Home Bancshares Inc Q1 FY2024 Earnings Call

Greetings, ladies and gentlemen. Welcome to the Home BancShares, Incorporated First Quarter 2024 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. Company presenters will begin with their prepared remarks, and then entertain any questions. The company has asked to remind everyone to refer to the cautionary note regarding forward-looking statements. You will find this note on Page 3 of the Form 10-K filed with the SEC in February 2024. And this conference call is being recorded.

Thank you. Good afternoon, and welcome to our first quarter conference call. With me for today's discussion is our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Stephen Tipton, Chief Operating Officer; Kevin Hester, Chief Lending Officer; Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. To open our discussion on the quarter today, we will begin with some remarks from our Chairman, John Allison.

Thank you, Donna, and welcome, everyone. Welcome to Home BancShares first quarter earnings release and conference call. We released our results this morning prior to the market opening. And overall, it was a good start to a volatile year. Anytime you conduct the trends with positive results across the board on net interest income, revenue, EPS, margin, increases in both loans and deposits while maintaining our strong liquidity position and reducing expenses by over $3 million below the first quarter of last year, '23, is a big win. Home, with our fortress balance sheet, is one of the strongest banks in America and having the ability to pay out all uninsured depositors should provide comfort for all our customers and shareholders. As I've said in the past, we will not be the highest when it comes to paying rates on your money, but you will not have to worry about getting your money anytime you need it. During this crisis, we have never run a CD and paid these outrageous unprofitable prices for deposits like many troubled banks are doing today. This did not happen by luck. Your management team has remained very conservative during what appears to be a mirror image of the inflationary Volcker times of the late '70s and the early '80s. We have been active in recognizing the danger of the Volcker years and have managed accordingly. This one is not over yet and will not be over this year. Inflation is and will continue to be with us for the foreseeable future. Our government is totally responsible for this situation. Irresponsible spending is the direct cause of all our inflation in this country. Both Republicans and Democrats, and more so Democrats are spending like drunken sailors and even trying to relieve student debt in an attempt to buy votes with our money. They caused it and now Powell and the Fed is desperately trying to stop it by avoiding a recession. Really, they should all be punished for their action. Their stupidity is the reason for inflationary problem. The problem is that most of them couldn't run a washing machine. The buck stops with them. We have not felt the full impact of the increase of oil prices rolling into our economy. Coming from the manufacturing business, the impact of oil is not just at the service station as we learned through experiences past oil spikes, but multitudes of products derived from oil are byproducts thereof. Earlier this year, the market was signaling six cuts. Let me say this: if we had to have six cuts, Donna, this country would have been in a lot of trouble. I made that statement earlier in front of her. She said, we wouldn't have been in trouble, and I said I didn't say us. She said, well, make it clear that we say the country would have been in trouble. We called for higher for longer before that was popular. We forecasted one and not more than two rate cuts. I'm beginning to believe that may be high. The only caveat coming is politics. I think instead of cutting rates because it's not the right time, the Fed needs to consider raising rates again. President Clinton, when inflation was sticking its ugly head during his term, surprised everyone with a 50-basis-point jump in rates when no one expected it. Within a short period of time, he dropped back 25 basis points, but he did stop inflation. They say the President has no control over the Fed or the Chairman, but he did during the Reagan administration. When Volcker was called to The White House to meet with President Reagan, by Chief of Staff, Jim Baker, the meeting took place in the library and not the Oval Office. And according to Volcker, the President never said a word. Baker asked Volcker to sit down and then he looked at him and said, the President of the United States is ordering you not to raise rates during an election year, end of meeting. I just finished the book, and that little duel was in there. I thought I'd share with you because it does maybe politics do involve themselves. By the way, Volcker thinks the reason for the library meeting was not because there's no recording device in that room. And as Richard Nixon found out in the later years, there was one in the Oval Office that paved the way for the Watergate fiasco. The profitability of our bank is simply based on earnings, revenue, and expenses. I understand that's a simple approach to looking at our company. But how much revenue was generated over the quarter and how much did it cost us to generate that revenue? Therein lies the efficiency ratio. How much does it cost to make a dollar? We have to give credit where it's due, and that belongs to the revenue side and the retail side of our company. Our loan teams have continued to write loans in a way that is accretive to our overall yield. As a result, it has been pleasing to watch the overall yield of the entire book continue to hit a new high of 7.34%, and that is without any event income, I believe, Stephen, is that correct?

Correct.

All while maintaining strong asset quality. Congratulations to our entire lending team. It is because of you and your strong relationship that you've developed one-on-one with our customers. You continue to answer the call to do the best for owners, shareholders and provide opportunities for Home to remain one of America's best and most profitable companies. During the quarter, our lenders originated $954 million in loans at a record rate of 9.28%. Only about 40% of that funded, I think, less than half?

