Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Third 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 February 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.

Thank you. Good afternoon and welcome to our third quarter conference call. Today's discussion will include prepared remarks from our Chairman, John Allison; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; and Stephen Tipton, Chief Operating Officer. The rest of our team is present and available for questions. Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; and John Marshall, President of Shore Premier Finance. In a year that continues to produce wild market swings and economic uncertainty, the third quarter was no exception. However, with a fortress balance sheet, conditions at Home remained strong and with a positive outlook. To provide more color on that, I will turn the call over to our Chairman, John Allison.

Thanks, Donna. Welcome everyone to the third quarter earnings release and conference call. The headline for the quarter is similar to the statements we made last quarter about uncertainty. We're basically in the same place we were last quarter, except prices and odds are that they're going to go higher for longer. If you remember what I said last time about interest rates in the seventies, the Federal Reserve took rates to 14% in the late seventies, but he didn't kill the snake before he pivoted. He pivoted under pressure because people said we had to turn it around. As a result, he had to come back in the eighties and take rates to 21% to cut the head off of the snake. I think that's exactly where we are today and most everyone is hoping for a pivot, but it's absolutely the wrong time to do that because we have not killed the snake yet. Another 150 to 225 basis points may get the job done. Rates are certainly much higher than most of us thought, but there is still room for them to run. Inflation is certainly the highest in 40 years, and this administration is still trying to continue the inflationary spiral. I will say there is no substitute for experience. I always heard it said, but I always heard Nancy Pelosi say there is no substitute for experience. There is no one in this administration with any business experience, period. You cannot take a bunch of PhDs that got their expertise from some book. The world of business is much different than that. I trust a decision-making opinion from an experienced person much quicker than I'll trust some inexperienced politician, no matter how many degrees they have. I'm still sticking to the possibility of a 6% fed fund rate, as I said for the last two quarters, because the puppet show is continuing on by Powell and his group. This is really not a time to panic and I like the world's not coming to an end because of high rates. Remember that the average fed funds rate for the last 50 years has been 5.44. We've gotten along fine with those high rates and the world didn't crumble. The sugar high that we've all been on, enjoying the crazy low rates, was just an accommodation to allow Washington legislators to spend recklessly year after year. The key for banks is to be premeditated and cautious with their moves, and playing a little defense is not all bad. When you see banks bending up CD rates in the newspaper now, you immediately know that they put all their money to work in lower-rate securities, leading to higher costs of funds and lower margins for them. We're getting looks at lots of deals right now that we normally don't get to see. Banks are tightening up. We just had someone fly in to meet with us from Florida and California. I asked, 'Why are you in Conway, Arkansas?' and he said it was because our five big banks won't do this deal. The good news is it wasn't a bad deal. We may be able to structure it and make a good deal out of it, but obviously, there is some tightening going on outside with other banks. The good news is that Home was prepared for the right side of what has happened, as shown in these quarterly results—they're very good. We did this in spite of the damage caused by the unprofessional actions of former employees in West Texas. The good news is that we hoped to be at a $100 million run rate sometime in '23; actually, we had almost $110 million for the third quarter, with a profit of $108.7 million. Our non-GAAP profit was $109.9 million. This is a nice start and a record. Adjusted nine-month earnings are $268.4 million or $1.40 this year, and that's also a record. Q3 revenue was $256.3 million, another record. Pre-tax income reached $142 million, or 55% of net revenue, another record for the company. Our return on assets was 1.81%, and our net interest margin for the third quarter was 4.05%, compared to 3.64% in the second quarter, an increase of 41 basis points. This reflects how it has ticked up since April—April was 3.35%, May was 3.57%, June was 3.71%, July was 3.83%, August was 3.98%, and September was 4.08%. So that has improved and hopefully it will continue. Return on tangible common equity was not a record but was close at 20.93%, and EPS was $0.53. Our adjusted non-GAAP EPS was $0.54. After-tax net profit was 42.37% of net revenue. That's what I call P5: our pre-tax, pre-provision profit percentage of net revenue was 42.3%. I don't know many industries or companies that can pull down 42% of net revenue into profitable after-tax profit. Asset quality remains excellent: non-performing assets were 0.27%, non-performing loans were 0.45%, and charge-offs were $5.1 million as we charged off the final portion of a professional athlete loan. We had already allocated 100% for it, but we had not charged it off until this quarter. We had hoped, but it didn't work out. We held off making any loan loss allocation because of the hurricane damage. We're evaluating our customer's damage and will make estimated allocations when we make a final determination. Expect a reserve allocation somewhere between $10 million and $20 million. I would expect maybe not. Kevin will talk more about that as he is more up to speed on it than I am. Our allowance for credit losses was 2.09%, or $289 million, and combined efficiency improved from 46.02% last quarter to 42.97% this quarter. That's notable improvement for us. We will continue maintaining strong capital ratios, and Steve will discuss those later. Our intangible book value dropped from $9.92 to $9.82 during the quarter. We repurchased over a million shares of stock, and although we had AOCI, our TCE is still standing strong as we continue to maintain strong profitability regardless of the obstacles thrown at us. Loans were down $94.6 million for the quarter, led by CCFG. I think they were down, and Steven, you said they were down about $500 million, but the net was about $342 million.

