Home Bancshares Inc Q3 FY2024 Earnings Call

Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Third Quarter 2024 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued after the market closed yesterday. The Company presenters will begin with prepared remarks 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 on Page 3 of their Form 10-K filed with the SEC in February 2024. At this time, all participants are in a listen-only mode and this conference call 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. With me for today's discussion is our Chairman, John Allison; Stephen Tipton, Chief Executive Officer of Centennial Bank; Kevin Hester, President and Chief Lending Officer; Brian Davis, our Chief Financial Officer; Tracy French, Chairman of Centennial Bank; 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. Welcome, everyone. Welcome to Home BancShares' third quarter 2024 earnings release and conference call. The company had another great quarter. The quarter was very strong and would have finished as one of the best that was until the last few days of September when the first of two disastrous hurricanes took a swipe across Florida, where Home has a little over $1 billion in customer loans. We felt it is prudent to move into hurricane mode as we have in past years when weather events affected the area where we did considerable business. Some of our customers are still involved in litigation over the claims from the last hurricane. We have closed the books for the end of the first quarter after the first hurricane when the reserve estimate that we made we thought was reasonable and then here comes Milton, number two hurricane and by the way in two weeks. We're always trying to get out in front of situations that may affect our earnings or our company in any way. We've dealt with these events over many years. We even have hurricane procedures and we've practiced for years that includes satellite phones, electric generators, 1-800 wellness check-in numbers for employees, customer extensions and the reality of losses. We will refer to have 5% plus reserve for the main area of the storm. We already had a reserve of 2% for the area and we're optimistic that we may not need over an additional 3%. Fingers crossed. As a result of our needed reserve, we will hopefully be in the $20 million or less range. Please don't hold me to that estimate because it's early and it's a fluid situation. We'll keep you updated as we hear more information and I would expect the flow of information to improve. And by the way, Kevin updated me, it's not only the hurricane, it spun up a lot of tornadoes outside of that and our orange grove that we've had for years sent some pictures of some of these orange trees that were damaged. So we don't know the extent of that as of yet. As the quarter was coming to an end, I was very pleased with the results I was seeing with July and August were nicely above forecast and September's data report was also running ahead. I was expecting $0.55 to $0.56 for the quarter. One should never count his money until all the hay's in the barn. I knew better, but things were running pretty smooth, so I made a mistake and counted the money. We reported a 1.74% return on asset ROA and without the $16.7 million reserve, our income would have been higher. That's an annualized income for the company of over $450 million and ROA of 1.96%. You can see why I was excited and then bam, here's the hurricane. A little disappointing, but as always, we do what's in the best interest of our shareholders period. Well, here's the numbers and I think you'll agree with me. It was a good quarter ex-hurricanes. Total revenue was $258 million. I didn't check, but that may be a world record. Brian, is that a top number?

It is on core earnings. We had one quarter about two years ago, we had a $15 million windfall and that would be slightly higher. But on core earnings that is a record.