Yes, sir.

We appreciate the support of our customers and shareholders as we maintain the strength of our balance sheet during some of the most turbulent times in Home's 25-year history. However, without deposits, which I refer to as the raw material, we wouldn't be able to issue loans. This highlights the significance of the retail aspects of our bank. In these uncertain times, depositors have the freedom to choose where to go for returns, depending on their risk tolerance. Many banks promoting high-rate CDs might struggle to honor all insured deposits. Recently, on my way to my grandson's game at Greenbrier, I noticed a sign at one of these banks advertising 6.1%. There's no way they can sustain profitability at that rate. Anyone with signs offering over 5.4% should consider the current borrowing rates, which hover around 5.4%.

That's fed funds, yes.

Fed funds at 5.4%. So if you're paying more than that, to me, that says I have borrowed all the money I can borrow and I got to get some money from the customers, whether it's safe or not. Our retail staff who deals directly one-on-one with our customers has built relationships with them and has been able to hold deposits at some lower costs because our customers trust us to protect their personal deposits by having the ability, again, to pay out all uninsured deposits. In this cycle, deposits have been king. Lack of available deposits is what took down SVB, Signature and Republic. Early in the pandemic, we were flushed with excess deposits, but we were afraid that the excess deposits would eventually run off by our customers spending that money. That's pretty much exactly what happened. And we were suddenly scrambling to have enough deposits for our loans, plus being able to pay out uninsured deposits. I thought of the days where we did not even begin to recognize the importance of the deposits as I watch SVB and Signature banks being taken apart in a matter of days. I remember us trying to move some deposits out of our bank. How wrong and misinformed can one be? Protecting and holding our deposits and not putting depositors' money into long-term securities are the main reasons Home BancShares is in a great financial position than it is today. There will be no need for the expense side if there were no revenue. The lifeblood of this company is revenue. Nothing happens until something is sold. There is nothing to account for. There is nothing to regulate. There's no need to hire people. The expense side's sole reason for existence is to account for and accommodate the retail and revenue side of this bank. We have worked together as efficiently as possible and not against each other. We have to support our retail and revenue horses. They are the ones that make it happen. They are the rainmakers. They don't deal from a desk in the back office. They're on the firing lines one-on-one with the customers. I have some concerns about our current position in this cycle, particularly regarding the many struggling banks that can no longer utilize the federal lending program, BTFP. Will the cost of funds keep rising? Will certificate of deposit rates reach 7%, 8%, or 9%? Could this lead to bank failures that we might have seen earlier if the Fed hadn't previously supported the sector with the program? Have these banks managed to recover enough to pay some or all of their uninsured depositors? While the situation has been alarming, it could become worse. I believe the Fed may be compelled to extend the program to prevent numerous bank failures. I can assure you Home will be one of the good banks, helping the regulators to clean up the mess. These banks with 8% or less capital and 110% loan-to-deposit may wish they had found a partner before it was too late. When you look at margins of some banks, you see some with a 2 handle. And believe it or not, there's some in Arkansas with a 1 handle. What were they thinking? I guess, better said, they weren't thinking at all. There are entirely too many banks running around in the market doing stupid things to appear to not have a clue what they're doing. Don't shoot me, but I'm strongly in favor of capital requirements being raised into the teens. I call them clutter banks because they don't have a clue in most instances and they just get in everybody's way and continue to do silly and stupid things. Despite the serious situation, the trends at Home are encouraging and seem to be improving in terms of deposits, loans, margin, efficiency, net interest income, expenses, and asset quality. We anticipate a minor issue arising from Texas that we need to address. There are some matters in Texas that should have been handled earlier, but they are manageable. We did make some loans that were questionable, and we'll need to take care of those. Kevin will discuss some of these issues further shortly. Let's go to the numbers. Earnings were a little over $100 million. I think we even budgeted, Brian, we budgeted down. Didn't we?

No. That is correct. We didn't do that.

