Home Bancshares Inc Q1 FY2023 Earnings Call

Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated First Quarter 2023 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 and then entertain questions. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their Form 10-K filed with the SEC in February 2023. 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 first quarter conference call. Today's discussion will include prepared remarks from our Chairman, John Allison; Stephen Tipton, Chief Operating Officer; and Kevin Hester, Chief Lending 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; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. And it’s been an interesting 90 days in the banking sector. However, Home is still standing strong and to provide you with more color on this, I want to turn it over to our first speaker, Chairman, John Allison.

Good afternoon. Thank you, Donna. We usually open with profitability being the first thing. But during these times, we thought it was more appropriate to talk about the strength of the company. The strength of Home Bancshares, our strategy and patience have paid off for our customers, our employees, our depositors, and our shareholders. The strength of Home's liquidity provides more than 100% coverage for all uninsured and uncollateralized deposits as of March 31, 2023, and that carries through today. Home has the liquidity to cover all uninsured and uncollateralized deposits for any customer that we have in the company. We're very proud of that. The strong liquidity of Home has allowed Home to pay all collateralized depositors with deposits in excess of FDIC limits of $250,000 and still have $1.7 billion of money available, equating to the fact that Home can cover 133% of all uncollateralized deposits. We are proud of the fortress balance sheet we've built. Home Bancshares, Happy Banks, Centennial Bank is one of the strongest banks in America. There are only a handful of banks in the country that can be trusted to make this statement. If there was any concern from our depositors, this should comfort them. The press release also has a table showing our availability. As I said last quarter, not all banks are created equal. Our goal was not just to say we were better but to prove, after years of excellent performance, that Home should be separated from the pack as a very safe, strong, and well-managed financial institution. I hope you agree that we have proven the strength of Home's balance sheet and the performance of the company that has stood the test of time again during a new and different bank crisis. What can possibly go wrong? I think we've seen almost everything that could happen. Key factors that have contributed to the strength of our performance are liquidity, capital, asset quality, loan reserves, profitability, and management experience. Liquidity wasn't important until it was. Banks obtain liquidity mainly from deposits — all forms of deposits, borrowings, security portfolios, and as well as selling assets. During 2021 and 2022, the U.S. Government was spending excessively. During that time, we increased liquidity deposits to over $3 billion in excess liquidity. The great majority of these funds we simply put into Fed funds, assuming many of these excess deposits would run off as interest rates continued to increase. If you watched the analysts on Wall Street, they often said cash is trash. However, cash was king then and certainly now more than ever. During that time, banks with newfound liquidity decided to invest in low-rate securities, creating a race to the bottom of loan rates. This critical decision made by the leaders of respective banks created this crisis. I've said for years that bankers with no business experience are not the ones you want handling your money. Many banks act like a pack of analysts, they took their employees, shareholders, and deposits straight to the slaughter because they didn't build a strong enough house. Many banks would fail, while only a few will survive. Home built their house with bricks and steel. Many would have negative capital ratios if they had to mark to market their securities portfolios. If Home were to take their losses, we would remain one of the best capitalized banks in America. Different from many, many banks. A loan to deposit ratio of 100% or greater with 8% capital or less is a recipe for disaster. When cash runs out and banks deplete their bonds, they have no choice but to go to high-rate CDs, which kill their margins and profitability, turning them into survival mode. You see CD ads everywhere; that’s an indication of who is in dire need of money. Home Bancshares, Centennial Bank, or Happy Bank have not advertised CDs because we have the cash liquidity and availability required to pay all deposits. Assuming Home was forced tomorrow to do that, even if we had to borrow $5 billion at an interest rate of 5%, we’d free an additional $250 million in interest expense and still run a 1.2 ROA which is better than 90% of banks in the country today. We provided a chart to show our bond availability. If a bank can pay out all uninsured deposits and still make a 1% ROA, then the top bank analysts in the country said banks that can do that are in the catbird seat. Well, welcome to Home Bancshares. Home Bancshares' capital ratios are in the top tier of all banks. Our conservative management team always maintains strong capital because you can't get capital when you need it. A prime example is Silicon Valley Bank. As your largest individual shareholder of Home and with this company being my largest personal asset, I certainly have a vested interest in protecting what my wife calls the Chuck Wagon and Home is the Chuck Wagon that feeds all of us. Most of you know she's very protective of her dividend, and when I told her about the bank crisis, she said to protect the Chuck Wagon at all costs. We will circle the wagon with our strong employees, our partners, our shareholders, our customers, and depositors, and that is exactly what we have done: good liquidity, strong capital, huge loan loss reserve, strong asset quality coupled with peer-leading profitability. By the way, it’s also the largest asset of our executive committee and some of our directors. We are all focused on the same goal. Asset quality, while maintaining one of the highest loan loss reserves in the country, rather than play a guessing game of raising and lowering quarter-to-quarter, because of all the factors we faced over the last 23 years, we know what has worked for the last 40 years, and that is a 2% reserve balance. The company's reserve is $287.2 million or 2%, compared to 2.01% as of December 31. The allowance for credit losses on loans represents 383% of non-performing loans. Past dues totaled only 0.62%, even with $30 million in ALF and memory care loans added this quarter. Stockholder equity grew for the quarter by $104 million, consisting of retained earnings at $66.3 million and a $49.2 million reduction in ALCI as interest rates softened somewhat. Earnings for the quarter were $103 million or $0.51 per share, with adjusted earnings of $0.54 per share. Return on assets was 1.84%, adjusted to 1.95%. Return on tangible common equity was 19.75% or adjusted to 20.90%. Tangible book value of $10.71 reflects an increase of 5.4% from the first quarter last year.