Yeah, balances were down $340 million. I think they had about $500 million in payoffs.

Well, Chris will tell you there's nothing wrong with the payoffs, and I agree with him. In our legacy footprint, we grew $273 million for the quarter, and we had $26.4 million in PPP loan payoffs. I had expected loans to be flat or up for the quarter, but we didn't get there. We implemented a new loan system that’s complicated. I'm not sure if we like it yet, but it appears the company provides no help, and we have to get third parties to assist us. This was new to us and we kind of stumbled a bit due to that and the impact of the hurricane on loan closings. As of today, we're up over $100 million that we believe would have closed had the hurricane not hit. We're fairly close; we're not too upset about that. We repurchased $24.3 million of Home BancShares, which was around $1.32 per share, and that was a significant buyback—it was a million shares last quarter, I think, Brian, right?

That's correct.

Our holding company has about $55 million in bank stock, and bank securities investments yield about $6.5 million. We realized a loss of $2.6 million due to marking that to market. These securities were purchased for their dividend yield at the holding company and they produce about $3.6 million a year in dividends. So we'll continue to hold these securities; they will fluctuate. Bank stocks do, as you know. The only extraordinary items unless there’s something I’m missing for the quarter include a $2 million cost due to the unprofessional departure of some West Texas employees. That’s number one. Number two, we had a fair market loss on securities of $2.6 million, and number three, if I read correctly, Brian, we had a $1.1 million recovery on historic losses that were written off from a prior acquisition.

And that was from one prior acquisition. You're correct.

So going forward, loan demand is staying strong. Investment yields are very attractive. We will continue to pick our spots on high-yielding investments. On the M&A side, I had lunch with the CEO of a billion-dollar bank earlier this month, and we had preliminary discussions about possibly doing something together. However, the asking price was two times book, which is always the story that doesn't work for us. However, I liked him and I think he liked us. Who knows where that will go. That's about it for me. Tracy, do you have any comments that you want to make for the quarter? Are you happy or unhappy, or how do you feel?

We've got to be happy. When you look at the performance numbers of the bank, they are certainly better than they have been in a long time. It's good to see that 2% ROA on the bank side and know we'll get that number pretty quickly. You mentioned the hurricane; all our locations were safe and sound and back open. The staff did an excellent job getting that operation going. Kevin will give you a report on some of the lending aspects of that. We are certainly watching the interest rates, kind of like baseball season. We don't know if we're getting a curveball or a knuckleball or we may get hit by the pitch. But our goal here, Johnny, is to just hit doubles, keep moving around the bases, doing the right thing, and taking what's thrown at us. The Texas operation has turned around tremendously. The changes made have brought in great people, and the leadership has done well in supporting Arkansas, making that successful now. So we’re ready for the next quarter.