Everyone expressed surprise that we achieved these results, and I’m proud that we did. Revenue was $246.4 million, which exceeded expectations. Net interest income reached $205.5 million, and that positive trend seems to be continuing into April. The reserve for loans stands at 2% or $290 million, and we have $3.63 for every $1 of nonperforming loans. We experienced loan and deposit growth of about $80 million each for the quarter, achieving a good balance. Loans originated during the quarter totaled $954 million at a rate of 9.28%. Great job to Kevin and his team. The return on assets was 1.78%, and the efficiency ratio improved to 44.22%, which is much better than our previous levels in the 46% and 47% range where we were heading in the wrong direction, but we managed to reverse that. The earnings per share were $0.50. On a like-for-like basis, the margin was 4.21%. I won’t get into the specifics of the calculations, but I believe it was 4.13% previously, and you had 2 basis points of event income that contributed to 4.11%. If you recall, we adjusted for that at 10 basis points. So on a like-for-like basis, we're looking at 4.21%. The tangible book value is $11.79, with a return on tangible common equity of 17.22% and a capital ratio of 14.3%, showing slight improvement from last quarter. We also closed 4 branches in March, around the middle of the month, and we might see additional savings from that decision. We'll take the blame for a lot of expenses to get out of control and worse than that, we'll take responsibility for not taking actions earlier. Sometimes, we don't see the forest for the trees. Even though we started late, noninterest expense for the first quarter of '24 was less than the first quarter of '23 by over $3 million. Keeping expenses under control will be an ongoing project here. Because of our earnings being off and expenses continued unabated last year, the Board decided it's best to hold any dividend increase until later this year. As you know and would expect, my wife was not happy with that decision at all, no dividend increases. We'll ask the Board of Directors to address that again in the future. Donna, it wasn't quite as good as I wanted, but I'll take it. I'm sure there may be a few banks that might outperform us this quarter, but if so, it'll be a very small group, and those that beat us, congratulations to them in a tough environment. It has been a tough couple of years attempting to overcome the damage done to our company by a group of West Texas individuals. The lawsuit we filed against the individuals is and will continue going forward until our shareholders receive proper restitution for acts of others. We have the fiduciary responsibility to protect our shareholders with what appears to be intentional damage, which includes possible criminal charges. This is a matter for the court and law and juries to decide and we'll leave it to them to resolve. With this top-performing team of revenue horses and deposit gatherers, coupled with their strong relationships with their customer base, I would expect similar positive results next quarter. Trends are continuing to look pretty good and showing improvement in the revenue area in April. I hope that will hold throughout the quarter. If that holds, we'll have another great quarter, and we could be off on really a good year. I want to thank everyone. One change from next year, Ms. Donna, is we're going to report and we're going to report our earnings the night before. We've done it the same way this time as we have in the past, but we're going to change that next quarter.

Yes. Okay.

And I'll give it back to you.

Okay. Well, thank you for the colorful commentary as usual. And I actually think it's a great start to the year if trends continue. So I expect that from this team. Now Stephen Tipton will share operational results.

Thanks, Donna. I'll start with the net interest margin that Johnny referenced in his comments. As we discussed on the January earnings call, we added approximately $500 million in cash through borrowings late in Q4. That excess cash affected the Q4 net interest margin by 1 basis point and the Q1 2024 net interest margin by 10 basis points as we had the cash for a full quarter. Additionally, we had event income in Q1 2024 that accounted for a 2-basis-point increase to the margin. Normalizing for those items, we would have seen a nice 3-basis-point improvement in the margin on a linked-quarter basis. We continue to closely monitor asset repricing against the increasing cost on the funding side. The yield on loans, excluding the event income improved to 7.34% in Q1 and outpaced the increase in total deposit cost by a couple of basis points. During the quarter, total deposit costs increased 13 basis points to 2.22% while the yield on loans, excluding event income, increased 15 basis points to 7.34%. We will continue to negotiate pricing with core customers as we have been, but we are encouraged to see the pace of increases on the deposit side begin to moderate. Switching to liquidity and funding. It was great to see an increase in deposits again in Q1 with solid growth from several of the Florida, Texas, and Arkansas regions. Total deposits increased $78 million for the quarter. The deposit mix movement was similar to prior quarters as CDs continue to be in focus for the consumer. Noninterest-bearing balances grew by $30 million in Q1 and accounted for 24.4% of total deposits. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.2% of liabilities. The loan-to-deposit ratio was in line with the prior quarter standing at 86% as of March 31. On the asset side, in-period loan balances increased $89 million, led by growth from CCFG, Shore along with several individual regions within the community bank markets. On loan originations, as Johnny mentioned, we saw a volume of $954 million in Q1, with approximately 2/3 of the closing volume coming from the community bank regions. Yields on those originations continue to improve with an average coupon of 9.28% in Q1. Payoff volume declining from Q4 was a total of $549 million, which appears to be the lowest level we've seen in nearly 5 years. Closing, with the previously mentioned strength of our company, all capital ratios remain extremely strong with a tangible common equity ratio of 11.06%, a leverage ratio of 12.3% and a total risk-based capital ratio of 17.9%. We repurchased 1,026,000 shares in Q1 under our repurchase plan, and we've repurchased about $400,000 or so far this month through our 10b5-1 plan. So we continue to be active there.

Thank you, Stephen. Now...

I just want to mention that we experienced a 13 basis points rise in our cost of funds. However, Kevin's team and Chris' team managed to achieve a 15 basis points increase on the yield side. I consider that as successfully outpacing the cost of funds. Sorry for the interruption. Kevin, please continue.

Go ahead, Kevin.