Okay. Well, on core earnings, that was the best ever. That's good. PPNR was $148 million pretax, pre-provision, net income. When you think about that, you put an ROA to that, that's 2.57%. That's pretty impressive. We played with some numbers and I saw some analysts that Catherine sent out using that number. And so I put it in, it's 2.57% for us. When you think about that, that's 57.36% of total revenue goes to pretax, pre-provision. That might be another world record, I don't know. Stephen will cover the numbers more specifically, but I'll just kind of take a broad brush to it. Margin was up for the quarter. Yield on loans improved quarter-over-quarter. Interest bearing deposits had a slight increase, just a tick. Non-interest expense for the third quarter of '24 was $110 million versus the second quarter of '24 at $113 million and the same quarter last year was $114.7 million, much improved. Efficiency ratio of 41.42% also good improvement. Nonperforming SPA C. As we continue to work through the Texas credits we told you about, the resolution of those credits will hopefully be resolved either in this quarter or the first quarter of '25. Because of our strong balance sheet, we're able to take our time and work through several of these credits, reducing the loss exposure versus having to sell the asset immediately that may have resulted in much bigger losses. Stay tuned, Kevin will talk more about that in the report. Strong capital ratio, I thought we're going to catch Jamie Dimon, we didn't. We didn't. We're at 14.7% CET1 and he jumped on; he was at 14.7% and he jumped to 15.3%. I think he's afraid we're accurate. The loan loss reserves stands at 2.11%. Tangible book for the third quarter of '24 was $12.67 versus $10.90 for the third quarter of '23. That's a $1.77 improvement year-over-year. $0.77 of that came from AOCI and the dollar came from retained earnings. We earned $100 million and $0.50 a share after reserve for the third quarter. So for the first three quarters we're at 301.6 or $1.51 per share through the first nine months. Loans continue to grow in our legacy footprint, $131.6 million increase, while CCFG had an $89.1 million decline in balances; they still remain with $2 billion of outstanding loans. We were disappointed last year by missing our goal of $400 million due to circumstances outside our control, if you remember that being our payment to the Fed for the failed banks, plus the damage from the West Texas headwinds. The Fed also charged us with an additional assessment this year of approximately $2.3 million that we overcame early in the year. But the hurricane reserve could cause us to miss for the year, hopefully not. All-in, '24 is shaping up to be a good year ex-hurricane, an okay year with hurricanes in spite of all that's happened. In 20 days, I'm probably going to get off on political race, but I got to do this. In 20 days, we're going to elect a new President of the United States. And I think that will have a major impact on all our lives and our futures of our children and our grandchildren. One of the candidates wanted to substantially raise all taxes and even taxes on unrecognized gains. Inflation has already taxed the American public over 20%, created by the crazy spending and firing up inflation like we've not seen since the late '70s. The coup was throwing Joe Biden in the ditch and crowning a new candidate that absolutely has no financial experience and appears to have no idea of what's going on. Whether you like Donald Trump or not, I believe he has to win the race. We know what he did last time and he was business friendly. Watching both candidates through this short campaign has been very painful for all of us. But after watching, I cannot imagine anyone voted for Mrs. Harris. It's not about Democrats or Republicans, it's about saving our country. I think she will destroy all the good work that Chairman Powell and the committee has done to fight inflation. I'm afraid she will allow the snake to raise its head again. We have not killed the snake, but we've made an impact. Twenty-five basis points probably would have been better than 50. But I think that may have been politics as usually happens during election years. Taxes, crime, immigration, gangs, open border, sex trafficking, increased regulations, inflation—need I say more? We need to vote to stop the chaos. When you hear Walgreens announcing the closing of 25% of their 8,600 stores and one of the main reasons is the Fed should tell us all we need to hear. If that's not enough, Sunny, an ABC host, attempted to minimize illegal migration gangs taking over apartment complexes in Aurora, Colorado, saying the incidents were limited to a handful of apartment complexes and Donald Trump is the problem. I mean, you can't make this stuff up, enough of that. Our Texas lawsuit, we're totally engaged and await our day in court and let a jury decide the amount of damages done by what we perceive to be illegal activity by some West Texas individuals. On stock buyback, the company purchased 1 million shares for $26.9 million. That should put us below 199 million shares. Brian, where are we now?

We're like 198.8.

198.8. So we have continued to buy. Stephen, is that correct? Continued to be in there.

We have a 10b5-1 plan in place. It's not been active over the last couple of weeks. Plan to once we get out of the blackout.

I don't know where we're going with that, but we continue to buy stock and I guess we'll continue to hang in there. Our goal was to get it to 200. We've got it there. Now we're at 199. We may go to 195. I don't know. We'll see. We'll talk about it around the table. It was a good quarter. Thanks, everybody, for their support. Thanks, everybody, for the hard work that everybody put in. When you have those kinds of revenues and you control the expenses, it really rolls into a very good quarter. So Donna, it's back to you.

Thank you, Johnny, and our thoughts are certainly with all of those in the path of the hurricane. Our next report today comes to Stephen Tipton.

Thanks, Donna. As Johnny mentioned, Home Bancshares and Centennial Bank had another great quarter. Congratulations to all of our bankers and employees for continuing to make Home and Centennial Bank one of the top-performing banks in the country. As Johnny mentioned, total revenue increased again in Q3 to $258 million and adjusted PPNR increased to $146.6 million, which is a 17% year-over-year increase. I'll start with the net interest margin, as Johnny referenced in his comments. The reported NIM expanded one basis point in Q3 to 4.28%, while we continue to hold healthy excess cash balances. Excluding the event income noted in the press release, the net interest margin was 4.27% for the quarter, an increase of four basis points from Q2 and exited the quarter in September at 4.30%. The yield on loans, excluding event income, improved 10 basis points to 7.59% in Q3 and outpaced the increase in total deposit costs by six basis points. During the quarter, total deposit costs increased four basis points to 2.31% and exited the quarter at 2.29%. Leading up to and since the recent FOMC announcement, our bankers have done an excellent job managing interest rates while being mindful of liquidity and overall customer relationship. We've worked through most of the negotiated deposit pricing. And thus far, it appears we've been able to offset the decline in rates on the asset side. Switching to liquidity and funding. Deposits continue to be a key focus with our management team as they review lending opportunities as well as cross-selling opportunities on nearly 5,000 accounts that we open each month. We continue to emphasize the strength of Home and the comfort that, that provides. Total deposits declined $250 million for the quarter, most of which occurred in our Florida regions as seasonal outflows occurred with property management companies and municipal relationships. Noninterest-bearing balances ended at $3.94 billion and account for 23.5% of total deposits. Alternative funding sources remain extremely strong, with broker deposits still only comprising 2.3% of liabilities. And the loan-to-deposit ratio still stands below historical levels at 88.7% as of September 30th. On the asset side, in-period loan balances increased $43 million, highlighted by nearly $100 million in growth from the Community Bank regions along with solid growth from Shore Premier offsetting what we see as a temporary decline in CCFG balances. On loan originations, we saw volume of $1.13 billion in Q3, similar to Q2, with a little more than half coming from the Community Bank regions. Yields originations remained strong with an average coupon of 8.96% in Q3. Payoff volume picked up slightly to a total of $699 million, although a portion of what we expected to see this past quarter appears to have pushed into the fourth quarter. Closing with the previously mentioned strength of our company, all capital ratios improved and remain extremely strong with a tangible common equity ratio of 11.78%, leverage ratio of 12.54%, CET1 ratio of 14.65% and a total risk-based capital ratio of 18.28%. Couple that with reserve coverage of 2.11% and over three times coverage on nonperforming loans, we are in a strong position to capitalize on future opportunities. With that, Donna, I'll turn it back over to you.