No, I think that is a record, you're right.

Net interest income was $214,595 versus the fourth quarter of last year $215,666, which was remarkably flat. Total revenue was $248,759. The difference there is the fair market adjustment on holding company bank stocks and preferreds, which hit us for about 11.4%. We didn't sell them, so we haven't lost that money; we expect to see a recovery there. Margin improved again to 4.37% from 4.21%. This time last year, we were at 3.21%, so that's a 116 basis point improvement, which is pretty impressive. Non-interest expense came in at $114 million versus $118 million, showing a decrease of about $4 million over last quarter. The efficiency ratio was 44.80%, adjusted to 43.42%. Tangible common equity as a percent of total equity was 10.33% versus 9.66%. The common equity Tier 1 ratio, both before and after taking all losses, places us in top-class with the best in our sector. The yield on our securities book is 3.30%, and our loan book yield is 6.64%, up from 5.29% a year ago, reflecting a 135 basis point increase. We bought back 590,000 shares during the first quarter and have repurchased over 250,000 shares so far this quarter, mostly through our 10b5 filings.

Well, John, you made me feel comfortable just listening to your numbers and the strength and soundness we have. I will compliment you and the board on that. It’s been entertaining every quarter in the banking world. We just keep focusing on the basics. I know Stephen and Kevin will give a bit of color on loans and deposits. We’ve seen positive trends lately around deposits. Our deposit to loan ratio is improving. I’m proud to say we’re also expanding into additional areas, creating new lines of business.

Thanks, Donna. I'll start with the topics of liquidity and funding. We've seen a shift in deposit balances going to investment firms and money market mutual funds over the last three quarters. Total deposits declined slightly less than $500 million in the quarter, which was spread fairly evenly throughout the past three months. This was our lowest quarterly decline in total deposits since the Happy Acquisition one year ago. Absent outflows this month related to tax filings, we hope to start seeing a leveling off. Our analysis of uninsured balances shows they still represent 29.9% of our total deposits. While our size and strength allow us to expand and take on larger relationships, we still believe in the franchise value of core, granular deposit bases. Broker deposits comprised 2.6% of total liabilities and we have limits allowing us to grow over $1.3 billion, if necessary. Our top 10 depositors account for only 6% of our total balances, with only two considered uninsured or uncollateralized. Our updated deposit base review shows nearly 500,000 accounts, with over 70% open and active for at least three years. New account opening activity continues to be strong with over 14,000 new accounts opened in Q1.

Thanks, Donna, and good afternoon, everyone. As John noted earlier, a key contributor to the strength of Home Bancshares is our strong asset quality. Non-performing loans and assets remain low at 0.51% and 0.33% respectively. We have two C&I credits totaling about $6 million in this quarter, while our internal analysis shows we expect a loss of approximately $5 million, which is manageable within the larger portfolio. I am pleased to report multiple buyers are interested in the recently discussed assets.

Yes, Kevin, thank you. The division Shore Premier Finance in the marine space also enjoys good asset quality. We have not seen any deterioration; in fact, we've seen improvement, which is a positive sign.

Overall, I believe it was a strong quarter. We've weathered the storm and should be proud of the performance. There will be opportunities on the buy side, and we are monitoring the market. Our focus will remain on customer service and maintaining our strong position in this industry.

Thank you, everyone, for the powerful insights shared today. Now we will open the call for questions.

Thank you. The first question is from Jon Arfstrom with RBC. You may proceed.

Hey, good afternoon, everyone. Just curious if you are starting to see some deposits flow back into the bank after the decline?

Yes, we are starting to see some signs of that. Though we faced some deposit losses, we were prepared. We've seen some inflow even during tax time, which has been encouraging.

Regarding deposits, I can confirm that we've had some unexpected additions, reinforcing our customer relationships.

Thank you, and I'm curious about margins. Do you believe you can keep pushing this margin higher?

I believe we can, yes. We are not in a position where we need to pay high rates on deposits, which helps our margins. Our focus is on maintaining relationships and careful analysis without being overly aggressive.

Hi, thanks guys. Good afternoon. Wanted to start on the M&A side. You mentioned being opportunistic. Any color on what's in the marketplace today?

We are looking at some different assets, but most banks are loaned up with low capital ratios. We will not stretch for acquisitions and are focused on building value internally first.

Hey, guys. Good afternoon. Just wanted to touch on the level of criticized loans or classified loans. Can you give me an update?

We've seen a slight increase in criticized loans, but it’s manageable and we're working on improving those relationships.

I feel confident in our overall position despite market uncertainty. It's important to keep a solid foundation without being overly optimistic.

Just wanted to ask what you're hearing from regulators currently, especially after recent banking failures?

I fear new regulations may come down on banks as a response to what has happened. However, we have a strong relationship with our regulators who are diligent in their practices.

Thank you everyone for your participation today, and we look forward to connecting in the next quarter.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.