All right. Thanks, Donna. Good afternoon, everyone. As Johnny said, it is pretty simple. At the end of the day, it's just revenue and expense. On the expense side, our producers continue to get the job done. We continue to see improvement in loan yield and in net interest margin when adjusted for the Fed arbitrage. Volume was impactful as well, resulting in a third consecutive quarter of loan growth. I'm encouraged that we're continuing to see very good opportunities in our high-growth markets. Leverage is the question, but fortunately, there is plenty of equity available to get deals done today. The synergies that we've seen in our legacy footprint are becoming evident and post-acquisition happy. It took us a little longer to get there due to the orchestrated exodus. But when you continue to focus on the right things, it's just a matter of time before it clicks and you see the benefit. On the expense side, in the fourth quarter, we took the opportunity in what I would consider to be a challenging M&A market to make some overhead adjustments. Those changes really bore fruit in this quarter. The effects of improvement on both sides of the ledger are impactful. We will continue to look for opportunities to be more efficient as that has been our hallmark, but there are definitely opportunities to bring on producers who fit our culture, and we’re not hesitant to do so. While asset quality remains strong overall, we observed a slight increase in nonperforming loans, rising by 11 basis points to 0.55%. This rise was focused on a few smaller credits. As a reminder, we mentioned early in the acquisition that although these credits had a relatively higher level of problem loans compared to Home, this did not directly correlate with losses since many issues were resolved between due diligence and closing. We will see if this trend continues as we move ahead. We recognize that a higher-for-longer scenario puts more pressure on many projects. We fully expect that we'll see an occasional problem arise from time to time, but we're confident in our underwriting and in our geographies. And in addition, we have a fortress balance sheet with plenty of capital and a 2% allowance for credit losses. Lastly, an update on the three credits that we discussed last quarter. Subsequent to quarter end, the Oklahoma Marina note sale has closed, and as we anticipated, it cleared out the balance that existed at quarter end. The Miami property is still under contract, and there's no change in the timing of the approvals needed to close. I would anticipate that's probably a second half of the year item. I will turn it over to Chris Poulton to give an update on the California property and then a general update on CCFG. Chris?

Thank you, Kevin. Happy to provide an update. As I reported during last quarter's call, during the fourth quarter of last year, we transferred into OREO, the leasehold interest in approximately 50% occupied office building located on Ocean Avenue in Santa Monica, California. At that time, we identified three immediate priorities for the property. The first was to resolve some outstanding legacy litigation between the fee owner and our prior borrower. The second was that we were going to move our L.A.-based West Coast regional office to the facility. And the third was we wanted to engage with the existing tenant to determine their potential needs and stabilize existing tenancy. During the quarter, we made progress on all three of these areas. First, the outstanding legacy litigation was resolved with the landlord withdrawing their claim against the bank. The second is we did complete our office relocation in February upon the termination of our prior office space lease. And the third is that in discussions with the existing office tenants, they expressed the desire to remain in the building longer term and potentially expand their existing space. In the coming months, we'll shift our focus to finalizing lease extensions and expansion for existing tenants as appropriate and determine the remaining available space for lease. We anticipate at least one floor being available for lease and have begun marketing this space. In the past few weeks, we've hosted a number of showings. And while showings don't necessarily equal leases, and we do expect it may take some time to lease the available spaces, it's encouraging that there appears to be an increasing interest in our well-located office space in the Santa Monica submarket. We'll continue to provide some updates on this building as we go forward. But I think we're at least encouraged that we were able to accomplish what we wanted to in a fairly short period of time. Overall, for CCFG, we continue to see a good pipeline and good demand for our product. I think as many of you know from prior conversations kind of during these types of times or when we get to see some interesting transactions. And so I think we've done well. In the first quarter, we'll see that continue on into the second quarter, though I do expect that, eventually, it slows down a little bit, but we continue to be encouraged with the quality of product that we see. And we continue to see some nice payoffs and pay downs in the portfolio, especially in some credits that we were probably happy to see go. With that, Donna, I think I'm passing it back to you.

Thank you, Chris. Congratulations on the progress on the office building. That's great. Johnny, before we go to Q&A, do you have any additional comments?

I want to highlight that we maximized all our offensive measures and revenue opportunities. We engaged every aspect of our strategy. We experienced growth in both loans and deposits, which is a positive sign. Our asset quality remained strong, and we made significant improvements on the expense front. Overall, I don't have any major concerns for the quarter. As I mentioned earlier, feel free to ask any questions, as I believe we have solid answers for them. That's all from me, Donna.

Okay. I think we're ready for Q&A.

We're ready to go to Q&A.

Our first question comes from Catherine Mealor with KBW.