Thank you. And finally Kevin Hester will provide us with some color on the lending portfolio.

Thanks, Donna. Good afternoon, everyone. We often discussed the one of the strengths of our company is that we have multiple engines or regions that can independently help us reach our combined goals. As Stephen mentioned, this quarter was Texas, Arkansas and Shore that drove our loan growth. At other times, CCFG and Florida are the drivers. This kind of diversity is a real positive for our company. Of note, late in the quarter, I noticed a slight slowing of early deal flow and it is beginning to show in our pipeline for this quarter. Combined with an increase in projected payoffs, I believe that fourth quarter could be flat to down slightly. Moving on to asset quality. The metrics declined slightly this quarter with increases in nonperforming loans and assets of 10 basis points and 7 basis points, respectively. This is due primarily to a Texas hotel moving to nonperforming. That is one of a trio of hotels to a related ownership group that we've been working with for a few quarters. One of those hotels sold this quarter and another is in the process of selling. So we're hopeful that we can continue to achieve a good outcome with this relationship, but it could take some more time. We expected to complete the construction of the multifamily project that is in OREO, which is located north of the DFW Metroplex in the third quarter, but a delay with an unreasonable local utility has pushed this completion into the fourth quarter. The timing delay does not appear to change our overall outcome, which will be to move it out of OREO by year-end to a buyer that we have ready to contract. We continue to expect no worse than a small loss on this exit. Other Texas issues that we've been working through include a completed multifamily project closer to the DFW Metroplex that has experienced a decline in occupancy and our South Texas C&I relationship that has had multiple recent operating issues, but has a very profitable history. These regional issues have our full attention. And as Johnny said, because of our strong balance sheet, we were able to take our time and work through these credits in the best way possible. The considerable experience that we gained working through failed bank portfolios serves us well in working through these issues. Lastly, the California office that is in OREO continues to improve. Occupancy is approaching 70% after an existing tenant took another half of one floor, and it is cash flow positive. We are negotiating with another potential tenant that would take it above 80%. Switching to a discussion regarding the recent hurricanes. We are thankful that none of our employees were injured by hurricanes Helene and Milton and that the damage to our branches was limited in nature. This is clearly not the case across all of this widespread area impacted by these two storms. Hurricane Helene took a swipe of the West Coast of Florida, where we have a substantial presence and then proceeded inland into Georgia and North Carolina, where it inflicted major flooding damage. We have approximately $1.5 billion in loans in these counties within the FEMA-designated disaster areas from Helene, with almost 90% of those loans in Florida. Less than two weeks after Helene, Hurricane Milton cut a swath west to east across the Peninsula of Florida, hitting some of the same areas on the Central West Coast of Florida hit by Helene. By continuing through to the Atlantic Coast side, remaining a hurricane through its exit of the mainland. We have $1.8 billion in Florida loans in the FEMA-designated disaster areas from Milton. There's about $1.1 billion in loans that were subject to both hurricanes. So the total in loans that's subject to either one of the hurricanes is about $2.2 billion. We dusted off our disaster deferral procedures and have them implemented on these loans. And as you saw in the press release last week, we established an approximate $16.7 million reserve for the loans subject to Hurricane Helene. Areas from Tampa Bay North were the hardest hit by Helene and we were assessing damages in that area when Milton threatened less than two weeks later. A late turn to the south by Milton took the brunt of the storm south of Tampa and areas from Bradenton South where it appeared to be the worst hit there, along with random places across the interior of the state hit by tornadoes spawned from landfall. We are continuing to reach out to affected customers, we're touring damage where possible, and we're implementing our past playbook. Past history tells us that it takes 6 to 12 months to fully assess the credit impacts of these events. I know it's hard to imagine, but we still have customers who are dealing with insurance claims from past hurricanes. The cleanup and rebuild is a long process, but this is not new to us and we are confident that the areas will come back stronger than before. Donna, that's all I have, and I'll turn it back to you.

Thank you, Kevin. Johnny, before we go to Q&A, do you have any additional comments?

