Home Bancshares Inc Q2 FY2021 Earnings Call

Good day, and welcome to the Home BancShares, Inc. Second Quarter 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 Donna Townsell, Director of Investor Relations. Please go ahead.

Thank you, Rocco. I am Donna Townsell, Director of Investor Relations, and our management team would like to thank you for joining our second quarter conference call. Reporting today will be our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; and Stephen Tipton, our Chief Operating Officer. Before we jump into the numbers, I wanted to highlight a couple of developments that occurred in the second quarter. First, you may have seen our announcement earlier this week, where Home’s wholly-owned subsidiary Centennial Bank announced the appointment of a new Director of Corporate Social Responsibility. This move highlights our intention to enhance the development of strategic initiatives supporting Centennial Bank’s focus on environmental, social and governance topics. While these pillars of corporate citizenship have always been important at Centennial, we feel like a more formalized program will ensure that we continue to keep ESG top of mind. Also, there continues to be discussion around FinTech partnerships. Home recently joined in with 65 other banks to form an investment bank, designed to help accelerate technology adoption at community banks across the United States. The partnership brings together seasoned FinTech entrepreneurs and bank experts to invest in the next generation of companies, changing the way financial institutions and their customers move, track and interact with money. These are just a couple of examples that show Home’s desire to continue to be one of the best banks in America. Now to transition to what you all called in for, our first report of the quarter will come from our Chairman, John Allison.

Thank you, Donna. That's pretty exciting about the FinTech. I think those are positive developments for our company. Good afternoon, everyone. Thank you, Donna. And again, welcome to Home BancShares’ second quarter 2021 earnings release and conference call. The performance for the second quarter was another solid quarter for our company with $0.48 of EPS and $71.9 million in profits. Good asset quality and decent expense control. Loan demand is a frustrating part of the equation. While sitting on $2.7 billion in cash and no reasonable place to invest for a decent return, we've decided to hold closely and be patient. If we're right, we think we're only six months away from rising rents, which may include an earlier period of time of tapering and purchases by the Fed. I pay a lot of attention to Jamie Dimon, and I agree with what he said. He is sitting on $500 billion, and he says patience is certainly the key here because rates are going up. As I’ve said in the first quarter, we had the wind at our back and a lot of things that we've been working on came Home to us. During the second quarter, we had the breeze to our back with continued income from investments we've made last year. Since going public in mid-’06, we have been through the worst financial collapse since The Great Depression and the worst pandemic the world has ever known, maybe worse than the one in 1970. By the way, as you well know, throw in a couple of hurricanes in Florida during that time. These huge events created fear, uncertainty, and lots of anxiety for all Americans and people throughout the rest of the world. I want to thank you all for your support during these very difficult and stressful times. In addition to all the events that happened, we were going over $2 billion and incurred addition of $2 billion. We blew through $2 billion, but $10 billion was a big mark for us. And all the associated expenses, the adjustments for $10 billion took us longer and cost more than we ever anticipated. New terms to our vocabulary like enterprise risk management, CFPB, Bank Secrecy just to mention a few. The other 50 minutes was spent on things I barely heard of for the last four or five years. Home has continued to produce peer-leading results with ROAs running from 1.80% to 1.90%, and some over 2%. We have managed here through the crisis regardless of pandemic, hurricanes, or COVID-19 viruses, where the business was good or bad, regardless of interest rates going up or down, or adjusting to what plan of attack our management decides. Let's take a walk back over the last three-and-a-half years, and I think you'll agree with me that the consistency of Home’s earnings is impressive, even without all the unusual circumstances we found around us. Our total revenue net after interest expense was $663 million in 2018, $662 million in 2019, $694 million in 2020, and $365 million in 2021. I think you have to agree with me that these numbers are pretty impressive and show the stability of this corporation and how the management team adjusts to situations in front of us. We decided to pick up our M&A hat out of the toolbox. We have worked on a couple of interesting opportunities but to no avail so far. A friend in the money management space. When I told him about the difficulties we were encountering, he assured me that winning banks are screening all banks to see who can pay the highest price. Then they go to potential sellers and say, 'Look how much Home could pay for your bank.' It's almost like a pocket list that a realtor has when someone says, 'My house is not for sale, but if you can give somebody that's crazy not to pay this price, then my house would be for sale.' My friend laughed and said that M&A deals just don't work. He went back to 2010, looking at all transactions, and there were very few that made sense. He said upon the announcement of a deal, Bank A and Bank B, the seller sells and shorts the buyer. It's important to analyze the stockholder ownership before engaging in a transaction. We are engaged on M&A, but are looking for other opportunities that could increase our earnings.