Brady always said this was his favorite conference call. And now I understand. I'm so glad I could be a part of this now. Really appreciate your comments, Johnny. I wanted to start maybe with credit, and I think, I appreciate the update on those three credits and then the commentary on the small increase in nonperforming assets. I was curious if you could just give us an update. I know mid-quarter, there was an increase in classified assets that you highlighted in your 10-K. And I think it was mostly related to one credit. But I just wanted to see if you could give us an update on that? And then also if there was any change in classified into this quarter?

Catherine, this is Kevin Hester. I'll address the overall question first. Overall, classifieds are down by approximately $25 million in total. Specifically, the credit we discussed in the fourth quarter that saw a significant increase is something we're continuing to manage. From a broader perspective, we're daily focused on managing cash flows. We noticed a drop of about $10 million in the operating line, and we're actively working to secure additional collateral to strengthen our position. We feel it's going as we anticipated. We expected it would take two or three quarters to resolve the issues that were apparent, and we believe we're making progress and staying on track.

There are two components of that credit. One involves tugboats and barges that are well-collateralized, while the other is a line of credit that is semi-collateralized. We've established a policy where if one piece of credit is classified, then all of it is classified. We have significant equity in the barges and tugs, which make up the majority of the value. The remaining portion is between $47 million and $50 million, associated with the line of credit. I wouldn’t have classified it otherwise; however, we handle it all. I don't see the need to classify the other assets since I believe they are secure. Acquiring a barge or tugboat today typically takes around two years, so their value remains strong. Our customer faced some challenges during this process. They export a lot of materials, but their transport bridge was unexpectedly closed, creating complications. We pulled the line of credit, but they secured other lines to maintain operations. We expect to see paydowns exceeding $20 million this month, and we'll keep you updated. If there's any exposure, it is limited, perhaps around $30 million in uncollateralized amounts. However, they are making payments and things are functioning well so far. That summarizes the current status.

Great. I appreciate that. And then a question on the margin. Margin is relatively stable if you kind of back out some of the excess liquidity. As you think about deposit cost going into the next couple of quarters, it feels like many of your peers have talked about this quarter still seeing pressure on deposit costs, but we're a quarter or two away from that stabilizing. Can you talk a little bit about where you think you are in that process, assuming let's just say, rates are stable for the rest of the year, kind of outside of any increases that you were mentioning, Johnny, or even cut. But if rates are just stable for the rest of the year, where do you think your deposit costs finally kind of peak?

Catherine, this is Stephen Tipton. I believe others are expressing similar feelings. In the past quarter, the rate of increases has slowed down. We saw a rise of 4 basis points in January and another 4 in February, with March being relatively flat. These figures are a decrease from the high single-digit to low double-digit increases we experienced last year. While we still have a CD portfolio maturing each month, which is relatively small compared to the overall, we are managing it on a selective negotiated basis. This has provided some upward movement, but as liquidity remains stable, we've been able to streamline some of our higher money market rates. In March, we managed to lower a few rates, which helped mitigate some of the ongoing increases. Looking ahead, we are targeting low single-digit increases. Overall, as Johnny noted in our opening comments, we are outperforming on the asset side compared to any developments on the funding side.

The growth we observed is continuing into April. We are comparing daily reports and looking at the first 17 days of April against the first 17 days of January. So far, we have seen a nice increase during this period. We expect significant repricing this quarter, with some rates moving from 4.5 to 9 and others from 4.5 to 8.5, which should provide a boost. Additionally, we have been working on our office building in Amarillo, Texas, and it appears we may have a large tenant for 240,000 square feet. If that lease comes through, it would be a significant advantage for us in the Texas market.

We now turn to Brett Rabatin with Hovde Group.

I wanted to start with expenses. And you talked about closing 4 branches. And Johnny, I was expecting you to be pretty tight on expenses this year, not that you're not always, but just kind of given the revenue headwinds the industry is facing. Is the level of expenses in 1Q, is that a good run rate to think about for the remainder of the year? Or are there things, either plus or minus, that might affect that going forward?

I believe that number is reasonable. We're not hiring anyone at the moment, and we will keep focusing on our expenses. It's an ongoing effort. If we don't maintain that focus, expenses can quickly spiral out of control as they have in the past. The forecast I received initially indicated a higher figure, and seeing the current number is significant. We're looking at a reduction in workforce of around 50 to 70 people, and that will continue. The real challenge facing all banks right now is inflation, which is driving up costs across the board. We managed to cut $3 million in expenses during the quarter, which is a decrease from the first quarter of last year. I consider that a significant achievement, and I hope to see similar results in the fourth quarter and beyond. We intend to maintain this momentum, and I am committed to ensuring we don't lose control of our expenses again.

Okay.

It was a battle to get it down, but we got it done. So...