No, this was a great quarter. If we hadn't had the hurricanes, it would have been an outstanding quarter. As you can see, I got excited. I counted our money, counted how much we'd have before the final day of the quarter when the hurricanes hit. So it's a little disappointing, but our people did the job. I mean, Home Bancshares' people did a hell of a job for the quarter. Great run rate, great numbers, all good, and we'll overcome it. Maybe we get lucky and put that back into income someday, or if we have to make a larger allocation, we'll do that too — whatever is in the best interest of our shareholders. Anybody else got anything? Tracy, do you have a comment?

No. Good report at all.

No. I thought it was good quarter.

I don't.

I guess we will turn it over to the operator for some Q&A.

Great. Thanks, Donna. Our first question today is from the line of Stephen Scouten of Piper Sandler. Please go ahead. Your line is open.

Thanks. Good afternoon, everyone. Appreciate the update here this afternoon. Curious, Johnny, kind of how you're thinking about M&A today, if there's any change to kind of your outlook, your views on what BTFP could do in the first part of next year? And then maybe conversely, if Trump does win the presidency, if you think, any regulatory relief could kind of propel you to be more aggressive on the M&A front or maybe what it would take for you to get more aggressive?

Well, we're looking at that. I mean, we're looking at opportunities today and to get more aggressive, they just have to work, right? Everybody's price has gone up. Ours has gone up and everybody else's price has gone up, and that probably will make more people think about doing M&A, and I suspect that we'll hopefully find something, if not this year, early next year to do. Regulatory-wise, it was much easier to do a transaction when President Trump was in. We had better support there. And that will take a while to change if the administration changes. But I'm optimistic that we could see a kick to M&A activity if Trump wins and comes back in. They've been really slow. Regulators have been slow in approving deals. It seems like they've gotten a little quicker lately, doesn't it? You guys seem to think they moved on some that were hanging out there for a long time. They finally got them done and closed. So I don't know if that answers your question, but we're certainly looking. As I said last quarter, and I'll say it again this quarter, when you run basically without the extra reserve of 1.96 ROA on $23 billion worth of assets, this team just needs some more assets. So we just need to find the right trade and pick up some more assets and let them fix. I don't care what kind of shape the bank is in. We just need them to fix it. It depends on the price, right? We'll buy anything from something that needs help to something that's really operating in a good fashion. So it all depends on the price, Stephen, you know how we do. So we're working with your people on some stuff.

Makes sense. Makes sense. Okay. That's very helpful, Johnny. And then maybe one, probably more for Stephen, I guess, is just can you talk a little bit about how you think the NIM can trend from here, if we get, let's call it, 100, 150 basis points to cut, how you're thinking about loan betas and deposit betas from here? I know, Johnny, you look at the NIM on like a daily basis. But how do we think about that over the next, let's call it, 12 to 18 months?

Yes. I think a win there would be to be flat relative to where we are today. Our model shows down 4% to 5%; I think roughly down 100 basis points. But if we're able to pass through deposit rate cuts, which our team has done a great job on so far, and there is probably still some opportunity in the back book that we can work down, then, on that basis, I'd be pleased to see us in line with where we are today.

I know it's early in the quarter, but in the first 15 days or so we're actually a little ahead of where we were last month. We've had adjustments in loan yields and cost of funds, and it looks like they're almost matched. We're only up a couple hundred thousand dollars, but they look matched. So I'm pretty pleased with that, although it's early. There will be a lot of adjustments, but as of right now it looks pretty good, Stephen.

Got it. Got it. Okay. That's helpful. And I don't think you're guilty of counting the hay before it's in the barn. The hay is in the barn. It just might not be a net income, but it's still in capital. So that's still the bank's money, and it's a great quarter. So well done.

Our next question today is from the line of Brett Rabatin of Hovde Group. Please go ahead. Your line is open.

Hey, good afternoon, everyone. Wanted to just start on the loan growth outlook. And it sounds like CFG might continue to have some payoffs in 4Q that will keep the fourth quarter anyway flattish to maybe down a little bit. Can you guys talk about the outlook for '25? Maybe I know it's a little bit early and there's obviously a lot to figure out with where rates end up and all that kind of stuff, but is the pipeline for CFG strong enough to outrun any payoffs as you guys see it past the fourth quarter? Or maybe just any color that you guys see it as you think about loan generation in the '25?

Hey, Brett, this is Kevin. I'll give a little color from our perspective on the Community Bank side and then I'll let Chris talk about New York. As you saw this quarter, we've had a good year in the Community Bank footprint and I think that will continue. I think there's a little softness this quarter. I can't really pin it on anything. We have a couple of regions that are still pretty hot in terms of opportunities, but across the group I'm seeing a bit of softness this quarter. I do think that will come back next year. Obviously a lot of this depends on how much rates drop and what the expectation is going to be, so I can't really tell you what that looks like. But I do think that in '25 we'll see, in the Community Bank footprint, a continuation of what we've been doing the last four to six quarters. Chris, do you want to add some color on what you're seeing?

