your asset sensitive nature o r how do you think about the NIM with this rate environment?
I think as I mentioned, we have a lot of opportunity for repricing in both the loan and investment securities portfolio, and you've seen that with our stable loan yield and slightly increasing investments. I still think without any rate cuts, we're still seeing expansion in our loan yield and by picking up about 40 basis points on cash flow versus new originations. I think that deposits are probably without any further rate cuts, probably around their floor. I still think that there is opportunity without any rate cuts for expanded NIM.
I would just add that the deposit side probably will dictate the pace of the growth of that NIM. We know that we have loans repricing, but assuming rates stay where they are, not sure exactly where deposit rates are going to have to go for us to sustain the level that we have today.
Yep, that makes sense. Could you give a little bit of color on what you saw from a production standpoint on the loans on maybe customer demand throughout the quarter? I know you mentioned the strength in the Texas markets. I think you said 3% growth there, but kind of how maybe that demand segmented by time of the month as well as those different markets.
Yeah. The demand, of course, the last three quarters, second, third, and fourth of last year were, I guess, really hurt by some pay downs, companies selling, businesses selling, whatever. This first quarter was very typical of previous quarters other than the last three years. First quarters, I mean. First quarters typically are relatively flat and people kind of getting their footing and moving forward. The last three years, though, first quarter was much more productive. I think this is a more natural period where I think people were looking for lower interest rates. They realized we're not going to get it. I think we'll see higher demand potentially in second and third quarter. Assuming also geopolitical issues throughout the world are not slowing that demand.
Makes sense. Okay. Maybe just last thing for me. I'm curious, obviously the stock has had a really nice run over the last year and a half or what have you. Does that allow for any potential M&A conversations to pick up or escalate? Conversely, if nothing's able to happen, do you at any point start to think about partnering with a larger institution?
Absolutely. I think M&A will come a little more into focus. What we did look at over the last three years, more so were smaller transactions because we did not have the commodity to be able to utilize our stock. I think with our stock price trading close to the 1.40 x tangible, we think we can do a deal this year. Potentially something of a little more size than what we've been looking at for the last three years.
Okay, great. Thanks so much for the time. I appreciate it.
Thanks, Stephen.
Thank you. Your next question comes from the line of Joseph Yanchunis from Raymond James. Please go ahead.
Good morning.
Morning, Joe.
Hey, Joe.
Pretty good quarter on the deposit front, and as you discussed in your prepared remarks, the lowered cost, improved funding mix. Can you talk about what you're seeing in the market from a competitive standpoint?
I would say going back to Q4, when we started seeing the rate cuts, a good portion of the banks did lower their deposit rates accordingly. We did as well. We saw an outflow of CDs. I think I mentioned the dollar amount, and we lowered our CD rates. We did have some CD runoff from non-core customers. Looking at some of the competitive peer data, we did see a couple of outliers, in the 4% range, and we had to adjust our CD rates up slightly. When I say slightly, I'm talking from 3.65% was our top rate to 3.85% in most markets. That stemmed the outflow of CDs for us a little bit. We are still seeing rate cut expectations going away. We have seen a couple of other competitors in Houston as well, be a little bit more aggressive in the 4%-4.25% range.
I appreciate that. David, just going back to your expense guide. It sounds like you lowered your out quarter expense guide from what you said on the prior quarter. Just wondering what's driving that decrease.
Joe, I feel like I didn't change the guidance for the rest of 2026. I'll have to follow up with you individually on that. I feel like I didn't change that guidance at all. I'll have to connect with you.
Okay. I'll have to double-check that. Just to be clear, you had said $23.3 million-$23.7 million is the go forward number?
Yes.
Got it. Kind of want to hit on the loan book a little one more time. In your prepared remarks, you mentioned that the pipeline has improved. I guess I was wondering, are you able to quantify the change in the pipeline versus the end of the December quarter? Additionally, it looks like C&I utilization dipped about 400 basis points this quarter. In your view, what needs to happen to see some recovery there?