Okay. That's helpful, Johnny. And then I've had a few folks asking early in earnings season, one of the Northeast banks, indicated seeing some weakness in marine dealers and your portfolio, I think, and what you guys do is obviously much different than maybe what some folks realize. Can you just talk about what you guys are seeing on the marine side? And just any activity? And just I know at one point, the inventory was hard to get, and maybe that's changed somewhat for the industry, but just any thoughts around the marine portfolio and what you guys are seeing there?

Brett, this is Kevin. Our operations are quite distinct from what you might have heard in the news regarding issues in the sector. Primarily, our focus is on vessels registered with the Coast Guard that are 26.5 feet and longer, and we generally deal with an average loan size of 750. All dealer advances are backed by the original Manufacturer's Statement of Origin and, in most cases, by a manufacturer's repurchase agreement. This sets us apart from the smaller end of the market, which involves tidal boats and trailers. Additionally, our team has found it easier to acquire inventory, which has been beneficial since previously they faced challenges with stock shortages. In reviewing the annual reports, I haven't identified any weaknesses in this area.

That's helpful. If I could ask one last question, Johnny, your comments about capital were a bit unclear to me. You mentioned postponing a dividend increase, but it also seems like you're less optimistic about mergers and acquisitions in the near term, and your capital ratios are very strong at 14.3% CET1. I'm curious about your thoughts on the capital levels, given that you've conducted some buybacks in the second quarter. How do you plan to manage those ratios to prevent them from increasing further?

Well, because we make a lot of money, we have the ability to buy back $22 million worth of stock for the quarter, paying $36 million in dividends. And what's the other button?

AOCI.

AOCI impacted us by approximately $25 million, but we still managed to increase our capital. Therefore, I believe we will maintain our robust capital base for some time, which seems to be the right course of action. We didn't have the chance to advocate for ourselves when the Federal Reserve initiated their lending program. However, if by next March everyone has to settle their obligations with those whom they will not receive payment, the actual returns on those securities won't be as favorable. Instead of getting a dollar for a fifty cent security, they might only receive forty-five cents. I believe that situation will evolve, so we will continue to build capital and maintain our current position while seeking opportunities for our company, as I believe there must be some prospects for Home BancShares. We're prepared to take action as the banking sector faces difficulties. We have the necessary capital, capability, and expertise for acquisitions. However, we haven't made any moves because of the Federal Reserve's interventions. If those interventions cease next March, we may witness a significant number of bank failures. In the meantime, we are focused on our operations and continuing to generate strong profits. As demonstrated this quarter, we have performed exceptionally well. If interest rates remain stable, we will keep executing our current strategy effectively. Overall, we are in a strong position, and this quarter's performance reflects that success. So I think we'll continue to hit every button going forward here and have a really, really good year for Home BancShares. So if we found the right trade to do it, we'd trade today, but it's awfully difficult to do a transaction in this market unless you find somebody is really in trouble and you pick that piece up. So I think we're going to see some of that, though, particularly if the Fed stops that program because that's going to change the world for thousands of banks. I think there'll be more bank failures if that happened. So my prediction is, the Fed will extend it. I don't know if that answered your question, Brett, but that's the way I'm seeing the world right now.

Yes. That's helpful. When your only real issue with capital is piling up, that's a good problem to have. Congrats to all the metrics this quarter.

You bet. Well, capital is king, deposits are king, and loan rates are king. And that's kind of how we've looked at it. Thank you for such support.

Our next question comes from Jon Arfstrom with RBC.

Question for maybe Johnny or Stephen. If the Fed doesn't do anything on rates, can the margin just grind higher over time, and I'm thinking more medium term? It seems like the ingredients are all there with the slowing deposit cost pressures and the higher loan yields. But how do you think about that?

I can address this, and then Stephen can provide more detail, but we're anticipating significant price adjustments on our loans. These changes will generate millions of dollars in income between now and the end of the year due to rate adjustments on some fixed-rate loans, specifically those that were originally set at around 4.75%, which will be increasing. I believe Stephen is making progress on the deposit side and Kevin on the loan side, and they are both doing an excellent job of enhancing our margins. Therefore, I predict that our margins will either remain stable or improve. Everyone is focused on this goal, and I don't see any signs of regression. Currently, we’re not moving backward, and I want to ensure this momentum continues. I'll hand it over to Stephen, who deals with these matters daily, while I engage with it more broadly.

No, I think that's fair. We discussed last year that we had around $1 billion in loans being repriced over approximately five quarters. For the rest of the year, we have nearly $700 million in loans that are below 6, which is included in that amount. Johnny mentioned that there are some larger credits coming up that are in the 4s, but there is $700 million below 6 that, assuming we maintain our credit quality, should allow us to see significant improvement in our spreads. Additionally, unless there are significant changes in our indexed deposits or factors related to the Federal Reserve, if we maintain our current position, I believe the performance in loans can balance out any impacts from the deposit side.