Sure. Happy to. Thanks for the question. We certainly hope we have payoffs because when we make the loan, we intend to get repaid. We've always said that the future of the business may shrink a little bit and then grow, and I think that's generally what we see happen. We've already originated over $1 billion this year, which is generally our yearly target, so we're running quite ahead. We emptied out our pipeline a little bit in the third quarter because I wanted to move some stuff out and get focused on the rest of the year. I think we'll have a pretty solid finish to the year and build the pipeline going into next year. So that's a long way of saying my guess is we'd probably come down a little bit from here and then go back up. Gross growth has never really been our goal. We're going to put good assets on, get repaid, and put that money back out, and good loans over time have resulted in growth. My expectation is I don't see anything different about that. I think we'll probably slowly grow over time, just as we've always done, but in between we may be up and down a little bit here and there and we don't see anything that has changed dramatically.

Okay, that's helpful, guys. On the deposit side, I know flows were lower this quarter and there were some drawdowns. How much of that was related to municipal deposits? And as you see it, are there any initiatives to grow deposits from here, in particular in any business lines or other actions that would bolster deposit growth? I know the balance sheet doesn't need excess liquidity, but I'm curious how you think about the funding base going forward.

Sure. Hey, Brett, this is Steve. I didn't, I couldn't hear your first question on municipal. Is it on the overall size of that book?

Well, just how much it came down this quarter. And then just, yes, about linked quarter balance would be great.

Sure. Munis were down about $100 million to $150 million for the quarter. I think we ended September 30 at a little over $2.8 billion. We've been in the $3 billion range, so some of that reflects normal flow and normal spend at times throughout the year. In terms of overall strategy, we're staying the course with select opportunities here and there. We've said for a long time the counties that we operate in Florida are very liquid and at times present opportunities to bring some of those in. Conversations with our lenders and our presidents are ongoing every day and every week at loan committees. That's still our approach, and we'll continue to work that base as we have.

Okay. Great. Appreciate all the color.

They are still active. I think some money may have left, but deposits are back up, which explains the movement this month. These are real customers doing real business with us, and we may have lost some funds to customers who moved money to cover a program they must pay off in March of next year under the Fed lending program. As we predicted, some customers are taking higher-rate CDs now to lock in yields as rates come down, so what we expected may be happening to us to a small degree, not a lot but some.

Yes, sure. It's been interesting to see some banks still being pretty aggressive with rates. I appreciate all the color and congrats on another good number.

Thank you. Appreciate it. I hope you're feeling better. Thanks for joining.

The next question today is from the line of Matt Olney with Stephens. Please go ahead. Your line is open.

Hey, thanks. Good afternoon. I wanted to ask more about the operating expenses. I think the core was $110 million, down 4% year-over-year. So really good cost controls. Any more color on just the drivers of where you're seeing the cost saves? The bank already has an efficient platform. So I'm just surprised you're continuing to find more opportunities there.

Hey, Matt, it's Steve. I mean, obviously, there are some ebbs and flows with headcount, which is the biggest driver of noninterest expense. And I'd say, looking forward, we're at a good base there. There are a couple of large IT contracts that we're working through that we are not there yet in terms of final pricing and negotiation, but there's some potential for meaningful savings to take place at some point in '25 and beyond.

Okay. Appreciate that, Stephen. And then, I guess, also on the credit front, I heard the prepared remarks talk about still battling some of those legacy credit issues we talked about for a few quarters. I'm curious if you're seeing any new inflows of new problems? Or is it just the same legacy problems, mostly in Texas that we've discussed before?

Hey, this is Kevin. No. I mean, I think we may have added one to the list this quarter that we're discussing with you guys. But primarily, it's the stuff that we've been talking about the last two, three quarters.

And as far as the resolution on some of those, it sounds like we should expect some kind of resolution in the next quarter or two on a number of those? Did I interpret that right, Kevin?

Yes, certainly, one of them and possibly a second one. Some of these things, they just take a little while to work out. You think you see a path and you're working towards it, and you think that path leads you to 90 days and it turns into 180. But we're still in each of those situations, we're on track, and we're working through the plan, and sometimes the plan just takes you a little longer than you'd like.

I think it will look a little different by the end of the first quarter. We just have to get the issues resolved, and I think most of them are basically resolved at this point. On the hotel deal, one hotel was sold and the other we put into nonperforming status. I think that will work itself out as well. These are just some Texas hotels that we did a while back.

Okay. All right, guys, thanks for the color. Great quarter.

The next question today is from the line of Jon Arfstrom of RBC. Please go ahead. Your line is now open.

Hey, thanks. Good afternoon.

Hi, Jon.

Just a quick follow-up on those. Hey, how large are those? Can you remind us how large those potential resolutions are? I know you said timing is up in the air, but just an idea of the materiality of those?

From the loss perspective, on the one North Dallas $600,000 or $700,000 maybe around $12 million, $15 million. Altogether, we're talking about $200-ish million altogether.