That's good. Well, thank you. It has been a challenging quarter, though busy with rates up and down. I'm telling you, for our shareholders, it's a very busy place, and I don't know if we've accomplished much, but we’re certainly busy. Everybody's got their hands full.

Okay, well, sounds like a quarter with some fantastic numbers, so congratulations to all there. As you know, the quarter did end with the unfortunate landfall of Hurricane Ian, and I'm sure many of you are curious about the lending portfolio in those markets. So Kevin Hester is here to provide you an update.

Thanks, Donna, and good afternoon everyone. I know everyone's anxious to hear about how Hurricane Ian impacted the bank's Southwest Florida footprint. Ian was an incredible storm that had a tremendous impact on a large number of people in Florida, including several of our own employees. Our hearts and prayers go out to all of those affected by this storm. We have about $1.6 billion in loans across 20-plus counties in the designated disaster area. We had an established Disaster Deferral Program that we were ready to implement, and our Florida lenders are very experienced in this process. I am pleased to report that we have only about $9 million in deferrals executed at this time based on lender reports who have been reaching out to those borrowers. We see this balance growing possibly to $45 million in total, which is much lower than the deferral balances resulting from Irma in 2017 or Michael in 2018. Asset quality continues to be very strong, with non-performing loans and non-performing assets down six basis points and two basis points, respectively, on a quarter-over-quarter basis. Both numbers remain near all-time lows for the company. Early stage pass dues improved seven basis points to 0.5% as we completed our first full quarter after the happy conversion. Loan opportunities continue to be plentiful, as Johnny mentioned, as we continue to be diligent in evaluating both credit and interest rate risk. It is our experience for both CCFG and our community bank footprint that volatility often reveals more opportunities as the overall market becomes disrupted. We will continue to evaluate those opportunities as we move deeper into this fed tightening cycle. Donna, I'll turn it back over to you.

Thank you, Kevin. Next…

I just want to make one comment. We had the lady that runs our Pine Island branch; she was cut off from the mainland and was taking her deposits and money back and forth by boat. Pretty remarkable. They got a temporary bridge in now, and she’s doing remarkably well.

That's amazing. And early reports from customers are reassuring, too, so hopefully they're all going to make it through better than we could imagine. Next, we will turn to Chris Poulton for an update with CCFG.

Thank you, Donna, and good afternoon. Since the beginning of the year, we've been discussing several payoffs expected in our CRE portfolio. Johnny mentioned this earlier in his comments. The headline number for CCFG this quarter is the payoff number. During Q3, we were able to realize about $500 million of these payoffs, with four loans representing the bulk of this number. As a result, our portfolio reduced by $341 million to $2.1 billion. These were expected, however, and year to date, the portfolio has positive growth of about $150 million. As a reminder, payoffs are not only a natural part of our portfolio lifecycle, but we view these events as a sign of a healthy portfolio. A majority of these payoffs were refinanced into the permanent market at significantly higher amounts than our outstanding loan amounts. This quarter, CCFG originated just over $300 million in new loan commitments. Springing our 2022 total to well over $1 billion. As we approach year-end, we're working toward closing out our existing loan pipeline, while simultaneously seeing an increase in demand starting to build for 2023 origination opportunities, should we choose to pursue them. Donna, I'll hand it back to you.

Thank you, Chris. And now for our final report, we'll turn to Stephen Tipton.