Fair enough. And Kevin, what's the reaction like to the new pricing when these loans renew? Curious about kind of the competitive environment and then also what you're seeing for non-CFG pipelines.

As you would expect, nobody likes seeing rates rise from the 4s to the 7s, 8s, or 9s. But that is the reality, and it will happen regardless of where they go. It's just part of the timing. Pipelines look good. I can’t speak for Chris, but from the community bank perspective, we're in strong markets in the Southeast. We're still experiencing solid activity and are generally able to structure deals as needed. Occasionally, there are some unexpected situations, but for the most part, we can set things up as required and achieve the pricing we're aiming for, as indicated by our performance this quarter. I'm optimistic that we'll be able to continue this trend for a while.

Okay, good. And Chris, if I heard you correctly, please continue, Johnny.

I didn't mean to interrupt you, Jon. I was going to ask you that, too. We're going to try to get it up, get the margin up if we can.

Yes. Yes, is there a Johnny prime today? Or are you satisfied?

I don't know, it's kind of Johnny prime. We just had to put it back into. That's funny. I've forgotten Johnny prime. We actually have some loans still on the books at Johnny prime.

Our next question comes from Stephen Scouten with Piper Sandler.

I guess, I might have missed it. I had some technology issues during some of Kevin's statements, but did you guys talk further about these bumps that you referenced, Johnny, out of the state of Texas and what that looks like?

Not really.

No, I can give you a little bit of color. I mean there's probably half a dozen credits this quarter that went nonperforming that were not last quarter. They were all $3 million or less and almost all of them were out of the Texas market. And some of them we've been talking about for a while, a couple of them not, but nothing that I'm overly concerned about, but still, it's stuff you have to work through. So we will just continue to do that.

Since we closed Happy, the situation has been fluctuating. Some clients are paying while others are not. We’ve decided to focus on our Texas loan officers to either get them back on track or let them go. If we were to lose all of them, it would mean a loss of around $8.5 million to $9 million, which isn’t significant for us, but we want to resolve the issues. Some are still making payments, but it’s time to address the situation and fix it.

Yes, you should consider that they also had acquisitions on their books. They had just completed an acquisition of Centennial Bank, and they were in the process of integrating it. So some of those are also considered acquisitions for them.

That's correct. Two of these loans in Texas are concerning to me. One of them was made around the time we closed the transaction, and it's a loan we wouldn't make today. It's the Marina loan, and it has been sold; Kevin managed to get that deal closed. I owe him a bottle of WhistlePig for getting that done before the end of the quarter. The other loan is an $11 million apartment complex, and I'm unsure about its status. It’s not a crisis, but there could be a potential loss of around $1 million, either way. We're just focused on cleaning things up. Some of the assets we acquired had issues that hadn't been addressed. Nothing major.

He reviewed all the due diligence related to the problem loans we had. By the time we held our first asset quality meeting after the acquisition, many of those issues had been resolved. As I mentioned earlier, their history shows they had more problem loans than we did, but many of those did not result in losses. They have successfully addressed a lot of these issues over time. Part of this success is due to being in a favorable market, similar to our situation in Arkansas and Florida. We'll see if this trend continues, and I expect that it will.

You're right, when interest rates suddenly rise to 7%, 8%, 9%, or 10%, we will start to see some issues. The key difference now compared to 2004 and 2005 is that people actually invested money in these deals back then, whereas in those earlier years, there was no capital invested. Today, people have equity in these deals, even if it may only be around 20%. While some may not have significant equity due to high interest rates, they are not facing major losses either. In 2003, 2004, and 2005, nobody had any investment at stake, and when issues arose with loans, they simply walked away. That doesn't happen anymore. We haven't had anyone walk away from us—though there were issues with the Marina property, but we have moved on from that. Kevin managed that situation well; he found buyers for those assets. Overall, things are progressing positively.

Yes, we're continuing to tighten up and manage those things as they are coming along. I think you're going to see progress continuing to be made here moving forward just because we still believe in those relationships, and we still are in really good credit quality.

Okay. Good. My only other question is really about looking ahead to growth. Chris and the CCFG team had a solid quarter, and organic growth in the legacy markets showed some increase. Is that growth due to your patience and having liquidity available to invest when others aren't, or is it more about you becoming more optimistic about the overall environment, or perhaps a combination of both?

I’ll let Chris address his perspective. From the viewpoint of a community bank, I believe it’s more about having the resources available. We notice that many are not participating in certain aspects of the market right now, but we are actively engaged. We consistently have funds ready to lend, so we will proceed in our manner and ensure it is done correctly. It’s mainly that we have funds available for loans while others are temporarily stepping back.

Chris, do you want to jump in there?