Okay. Good That's helpful. Another thing I want to clarify, John, you said in the prepared comments something about maybe $20 million needed for the hurricanes. And I didn't know if you're signaling that there's another elevated provision to come for Milton next quarter or that you feel like you already have it enough in reserves. Can you just clarify that?

I said we might need an additional $20 million. I don't know that for sure; I was just throwing the idea out there. It's too early for us at this point in time, and it may not be necessary. We had some damage. Kevin, where did we have the most damage?

Anna Maria Island.

Anna Maria Island. Yes, we got hit pretty hard. I talked to him yesterday, our customer. He said he's going to be fine and he has business interruption coverage in addition to coverage on these units, so that's good. He said he has that for every property. He owns a bunch of houses and some large rental properties, primarily single-family homes and a few hotels, but he wasn't there; he was actually in Arizona. He said he just went to Arizona for a few days, so he doesn't seem worried about it at all. I wasn't sure if he had business interruption coverage; I just wanted to make sure he did. Could there be a loss there somewhere? Maybe. I would suspect there will be a loss. Something is going to sneak up on us. That happens.

What we don't know is how the insurances are going to play with each other. This appears to be more of a flood event rather than wind and flood, generally has lower thresholds and lower payouts. So we'll just have to see in each individual case how these folks are able to access their insurance. I think every situation we've seen so far, they had insurance in place. So question is, how is that going to work? And this flood vs wind and vice versa and that just takes time to play out.

When you think about it, the number of hurricanes we've had over the years, we've really had been fortunate to have really minimal loss. So unless something really jumps out at us somewhere, I'm optimistic that we won't have big losses. But if we do, that's what we got preserved for.

Yes. Okay. That makes sense. And then on some of your earlier comments, Johnny, you're talking about what you thought would be a better quarter without the provision. Do you feel like that's the kind of run rate the company is on mid $0.50 type run rate or that you feel like there are any threats to that type of a run rate other than maybe these elevated provisions?

I think that's probably pretty close. I think $0.53, $0.54, $0.55, $0.56 is about where we are right now until we get something else. I mean, Jon, think about it, that's a 1.96% ROA. I can't ask for anything better than that really. So we need to get this team some assets. If they get another $2 billion or $3 billion, $5 billion, $7 billion worth of assets, it will take them a while, as it always does, for this group to get it where they want it. That would be what we'd be looking for. We'd be looking for something in that size, $2 billion, $3 billion, $4 billion, $5 billion, $6 billion, in a market that we think is a good market, either in an existing market or maybe something outside of that that touches one of the markets we're in. So when they delivered a 1.96% ROA, if we get them another $5 billion worth of assets you can see what happens.

Yes, they're hungry, Johnny, you got to feed them. Get them some assets.

I'm going to get them, I'm going to get them, put them another bonus program together for a long. Certainly if we get them.

Okay. All right. Well, it gets a good quarter.

Thank you.

Next question today is from the line of Catherine Mealor with KBW. Please go ahead. Your line is open.

Thanks. Good afternoon.

Hi, Catherine. Thanks for your ROI. I appreciate your ROI. I appreciate your ROI on the PPNR.

You're the one projecting a 250 PPNR, so that's on you. I wanted to dig into margin: you're asset sensitive with a very high margin, so it's reasonable to model a margin that trends down over the next year while remaining above peers. Your loan and deposit betas have been roughly matched at about 40% over this cycle. As we think about an easing cycle, is it fair to assume loan and deposit betas will stay around 40%? Or, particularly on the loan side, given the benefit of fixed-rate repricing and pricing on new loan originations, could the loan beta be meaningfully lower next year?

Catherine, this is Stephen. Yes, there's still some opportunity on the loan repricing side. We've got about $300 million or so this quarter that's below 6%. We've got a couple of hundred million. I guess all in total, there's probably $1 billion over the next three quarters that is in the low to mid-6s that we should get some lift on, presumably. I guess we hadn't talked competition-wise, but we're starting to hear from some of our presidents or different footprints that competitions pricing out the curve now and you're seeing some stuff in the 6s and 7s, but so we'll have to deal with that. But there's still some opportunity there on the repricing side. Yes, I think we said earlier on the call, I mean, I think it's flattish in the range that we're at today, I would be pleased with. I think it depends how deposits behave and liquidity profile. And if we're able to continue to be aggressive on drop in rates on the deposit side.

And on the loan side, I know you've said before that about 34% of your loans are floating and are repriced immediately. Can you break that down: is that mostly tied to SOFR? And then maybe give us the next bucket of adjustable-rate or available-rate loans versus fixed-rate? If there's a way to lay out these three buckets.

Sure. So it's about $5.5 billion or so that are variable rate change in the next two quarters or so. We've got some adjustable stuff in there too. But just talking about what's strictly purely variables, about $5.5 billion. There's $2.8 billion that's tied to Wall Street Journal Prime. And the vast majority of the rest is tied to SOFR. All of Chris' portfolio, $1.9 billion, $2 billion is tied to SOFR and then we've got about $700 million or so in the Community Bank group that's tied to SOFR.