Thanks, Donna, it's a pleasure to get the report on our company today. As Johnny mentioned, our company's patience and persistence over the past couple of years continues to pay off. The net interest margin improved again in Q3 to 4.05%. Our intentional approach to maintaining cash balances at the Fed, variable rate loans, and variable rate securities all contributed to that increase. While we are cautious around customer expectations for interest rates on the deposit side, we could see additional improvement if rates continue to rise. Our current ALCO model projections show a 4.5% increase to net interest income in the next 100-basis point scenario. We continue to keep a daily watch on deposit balances and customer activity in this dynamic rate environment and our new markets in Texas. We'll continue to refine the deposit base and navigate what has been a rapidly rising interest rate environment. Total deposits ended the third quarter at $18.5 billion. Nearly half of the $1 billion decline came from our Florida markets, while the other half was mixed between Texas and Arkansas, respectfully. We've analyzed the changes we saw in a number of large customers opting to take advantage of treasury rates, front-running bank deposit rates, the Fed, and also real estate investment projects and other opportunities. Chris, we may call on you to spin up the deposit machine in New York at some point if we need to. With over $5.5 billion in non-interest-bearing deposits, which comprise 30% of the total today, we continue to like our core deposit positions in the markets we serve. I’m pleased to see account opening activity remain steady over each of the past three months. Staying with liquidity for a moment, our loan-to-deposit ratio ended the quarter at 74.6%. Our primary liquidity ratio stands at 23.74%, which is more than double our historical pre-pandemic levels. Switching to loans, production was strong at $1.54 billion for the quarter, with $1.2 billion coming from the community bank markets in Texas, Arkansas, Alabama, and Florida. Yields on new production have continued to increase each month throughout the quarter, now seeing sevens and even a few eights recently. The unfunded commitment pipeline increased by nearly $200 million in Q3, and now stands at $4.4 billion. Kevin can provide additional color on what he's seeing in the pipeline during Q&A, but the activity in our commitments in the past three months has been strong. On the other hand, payoff volume increased to just over $1.2 billion in the third quarter. As Chris mentioned, his payoff volume was elevated around $500 million, while the community bank footprints remained at more normal levels. We still see this as a sign of overall health in our markets with the projects that are coming online. Finally, switching to capital and a few key ratios: we had total risk-based capital of 16.75%, a leverage ratio of 10.39%, and as Johnny mentioned, a strong tangible common equity to total assets of 9.24% as of September 30. All well in excess of our internal targets. The current market still feels like a good place to be. Donna, with that, I’ll turn it back over to you.

Thank you, Steven. Johnny and Tracy, before we go to Q&A, do you guys have any additional comments?

I'm good.

I'm good. I guess it was a great quarter, the best quarter ever in the company's history. I don't know how you say that. We keep saying that lately; we've had a bunch of these deals, but the Texas operation has worked out pretty well for us despite the challenges we faced. We've overcome it. It cost us some money, but we're fighting that battle. So that’s it. Donna, are you ready to go to Q&A?

And operator, we'll turn it back over to you.

The first question comes from Matt Olney with Stephens Bank. Please proceed.

Hey guys, good afternoon. How are you?

We're good, Matt. You have a quarter like that; you’ve got to feel pretty good, haven't you?

Absolutely. Well, thanks for your commentary. Always colorful. Johnny, do you ever think that maybe Nancy Pelosi’s been listening to your Home Banc calls and stealing some of your quotes?

She and her husband are buddies. We’re drinking buddies. No, we're not. No, I don't know. She wouldn't get much of anything out of me, I'm afraid, but anyway.

Well, I want to hit on some questions and thoughts on the third quarter results. But first, I came across a press release that Home Banc put out a few minutes ago, and it sounds like there was a lawsuit settlement with ServisFirst and some former employees of yours. And if I'm reading this right, it looks like you'll be receiving $15 million in the settlement. Any more context you can give us on this deal? It's been a few years since we've talked about this. I can't recall all the put-to-takes around it. Thanks.

Well, it has been a long affair. I wish ServisFirst the best. There's the right way to do something and the wrong way to do it. We thought they did it the wrong way. They thought they did it the right way, but it’s such a fine line, really. We're just glad to have it behind us. Kevin's been with it the whole way. Kevin, you got a comment on it?

Well, you said it. It's been a long, long road. It's almost seven years. It's good to get it behind us. We're pleased with the outcome, and that's probably all we should say about it.