Yes, Kevin, I couldn't have said it better. I mean last year, I think we did $750 million in volume last year, which is down kind of from what we normally do, but part of that was because we just didn't like some of the things, and there were some people doing some things, et cetera, and we felt like, at some point, the market would come back our way. And so having not lent the money last year, we have the money available to lend this year. I can't say that's true for everybody. Will it change as the year goes on? Yes, I think people come back into the market if they start to feel better about it. We have the benefit of never feeling good about the market. So...

Yes, you're very consistent there, Chris. I appreciate that a lot.

Our next question comes from Brian Martin with Janney.

Kevin, regarding those credits in Texas that Johnny mentioned, can you clarify the exposure? Johnny mentioned a figure, but I'm unsure if he was referring to the credits or the loss content. I thought he said it was around $8 million or $10 million. I'm just trying to understand the level of exposure regarding those credits compared to the loss content.

So I was talking about the increase in nonperforming loans quarter-to-quarter. He was talking more about overall exposure, if everything that we see in our asset quality meetings just went in the toilet. So we were talking about two different things.

Okay. So what is the total exposure of those six credits? How significant is that exposure, and what potential loss do you foresee?

I think we are looking at a couple million, maybe $2 million or $3 million. At this point, I'm not convinced we will lose anything from any of those credits that changed this quarter, but I believe they are all secured by real estate. Even if we were to foreclose on all of them, there is likely to be some level of recovery. Therefore, I don't anticipate it being a significant amount. I was mainly referring to the changes in balances from quarter to quarter.

Yes, that's referenced. It was a max loss so.

Understood. I got it. Okay.

Regarding the margin with the bank term lending program, what is your outlook? Johnny, you mentioned that you believe it will continue. In the last quarter, what was your decision to maintain its use? Currently, it's factored into the numbers, so do you expect to keep it going and see the same drag on the percentage compared to the dollars you're receiving in the near term?

This is Brian. I'd say that it's probably going to be status quo for at least a couple of quarters. If there's no drops in the Fed funds rate, we might as well hang on to the money. We'll have to pay it back, I believe, on January 16. But right now, we've got a positive arbitrage on it. So there's no real reason to pay back unless rates go down.

And you look at the balance sheet...

Yes. Just wanted to make sure that. Okay.

We got the cash paid back, so we don't have to go borrow it, I mean.

Got it. Stephen, you talked about the repricing opportunity, mentioning that there’s an expected pickup of $600 million to $700 million this year. Does this opportunity carry through to 2025, or are there expectations for similar repricing opportunities in that year?

It begins to step up and pick up the last couple of years production at a little higher rates when you get out into '25. So we really just kind of focused on near term this quarter, next couple of quarters.

Got you. Okay. And I think you mentioned the deposit stabilizing. Is your thought that the second half of the year is what you're suggesting, Stephen, based on what you see there?

From a balance standpoint or from a rate standpoint just to make sure?

Yes, from a rate standpoint, Yes, yes, just a rate standpoint.

Yes. I mean how much of the top part of the deposit book that we continue to try to kind of shave off and offset some increases, we'll see. But I think we see something in the low single digits in terms of an increase. We'd be pleased with and feel like we can offset on the loan side. Like Johnny said, through the first half of this month, it's trended so far from a net standpoint.

Yes. Okay. All right, last one from...

The trend should continue with the significant repricings we have ahead of us. This should provide another boost. We're already performing well, and we expect to see another improvement in the next 30 days.

Understood. Okay. And then my last question is about the expenses and the improvement you observed this quarter. Could you elaborate on the overhead reductions and whether there are any additional opportunities to reduce expenses? If it's not related to overhead, what other areas should we consider for potential cost savings as you continue to focus on managing expenses?

We improved our efficiency from 38% to 46% and then to 47%, and now we're at 44% for this quarter. We're satisfied with the $3 million outcome. However, if we can generate $3 million within 90 days, there could potentially be more available. I'm not suggesting there definitely is, just that there might be. For this quarter, we are operating with $3 million less than we did at the same time last year, which reflects positively on our performance considering our prior increases.

Right.

Everybody's getting these increases now. So I think that's probably a good run rate. I wouldn't expect it to go up. I think that's probably a good run rate. If it goes up, we'll do something else. We'll figure out something else to do. Yes. Okay. Perfect. Got it. I appreciate it. Thank you. Appreciate your support.

This concludes our Q&A. I'll now hand back to Mr. Allison for final remarks.

Thank you all for your support. It's been a strong quarter, and we at Home BancShares are quite pleased with our performance. I believe this might be the best quarter the corporation has ever experienced. We've successfully addressed all key issues, and with the reduction in expenses, we are seeing a positive impact on the company. This might mean an increased dividend for our shareholders soon, which my wife would certainly appreciate. Anyway, appreciate everybody's support and we'll talk to you in 90 days.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.