Yeah. I think one of the things that we focused on probably going back two years now is a reduction in our appetite for non-owner occupied. What you've seen so far in 2026, first quarter was a reduction in those types of loans. There are some players out there that are very competitive on rates, and so we weren't able to hold onto those. Those are a lot of rental properties and things of that nature. That's where our loan reduction's coming from. We still have a decent pipeline, but we've lost, I don't remember the number, David, $30 million in those two categories?
Yes.
We anticipate that runoff maybe slows down a little bit, and that will help us add balance in second and third quarter, maybe even fourth quarter, assuming no rate cuts. Rate cuts may even spur that on a little bit more on the loan side.
Okay, I appreciate that. Last one from me here.
Joe, the pipeline increased about $30 million as of March compared to December.
$30 million off what base, if you don't mind?
To about $122 million.
T hat's great, certainly from a percentage standpoint. Last one from me. While relatively small, it looks like SBA volume has ticked higher this year, while the average deal size has been cut in half versus 2025. Can you talk about your SBA strategy and how it's evolved?
Yeah, it's been a very slow process. We've looked at a lot of C&I type loans on the SBA side. A lot of the brokers are taking some of the 7(a) type loans. I don't think we've originated any 7(a) loans in the last couple of years. It's been very tough. Either they don't fit our appetite or very competitive bidding and the prices are such that we're not winning them. That's something that we're actually discussing, our strategy for SBA. It's not going to be a big part of our portfolio. To be able to make it a big part of our portfolio, we would have to invest in a lot of lenders in that world, and we wanted to have that as a go-to, but not necessarily drive it for significant success. Does that paint a good picture for you?
Understood. That's great. Thanks for taking my questions.
Thank you.
Thank you. Once again, if you have a question, please press star followed by one. Your next question comes from the line of Feddie Strickland from Hovde. Please go ahead.
Hey, good morning. Just wanted to touch on loans first. David, I think you mentioned a 40 basis points pickup on loan yield, kind of the stuff as we're doing, but I was curious, what's the average rate on new production today?
About 7%.
Okay. On the credit side, I was wondering if you could just walk through a little bit more of kind of maybe what's maybe in workout and maybe some changes that we could see later this year just as you kind of work through the credits. I appreciate that you've mentioned in the release that the losses should be immaterial, but just curious if we could maybe see a directional change in NPAs later this year.
Well, I think, the biggest issue that we've seen probably in the last two or three years is the time it's taking to run these special assets through the process. We had some that we're working on in New Orleans that filed bankruptcy the day before the foreclosure, and so we're in year two of collections on that. Our oldest classified asset is trying to refinance outside, and hopefully that happens. That's been a bad asset for seven years.
The longevity of these and our ability to get them and work them seems to be the biggest problem, because once we get them, we can work them, whether we take a loss or we're able to recover our loan amount is irrelevant. We want to work and get them out and get that money back working. It's just been a very slow process over the last couple of years in getting that done. That's why we're having a little bit more accumulation. It's not like we had that much in the quarter, $3 million additional, but we didn't have $3 million of runoff. That's the problem.
Got it. Just one other question on the deposit side. It was good to see solid DDA growth. Just curious, I know that's kind of tough in this environment with rates sitting where they're at, but do you think there's an ability to continue to grow non-interest bearing? Do you see anything on the horizon that could lead that number to continue to climb higher?
Yeah, I think the biggest change for us has been attracting bankers that are more C&I driven, and so we're getting total relationships, and some of those relationships come with very healthy deposits. As long as we continue to do that, and for a long period of time, we were a CRE bank, and our focus changed about four years ago away from that to more of a C&I customer, and I think that's what you're seeing here is the influx of deposits, not necessarily big loan amounts.
Got it. I think that's it for me. Thanks, Dave, for my questions.
Thank you. Have a good day.
Thank you. Once again, if you wish to ask a question, please press star followed by one on your telephone keypad. This concludes our question- and- answer session. I would now like to turn the conference back over to Mr. John Bordelon for any closing remarks.
Thank you all for joining us today. We sure appreciate your questions and your concern for Home Bancorp. We look forward to speaking to many of you in the coming days and weeks, and hope everyone has a wonderful week. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.