Okay. And where is that yield today on average? What's the spread is there for typically?

Make the vast majority is going to be 4 plus, probably 4 on Chris' side.

On Chris' side. On our side, the construction would be in the 3.50-ish, probably average over.

We're starting from a high 8%, 9% yield?

Yes.

Okay. Great. And then any commentary on what products within the deposit side you've been most successful at lowering rates on for this first 50 bps move?

Largely negotiated money-market–type products. We have a standard corporate product we've used for years with about $1.3 billion, and we were able to pass essentially all of the last rate increase through to those balances. We also use negotiated rates across checking, savings and money-market accounts. As you noted earlier, rates have come down some, but local peers are still paying 4.60% to 4.70% and some community banks are close to 5%. Our team has done a good job negotiating to keep our overall cost in the sub-4% range.

It appears that.

All right. Great and congrats on a great quarter. Let's go ahead, Johnny.

Thank you. Yes. Well, Tracy will tell you that you run the models based on what it looks like today and estimate what's going to happen. It never turns out that way. I'm a believer we're ahead of the game right now and we'll stay ahead of the game. So until circumstances change, we'll stay committed to what we're doing.

It's working so far. Thanks so much.

Thank you. Thanks, Catherine.

The next question today is from the line of Brian Martin with Itau BBA. Please go ahead. Your line is open.

Hey, good afternoon, guys. Hey, Catherine just covered some of mine on the margin side. But just maybe one question, Steven, in terms of on the funding side. Can you remind us how much of the liabilities are indexed that move immediately that aren't the ones repricing negotiating?

Sure. Yes. There's about $3 billion or so that's tied to either 91-day T-Bill or reference to Fed funds. Most of that is municipal. But we've got a few other products that are directly indexed to those.

Okay. I think you mentioned it's about $1 billion of loans, maybe last quarter at the reprice so in 2025. With the new rates today and what you're hearing from your presidents, you had previously thought rates might tick up to around 9%. Where are the newer rates today that you're expecting the repricing loans will move up to? What range do you think is reasonable given what you're hearing now about the rate environment?

Well, on renewal, I mean, we should be able to land in the 88.25% range. But again, I think a lot of this is kind of subject to what we hear and see from the competition. I'll let Kevin give a little more color on what he's seeing.

I think Stephen said a minute ago we're beginning to see some folks go out the curve a little bit and try to fix rates in the high 6s to the low- to mid-7s and extend them out a few years with prepayment penalties. We're seeing some of that, and I don't know how much will continue if we get another rate drop before the end of the year. That will be one of the things we'll have to fight for, for sure.

Yes. Okay. All right. Maybe one question for Johnny. Johnny, on M&A, can you remind us where you are more focused in the market today and what opportunities you are seeing? Also, have transaction sizes drifted smaller or larger? I guess that's a better question.

Right now we're looking at two types of markets: in-market and out-market. An out-market would be a neighboring state that touches a state we're already in, so we wouldn't leapfrog over another state. We're just exploring those ideas at the moment. I think we'll see some boards of directors telling management that this is a tough time and they need to put the business in strong hands and deliver a solid dividend. Beyond that, I don't know — one opportunity is outside the market and the other is inside.

Okay. And if you go out of market, it's got to be bigger, just have enough scale? Or I guess is that fair to think about if you're going to go outside?

I just like the one that was out of market. I like their footprint. I thought it looked intriguing. The market has good growth. We look at everything, and I was reading about this out-of-market opportunity and kept reading about it. I thought that's a really interesting story, and I verified that the information was correct and what kind of growth they were getting there. It's got my attention.

Yes. Two quick items: the last was on the expense side. I think you said that, but maybe I missed it; I didn't hear what you said earlier about the outlook on expenses. There's been really good progress in trends. Are the current levels sustainable? Is there anything embedded in the numbers we should be thinking about as you go into 2025, or are current levels okay?

I think we had a little windfall this quarter. I think the 111 and change number is a good number. You asked, and I was asked last quarter, and we said 111 is the number. So 111 and change is probably the realistic number.

Got you. Okay. And then just a bigger picture on credit, maybe someone asked this, but just in terms of a few things to work through here, but no significant spikes expected, I guess, in terms of additional nonperforming. And kind of what you have is in front of you and now it's just working through that and really nothing coming on board that you're expecting?

Well, there's always a flow in how they transition. Accounts go from past due to nonperforming and then they go out the door. So there's always a transition of those things working their way through. I would have thought we would have had the project north of Dallas cleared because it's finished; we have two offers and I think we're under contract on that. So I would have thought that would have been gone. I think we've got about $200 million total that we're dealing with. That will be moving in and out and around before it's all said and done. Do I think there's any giant loss in any of it? One credit could have some loss that bothers me, but outside of that I don't think there'll be much loss in these credits. We have an apartment project where we could lose a couple of million dollars on that deal. That could happen. We only have one big one out there that concerns me, and we'll just have to wait and see how that works out. They've certainly improved what they were doing in the past and they're getting better, so we're seeing improvement in that credit. That one may not be a problem in a month or two, or it may be a problem. We just have to see.