Anyway, it's done and we'll get our money in a few days, and we’ve got it resolved.

And as far as the results and the outlook here, loan growth, you gave some good commentary on that. You mentioned some challenges near-term, the higher pay down you saw, the new loan system, and the hurricane, obviously. Curious about your updated thoughts about loan growth from here. Do you think some of those headwinds will continue, or do you think some of those things will ease up to produce some loan growth here? Thanks.

We're actually up. We just didn't get them all closed. We're actually up $162 million as of today. That’s pretty good. We just didn't get them all closed. And as I said, we have a new loan system, and that's a little more complicated. It's creating some problems. I won't call the name of the loan company, but it has created some problems throughout the system. The jury's still out on it. We're trying to stay with it the best we can, but it is different and complicated. The hurricane did slow it down, and the loan system slowed it down. But I'm proud to say we're up $162 million. I hope that holds and we continue on.

Anything specific from Chris Poulton? I know Chris called out some higher pay-downs that were likely to happen in the third quarter and we saw that. Just anything from Chris on the loan growth outlook from here?

You can take that, Chris.

Okay, thanks. Hey, Matt. No, I think we continue to see good demand. We’re still up for the year, right? I think the last two quarters we kind of said we've front-loaded some of these pay-downs. I probably would have normally expected to have one in the first quarter, one in the second quarter, maybe two in the third quarter. We are seeing the secondary market and the take-out markets are a little choppy. I think what ultimately happened on these four in particular is, at least on three of these, I think they were waiting around hoping the market got better for them on take-out financing and they finally decided to pull the trigger. It’s why they all happened at once. I think they probably made the right choice. Two of those in particular, they were taking large cash-outs in their refinance, and that may have been the last time they could do that. We’re seeing conditions tighten, especially on take-out financing with cash. So, we always like to have pay-downs. I mention that a lot. These were projects we helped people achieve, and they got through and they were able to put some cash in their pocket and reduce their rates. I think that’s good. Having done that, they'll come back and borrow from us again.

Okay.

It's a bit concerning. We're seeing people coming in more so than we've seen in a while. People we don't know, which, what ties to what Chris is saying. They've been getting their money, they can't get it, and they're not lending in that asset class. Anyway, it's interesting watching it, and I think in my commentary, I said we've had guys fly in here, more so than we've seen in a while. Anyway, it's an interesting time, Matt.

Yep, it sounds like it definitely. Well, I guess switching gears over to the fee side, fees were especially strong this quarter. I know those can be volatile and a bit chunky sometimes. Was there anything in the callout in the third quarter fees or any kind of outlook you can provide?

Our other service charges and fees were up about $1.4 million and the bulk of that was all related to Chris’s division, CCFG. So if he wants to provide a little color on that, he probably can.

Yeah, sorry, on which fees?

Your fees for the quarter were up about $1.3 million. It’s probably related to the pay-downs, we also collected fees, so a big pay-down quarter is always a big fee quarter.

Yep. Okay. That’s right. Okay guys, that’s all for me. Congrats on the record.

Hey, thanks, Matt, appreciate it.

Thank you. Our next question comes from Stephen Scouten with Piper Sandler. Please proceed.

I guess I was kind of curious what your plans are and thoughts around continued deployment and kind of what you saw on new yields in the quarter, both in loans and securities, what you were able to obtain?

Well, we saw some good opportunities. We're seeing sevens and eights on the loan side. We're seeing some sixes and sevens on the security side. We're just kind of picking our spots when we see an opportunity. As our gentleman who runs that area for us said, there was kind of an out-of-balance deal the other day, and sometimes that happens, and he found some opportunities to pick up some AAA securities that he did. We're going to be deploying, just going to sit back for a little bit here and take the Fed Funds market for a bit and let Brian Greathouse pick his spots. I think that makes sense.

