Home Bancshares Inc Q1 FY2022 Earnings Call

Greetings, ladies and gentlemen, and welcome to the Home Bancshares Incorporated, First Quarter 2022 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. The company has asked me to remind everyone to refer to the cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in April of 2022. At this time, all participants are in a listen-only mode. And this conference is being recorded. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Good afternoon. This is Donna Townsell. I'm Director of Investor Relations. Welcome to our first 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, our Chief Lending Officer, Chris Poulton, President of CCFG, John Marshall, President of Shore Premier Finance, and Stephen Tipton, Chief Operating Officer. At this time, I would like to turn the call over to our Chairman, John Allison.

Good afternoon. Thank you, Donna. Welcome to Home BancShares First Quarter 2022 Earnings Release and Conference Call. In spite of all that's going on in the world with global risks and inflation resulting in rising wholesale prices, and increasing CPI index, coupled with spiking interest rates, closing our largest acquisition ever, it really was a pretty solid quarter. Pretty plain vanilla, $0.40 EPS, which exceeded a little bit if I'm not mistaken. With a fortress balance sheet and massive liquidity of $3.8 billion, we decided to use $300 million of our liquidity to retire our 5.65 floating rate subordinated notes on April 15th of '22, and that has been completed. This move will result in a savings of about $1,875,000 per quarter or $7.5 million per year for the next five years for a total of $37.5 million in savings. Not as straightforward, but the entire transaction was completed swiftly. We have received Fed approval to retire approximately $71 million in trust preferred of homes and $23 million of trust preferred API. The rollout of savings on this will be approximately $3 million per year. I want to congratulate our team members for receiving Forbes Number 1 bank in America for the outstanding performance for 2021, of all banks small. Additionally, last week, Home was named one of the top banks in the world, and this marks the third time in five years Home enjoyed this huge honor. We are happy to announce the closing of our acquisition of Happy Bancshares on April 1st. This transaction is part of our strategic focus to shift into high-growth Texas markets meaningfully, and we're already seeing the benefits of this Texas franchise with strong loan demand and attractive loan yield. We have enjoyed working with their team over the last month. However, the unforeseen impact of closing has been the rapid interest rate movement that has occurred and its impact on purchase accounting. We structured transactions with certain expectations, however, what we could not control was the timing of the closing and the inflationary impacts. We anticipate that the fair value marks on the balance sheet may have changed significantly, and we will provide a complete view of the financial position in our second quarter release. News flash, rates are headed much higher. We are facing 100 to 200 basis points in the remainder of the year. We believe the Fed will be forced to continue raising rates at a faster pace. President Bullard's research indicates that we are way behind the curve. In conclusion, I think we're probably in the best position for our company’s future with our fortress balance sheet, disciplined strategy, peer-leading asset quality, and an interest rate environment favorable for us.

That was a very insightful report. Thank you very much. Now, let's turn to Tracy French to hear what's new at Centennial Bank.

Thank you, Donna. And good afternoon to all. Centennial Bank closed out a good first quarter with bright prospects for the future, as we continue to optimize our excess funds. Centennial Bank finished the quarter with $18.6 billion in assets, up from $18 billion, or 3% for this quarter. Loans finished the quarter at $10 billion, up from $9.8 billion or 2% for the quarter. Deposits continued strong growth, ending the quarter at $15.2 billion, up from $14.5 billion or 4.5% for the quarter. Our efficiency ratio finished at 43% for the quarter, and our risk-based capital finished March at 16.35%. Our asset quality remains robust with our allowance for loan loss to total loans at 2.35%. We expect better in the coming quarters as we are well-positioned. Our net revenue for the bank this quarter was $166 million. Our team of bankers had a solid start this quarter and we remain focused on our non-interest income and non-interest expense. We are very pleased to welcome our partners from Happy as of April 1st, '22, and we have high expectations as we integrate our operations.

Thank you, Tracy. And now, Brian Davis will give us the financial report.