Hey Brian, it's Kevin. I'm just going to say they're all substandard, so we'll work with them. They could; there could be some level of it that goes to nonaccrual before it goes out of here. As far as loss goes, Johnny has given you our thoughts on losses. Ultimately, that's the biggest concern, right?

For sure. Got it. Okay, Stephen, one last question. I'm thinking about this: I know you expect and hope to keep the margin roughly where it is as you offset rate cuts. If you're not able to do that, where's the biggest risk? In practical terms, what happens if you don't meet that objective? What's the main downside of failing to hold the margin stable?

I mean today probably on the loan side in terms of pricing, we're going to protect our base and do what we do. But again, you've already, we've seen a few instances where we have customers getting quotes or that may be in the payoff pipeline now that pricing in the 6s for a mini perm term. Kevin?

From a positive standpoint, both Chris's portfolio and our construction portfolio will carry a spread over SOFR, and that spread will remain largely unchanged. If rates come down, those rates will decline as well, but the spread we've been earning should stay about the same. That's a big part of our business—the mini-perm items Stephen mentioned—where we'll have to compete with the rest of the market, and we typically do a good job of maximizing what we can get. I expect we'll continue to do that.

Yes. And Kevin, what's the breakdown on that in terms of what pieces — the mini-perm piece versus Chris's piece — is about $1.9 billion, I think. Someone had mentioned that earlier.

Yes, Chris, I mean, Chris, $2 billion range and construction is $2.5-ish billion, maybe a little higher than that. So I mean you're talking about probably $5 billion that tied to a margin over SOFR and we'll continue to do what we're doing there.

Got you. Okay. All right. Thanks for taking my questions, guys. I appreciate it.

Thanks, Brian.

Thank you.

The next question on the line is from Michael Rose with Raymond James. Please go ahead. Your line is open.

Hey, guys. Good afternoon. Just two quick ones. Any impact to Shore Premier Finance from the hurricanes on credit quality or on near-term demand or potential for growth? I would think this would, at least in Florida, have some near-term impacts.

As far as what we have in the portfolio, I've not heard of anything so far. I mean, you can imagine his stuff is spread out quite a bit. We've got dealers across the country and we've got credit across the country. So I've not heard of anything so far as damage goes. As far as the market goes, I mean, I can't really think of anything negative. I mean this is kind of the boat show season. So they're in the middle of doing a lot of their boat shows and planning for next year. So I've not heard anything negative from this perspective.

All right.

New sales coming out of it, Michael. I mean some of these boats got torn up. So there's probably some new sales coming out of this.

Got it. The only other thing I picked up on is that the loan-to-deposit ratio is a little bit higher than it's been in a couple of years. I know historically, you guys have run closer to 100%. But any concern there or is that kind of a comfortable place to be? I just worry about if loan demand does pick up. I know we're not trying to push any ropes right now. But at some point, it likely will. And just wanted to get a sense for if there's any discomfort if the loan-to-deposit ratio would move higher? Thanks.

Hey, Michael, this is Steve. No, not necessarily. I mean you mentioned, I mean it's been a little while, but we've run well over 100 in years past and more approved limits or in that range. I think what gives us comfort near-term is borrowing about availability, what I mentioned earlier about just the liquidity in some of the markets that we're in today. It's out there and you may have to pay a price to get it. But there's certainly liquidity in the markets that we're in. We've just chosen to kind of stay hooked to our strategy here over the last many number of years in terms of just dealing with customers one off. So at 88%, 89%, it doesn't give us any discomfort today.

All right. I guess that's said other than Johnny, I'm a little surprised that you said a 1.96 ROA was good. I've never heard you say it's good enough. So a little surprised that you're not setting the bar higher, but certainly understand.

Thank you, Michael. Yes. I heard that too.

I agree with you, Michael. I'll work on that with these guys. Thank you.

Thanks, guys. Appreciate it.

With no further questions in the queue at this time, I would like to turn the call back over to Mr. Allison for some closing remarks.

Thanks everyone. Good quarter. Hope we have another good quarter next week. I hope our people in the Carolinas and Georgia and Florida come through this without pretty tragic what happened particularly in the mountains of the Carolinas. So anyway wish them the best. And we'll talk to you next quarter. Tracy, you got a comment? You hadn't commented today. You got anything you want?

I have no comment.

No comment.

All good.

Tracy you can do better than 1.96 ROA?

It's always been our goal to get better.

That's right.

Very simple. You got to get better.

Brian, you got any comments?

No, I don't think I have any comments. I think you all got it all covered.

Well, thank you all. Talk to you next quarter.

This concludes the Home Bancshares Incorporated Third Quarter 2024 Earnings Call. Thank you to everyone who was able to join us. You may now disconnect your lines.