Yeah, absolutely. Absolutely. We also kind of conversely, how should we think about the balance sheet moving forward? I know there was maybe about a $1 billion reduction in deposits this quarter. Do you think we'll see the balance sheet shrink a little bit as you let higher-cost deposits run off, or was that an aberration at all? Or how should we think about deposits in the size of the balance sheet?

Once Chris activates the large deposit machine in New York, we're attempting to maintain our deposits, but we did incur a $50,000 loss on a deal today. I believe someone invested that in a four-quarter or similar arrangement. Banks that are low on funds are currently under pressure. On a positive note, our margin exceeded four, which was a target we aimed to achieve again, and we made improvements for the quarter.

Got it. Well, you're doing something right over there. No one's sending any planes to come pick me up or no one from California to see me. So it sounds like you're in a good spot.

Well, I was just going to mention, I was going to send a plane over during duck season to pick you up, but you've come hot with me.

Sounds great. There you go.

Okay, thanks, Steven.

Thank you. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.

Hey guys, good afternoon.

Good afternoon. How are you, Brett?

I'm doing good, thanks. Wanted to first ask Johnny, you've been 100% right on rates, and over the past year, you've been talking about the fed's going to have to do more and you've been aggressive with that, and that's proven to be true. I'm curious if you think about the outlook from here, if maybe you think now’s the time to batten down the hatches, so to speak, and maybe tighten more than folks have on credit standards, and was also just curious if you think about '23. One of the hard things is if rates are 200 basis points higher, what does that do to demand? So just curious on your thoughts on each.

Well, I think you can see the 200 basis points. I tell the story about Volcker in the seventies; he didn't fix it and almost fixed it. He slowed it down enough, but the pressure came from everybody to pivot, and Powell is going to get that same pressure. It's just a matter of whether he pivots too soon or not. I don't think it's time to pivot yet. When you think about this, again, I go back to the average of 5.44% for the last 50 years. We're not at the end of the world; we can continue to exist here; we just have to adjust. Adding to that inflation in material costs on all of these multifamily or office or whatever you're building definitely adds to the factor too. We're seeing multifamily still works; I'm not sure retail works anymore; but multifamily still works if you watch your Ps and Qs and pick the right area. The scary part is you're seeing, as Chris Poulton will tell you, he never uses forecasted higher rents above the market. If the market's $1.50 and you say we’re going to get $2, that is a stretch because of the costs you are using. So you have to be careful. It may work; you might get $2, but you're much better off pricing it at $1.50 if that's the market, and see if that works rather than assuming you're going to get $2. I think business will be okay. I really think there’ll be some projects that slow down.

With regards to tightening underwriting, we’ve always been historically conservative. We err on the side of a more cash and deals will mean more cash in the deal as rates go up. Volatility works in Chris's business, but it works for us in the community bank footprint too. We're excited by the opportunities we're looking at; we'll underwrite them appropriately for the rate environment we're in. We do believe that this is going to be a higher-for-longer period.

That's great color. You did mention one loan category that you're seeing growth in, multifamily is still working, I assume that's one loan category you still like to add to. What other loan categories look good to you at this point, and which ones are a little scary? Is construction and land development something you might deemphasize going forward to some extent?

Well, we’re seeing a lot of activity in the hotel space. You can get more in that space right now than we have available cash to do. It’s just about picking the right hotel loans, but we're not afraid of hotel loans. We just have to get the proper capital stack in there to make ourselves feel comfortable, particularly if we hit a recession, we won’t need to be tight on equity in the deals right now. If there’s anything we’ve done, we’ve kind of asked our people to get a little bit of additional equity in the trade. I don’t want to do any office, and I told you—my guy from Orlando said, retail doesn’t work. I’m not sure about office. Multifamily or industrial has been hot. I think we’ve been kind of out of the play because it’s been so hot. However, people are getting a little skittish in some areas. Some of those opportunities are now coming to us. The volatility brings us into things that, sometimes when things are really great, we’re priced out of. We see this in both Chris’s business and for us in the community bank footprint, too.