Thanks, Donna. Today we reported $131.1 million of net interest income and a 3.21% net interest margin for Q1 2022. Our first-quarter net interest margin decreased 21 basis points from Q4. During the first quarter, we had $53 million of PPP loans forgiven, which caused the acceleration of deferred fee income. Our PPP deferred fee income decreased $3.4 million from Q4 to Q1. The change was 6 basis points diluted to the net interest margin. Our excess liquidity affected Q1 as well, with $236 million of additional interest-bearing cash in comparison to Q4. The excess liquidity was 5 basis points diluted to the Q1 net interest margin as well. Our Tier 1 capital was $1.9 billion, with total risk-based capital at $2.6 billion. Our leverage ratio was 10.8%, showing strong capital levels.

Thank you, Brian. And now Kevin Hester will provide a lending update.

Good afternoon, everyone. Loans grew by $217 million in the first quarter, led by a $242 million acquisition of yacht loans from Lending Club Bank. Loan production remains strong, but payoffs continue to be high, and we are optimistic about the vibrant Texas markets from the happy acquisition. In the face of many headwinds, the first quarter was solid. Significant improvement in credit metrics was seen, with non-performing loans and assets dropping. Overall, we appreciate the hard work of our frontline lending and operations teams.

Thank you, Kevin. And now from New York, we have Chris Poulton.

Thank you, Donna. This month marks CCFG's seventh anniversary. Over these seven years, we've grown our portfolio through a range of conditions inclusive of high inflation and rising rates. During the quarter, CCFG originated 11 loans for a total commitment of $459 million. Looking ahead, we expect to have another solid origination quarter in Q2, though I anticipate that Q2 and Q3 may deliver more pay downs than we've experienced previously, as borrowers are likely to move towards more permanent financing. We've grown the portfolio significantly over the past year, and we appreciate the ongoing opportunities in our market.

Thank you, Chris. And now let's hear from John Marshall on the voting room.

Good afternoon. This summer will mark an important milestone for Shore Premier Finance and Centennial Bank as we celebrate four years since joining forces. We've grown significantly since then, with first quarter '22 originations of $87 million. Asset quality remains strong as our delinquent loans remain controlled. Our team is optimistic about the continued growth opportunities, and I appreciate the support we've received.

Thank you John. And now for our final remarks today is Stephen Tipton.

Thanks, Donna. Total deposits continued to show growth in the first quarter, with $320 million growth on an annualized basis. We believe this strong economy along the Gulf Coast and throughout Florida is reflected in our deposit growth. As we enter a rising rate environment, we are confident in our strong position to benefit from continued increases. We appreciate the efforts of our team in serving our customer base while pursuing a successful systems conversion.

Thank you, Stephen. Do you have any additional comments, Johnny?

I really don't. We're well-positioned based on what Stephen had to say. I'm optimistic about our path forward. We're seeing reinvestment rates jump, and I expect them to continue.

Let's talk about the $3.5 billion. What do you need to see to put it to work?

We need to see something with a four in front of it on the yields. We are disciplined and will continue to evaluate opportunities. We may deploy over the next 18 to 24 months and keep some funds in reserve for higher rates if they occur.

We're constantly evaluating market conditions. With expected rate increases, we remain focused on maintaining strains in our underwriting and risk assessment.

We're continuously careful with our pricing strategies to ensure we align with risk levels while remaining competitive within our market conditions.

We are proud of our asset quality metrics, and we expect continued resilience as we adapt to changing conditions in the market.

Thank you all for your insights today. Let's move to the Q&A session.

We will pause here briefly as questions are registered. The first question comes from Jon Arfstrom with RBC Capital Markets. Please proceed.

Let's talk about the $3.5 billion. I guess Johnny, that's not train light money, is it? That's a big number.

Yeah, it's there to be deployed cautiously. We need to see the right opportunities at the right yields. I have concerns about certain behaviors in the market.

It's important to remain disciplined in our lending practices. While there's potential for growth, we must also watch for impending risks.

Careful management of our risk is key, and we are committed to analyzing opportunities that align with our performance goals.

At this point, we're interested in how you're thinking about M&A going forward.

We have to effectively execute our current strategies first. The successful integration of Happy Bank is our priority for now.

That concludes the question-and-answer session. I would like to pass the conference over to John Allison for closing remarks.

Thank you for joining our call today. We're optimistic about the upcoming quarter, and we look forward to continuing to grow our bottom line. We'll talk to you in 90 days.