Thank you, Donna, and good afternoon to everyone. Steady as it goes in the second quarter for Centennial Bank and Home BancShares; steady and consistent are more accurate. That steady and consistent is our performance expectations. Our group will share with you in a moment some of the details about capital earnings, assets, liabilities. There are a few strong and safe performance numbers for the first half of 2021 for Centennial Bank, that represents all regions that just keep producing such powerful results. In fact, eight of our 12 regions had their best six months ever, led by Central and South Florida, while others are still doing extremely well and still complaining about our transfer pricing internal model, where their numbers would be better. For Centennial bank, our total revenue was $367 million for the first half of 2021, making a return on assets of 2.08%. Our return on average tangible common equity non-GAAP was 19.66%. The Allison P5NR is still above the 60% level coming in at 61.99% for the first half of the year, and holding that number throughout the quarter. A nice factor being our net interest income by the efforts of all, focusing on our interest income and interest expense. Our non-interest income is actually up over double digits for the first half of the year, while our non-interest expense is up slightly. Brian will give more detailed information on our strong capital, as our risk-based capital reports at 19.5%. Stephen will share the detail of the loan production and the deposit summary, as Johnny mentioned, there is now over $2.7 billion in excess, and our loan to deposit ratio is around 73%. Our non-performing loans finished the quarter at 0.58%. Our allowance for loan lease losses, excluding PPP ended the quarter at 2.48%. Quarter-end shows our allowance for credit losses to loans to non-performing at 407.99%. While we saw an unexpected dip in overall loans, we believe the signs are showing some positive movement in the second half of the year.

Thank you, Donna. Today we reported $141.3 million of net interest income and a 3.61% net interest margin for Q2, 2021. Our second quarter net interest margin decreased 41 basis points from Q1. Today, I’d like to cover two items that significantly contributed to this decrease. First, during the second quarter we had $247 million of PPP loans forgiven. This forgiveness causes the acceleration of deferred fee income for the loans forgiven. Our PPP deferred fee income decreased $3.5 million from Q1 to Q2. This decrease was 9 basis points diluted to the NIM. Second, the COVID-19 crisis and the resulting governmental response has created a tremendous amount of excess liquidity in the market. As a result of excess liquidity, we had $967 million of additional interest-bearing cash in Q2 compared to Q1. The excess liquidity was 23 basis points dilutive for the Q2 NIM compared to Q1. From our point of historical reference, the Q2 excess cash versus the historical normal cash balance has a negative impact on the Q2 NIM of 63 basis points. Now switch to the unfunded commitments. This quarter the company reversed $4.8 million of the unfunded commitment reserve liability, primarily related to one CNI loan. During Q2, the company determined it was not necessary to maintain the reserve on this cash-flowing credit. I'll conclude with a few remarks on capital.

Thanks, Donna. The first-half of 2021 was much like we anticipated. We've been fully engaged in PPP with forgiveness of rounds one and two and funding around three, which went largely as expected. Credit metrics continue to improve slightly even when it appears there's not much room left for improvement. New lending opportunities have returned, but the excess liquidity and low loan to deposit ratios across the banking industry have resulted in irrational pricing and underwriting, so growth is elusive. We've said all along that we felt that it would be the second half of 2021 before we could see any loan growth, and we still feel that way. The good news is that our production pipeline is stronger today than it was 90 or 180 days ago. In terms of PPP, round one and two balances have been reduced from the original $850 million to just below $150 million. As we discussed 90 days ago, little change was expected in early 2021, because a large majority of these balances were placed on an 18 to 24-months interest-only modification. Roughly 70% of this balance is hotels, and the recovery is definitely underway with virtually all the modified properties experiencing a significant improvement in cash flow. It appears that as much as two-thirds of the modified properties experienced at least a breakeven RevPAR in the month of April and May. Most importantly, early stage past dues remain very low at 41 basis points, which I believe is the lowest figure we have achieved in recent history. Overall, the second quarter of 2021 was very much like we expected when we visited back in April.

Thank you, Donna, and good afternoon. CCFG generated modest growth during the second quarter of about $40 million. We ended the quarter with loan balances of approximately $1.56 billion. Increased economic activity during the second quarter, especially in New York and California is starting to show up on our production and loan pipeline. We would expect this to lead to more opportunities in these markets. Overall, the second quarter continued the trend we've experienced in Q1. While markets are recovering, we do continue to see that it takes a bit longer than usual to close loans. I'd expect that this will moderate over the remainder of the year and start to return to our historic timelines. Donna, happy to turn the call back to you.

Thank you, Donna, and good afternoon. I'm pleased to report the second quarter of success for Centennial's Marine Finance lending unit. Retail applications have moderated to 120 per month from a COVID peak of 210 per month. Interestingly our average application amount has grown from $504,000 pre-COVID to $657,000 in this June just ended. We have moved from a 50-50 new to used ratio to a closer to a 30-70 split, as new product just isn't available. Second quarter retail production was a near record-setting pace at $59.5 million. We are seeing some evidence that prepay cycles may be slowing and despite or perhaps because of our falling asset values and disciplined expense management, our contribution to Centennial's bottom line has grown year-over-year. I believe we're well-positioned for growth once surplus cash has been exhausted and factories resume shipments.

Thank you, Donna. I’ll give the standard color on deposit activity, repricing efforts and trends. On the deposits side, core inflows continued during the second quarter of 2021 as total deposits increased $379 million. Four Florida regions accounted for $263 million, or 69% of the increase in the quarter. We're continuing to work deposit rates down where we can, as liquidity levels persist. In addition, we're continually evaluating our product stat and commercial fees to align with the market and drive additional revenue in this low-interest-rate environment. I'm pleased to see the efforts over the past few quarters here began to show in the bottom line this quarter.

Rocco, thank you, and thanks, everyone, for participating today. It has been some interesting and trying times, but we've gotten through. If you can get through pandemics and you get through the worst financial collapse in the world, and you still have a company that's as strong as this one is it makes us all proud. Anyway, I appreciate your support. And hopefully, we'll have an M&A deal we can announce here soon and we'll see you in 90 days.