Interestingly, some of our biggest customers we have picked up in times like this, when other people are not lending. We are continuing to lend into the markets, and I can name a handful of customers that we picked up in really difficult times like this. I’m looking for the opportunities here to pick up some of these really good customers and build long-term relationships with them because I think this is a good time to do that.

That's right. Our Jonesboro operation brought in a great credit yesterday with a strong family-oriented organization. We wouldn't have gotten a look at them except for this disruption in the marketplace. Long-time family operation. Very wealthy organization. Sometimes, this brings opportunities for us, even though it can become a bit tough once in a while. You know how conservative we are. We’ll continue to underwrite properly, do the right thing, and keep ourselves reserved for any problems that might arise.

That's great color. I'm kind of surprised the stock's not doing that well today. It feels like the market wants to punish the banks that have already burned through their liquidity, so it’s a little bit unusual. But congrats on the quarter anyway.

Well, thanks. I don't know why we’re down. We don’t deserve to be down with these earnings, liquidity, and being in great shape.

Hey, thanks. Good afternoon, guys.

Good afternoon. How are you, Brady?

This says the margin was up pretty nicely in the quarter, a 40 basis point move linked quarter. I think some other banks are out there talking about NIM expansion not being that great going forward just as maybe deposit betas catch up. So, how do you think about, a big move in the margin this quarter? Do you think there’s still some notable upside, or does the increase start to decelerate in the quarters to come?

Well, I look at it every day. Right now, I'm a little behind for the month by about $300,000, and I don't like that. So we're going to correct that. There's going to be some pressure on the margin; however, the model—I'll let Steven talk about the model and what it shows.

Yeah, I think we mentioned enough in the next up 100 basis points scenario; we show NII up about 4.5%. We've talked in the past that assumes I think around 40% deposit beta on checking and savings and a 100% beta on CDs. So I think all of this ties back to—we’ve had asset yields moving in the right direction. I think if I see it right, we've picked up a larger percentage of variable-rate loans from some of the production this past quarter from Texas. We're doing all the right things there; it’s a function of being able to control deposit costs on the way up while retaining everything we want to keep. That's been front of mind with our presidents every day and every week over the last two or three months is really trying to act like a 100% loan-and-deposit ratio bank today, just to keep the deposits we’ve got. We'll cultivate those opportunities.

Got you. Okay. And then just one on the expense space: you all did a good job holding quarterly expenses pretty flat, but we’re seeing a lot of inflation pressure and expenses going higher. Is Home any different than that? Do you expect to see some more meaningful expense increases, or not with how efficiency-minded you guys are?

Interestingly enough, Tracy called me up to his office yesterday about a $1.2 million increase for the next 12 months, about a $100,000 a month. We had discussed it yesterday. Outside of that, we'll have some increases, but I don’t think we’ll see it go up very high; we don’t see those numbers. We haven't really refined Texas yet on efficiency. There’s still lots more room to improve on the Texas side, particularly on the facility side. We have lots of big facilities.

Okay, got it. Thanks, guys.

Thank you. Our next question comes from Brian Martin with Janney Montgomery Scott. Your line is open.

Hey guys, how you doing?

We're doing really well. The stock's down, and there's no reason for this stock to be down. When I report these strong earnings, I don’t know why we’re down.

I totally agree. Do we expect the expense number, given the opportunities you have in Texas, will the net expense number trend lower in the next couple of quarters? Should we see them trend down? Is that your expectation? Or is that kind of wrong?

Well, we have a little investigation going on in Texas; we spent a couple million dollars there, and we’ll probably spend a bit more over time. As we look into some situations that have arisen that we’ve found—it could have pulled it down this quarter a couple million dollars, but we don’t want to discuss that right now. We just fine-tune it. The Texas people don’t waste money, but there's plenty of savings we did over the years that we haven’t instituted well in Texas yet.

Got you. Okay. And then, just a final housekeeping question; I think Brian mentioned there were some higher fees from Chris in the quarter. Was there anything in the other line item on the fee-income side? I think other fees were up a couple million bucks. Was that just core, or was there anything unusual?

Well, other service fees were up about $1.8 million, and we did have an item related to a fair value adjustment on our equity investments of $3.3 million. If you remember last quarter, we had some pretty large recoveries from acquisitions that had previously been charged off, so that’s pretty much the change you're looking at there.

Okay, that’s what I thought. I just wanted to confirm that. And then the last one was just for Chris, the payoffs you saw this quarter; typically the fourth quarter is stronger for payoffs. Given what we saw this quarter, do you still expect more coming in 4Q? I know you talked about originations being solid for '23, but just the payoffs in 4Q will be elevated? What's your expectation there?

I don’t think we're going to see an elevated level, at least what we're looking at now. We'll probably see our balance stay up through November; we may have a December surprise with a pay down. Right now, I'm forecasting flat to up overall, which would put us at a normalized level. We don't have a lot of these large loans left either; most of our loans are $50 million and less.

Okay, that's helpful. And last one was just Johnny, you talked about the hurricane reserve or provision, timing of that. I guess is your expectation at the fourth quarter event? And just how do we think about the reserve going forward, given the current situation, and the macro environment?

I may have overestimated what kind of reserve we have to have based on what I’m hearing; it may be better than I anticipated.

Yeah, in my comments, we said we felt like $40 million to $50 million is the most we could see for deferments. That's only about a fourth of what we saw with Irma and less than Michael, and Michael was up in the panhandle. At this point, I don't see it as a big event for us, though it’s still early, so we’ll continue to track that and report it as we go.

Okay. Just one final note on the reserve; as we go forward, how about the reserve? I think you're sitting at a little over 2%, is that a line in the sand for where you’d like to maintain it?

Well, yeah, think about it. You've had the worst financial crisis, a pandemic, a hurricane. It would look like an up-and-down cycle if you played with it. A 2% reserve has worked; it’s always worked for us. I don’t know if we need to adjust it, but what I do know is that 2% reserves have worked during this volatile time, and we need to maintain that.

Thank you. Our final question comes from John Arshtom with RBC Capital Markets. Please proceed.

Right? Close enough. Good afternoon, everyone.

Hey, John.

Hey, can you just— I know the call's gone a little long, but can you give us an update on Shore Premier and how the business did this quarter? Any hurricane-related impact?

As far as the hurricane, my folks tell me that so far we've only had one yacht totally destroyed, and the risk to us is that we got a 100% payoff of that loan. No one has filed for deferrals in the program that Kevin talked about. The third quarter was a solid quarter for us; we had nearly $90 million pushed out the door. We had about $55 million in repays and prepays, so $35 million of net growth, which is good for us. However, importantly, the components of that was $12 million on the retail side. The pendulum seems to be gradually coming back to us on the commercial side. The bulk of the $35 million in growth was commercial inventories. We’re happy to see that. We're seeing some slowing of applications, but as you would expect, the average application is going up due to increasing inventory values.

Okay. That's good to know. Thanks, John. Just last—thank you, Johnny. You talked on several calls prior to rates going up about some of the fixed-rate commercial real estate loans being made in some of your markets. Have you seen those banks struggle or have problems, or have they come to talk to you about acquiring them? How do you think those banks are doing?

Well, they’ve got to be feeling the pressure, as they’ve put so much money in low-rate real estate loans and securities. Look at the local newspaper for Sunday’s ads; that’s what I’m seeing. They’ve run out of money and have put everything in fixed-rate loans. I haven’t heard any squeals yet, but I’m confident that we will soon. From an M&A perspective, that complicates the possibility of doing a deal with them if their ALCI is significantly lower than what’s market for. I don't know how back really do an M&A deal right now, but you just see the fees attached, and it’s tough to do in this environment.

Yep, seems that way. So, okay. Thanks; appreciate all the help.

This concludes the Home BancShares, Inc. third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.