Earnings Call Transcript - HOMB Q3 2020

Operator, Operator

Greetings, ladies and gentlemen, welcome to the Home BancShares Incorporated Third Quarter 2020 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks then entertain questions. The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2020. This conference is being recorded. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations. Please go ahead.

Donna Townsell, Director of Investor Relations

Thank you, Gary. I am Donna Townsell, Director of Investor Relations. Our management team would like to thank you for joining our third quarter conference call. Reporting today will be Tracy French, our President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, our Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; Stephen Tipton, Chief Operating Officer; and our Chairman, John Allison. First up today to share with you will be Tracy French for the Centennial Bank report.

Tracy French, President and CEO of Centennial Bank

Good afternoon, and thank you, Donna. We had a great quarter to report for us today. As it goes for Centennial Bank as we navigate through 2020, the water may have been a little choppy along with the hurricane impacting us, but our company continues to produce very solid results. In some cases, we'll have the best results ever, thanks to our experienced Board of Directors and our outstanding Centennial Bank and Home Bank management staff. Our Chairman has been known to say the word experience, and 2020 has been exactly that. The past 20 years for this company has proven time and time again that working together, we can accomplish anything, no matter how high the water gets. We announced our quarterly results this morning, and they represent that Home BancShares is weathering well in all areas, which is quite impressive. We have used the P letter a lot over this past year. Powerful, Profitable, PPP, and I have a strong feeling that you're going to hear a little more Ps this afternoon from our Chairman. Others will report details of the quarter and the year. It will be clear, our company is focused on profitability, asset quality, and margin, while maintaining the safe and sound company we are. Let me just share a few things. EPS is $0.42. Total revenue is $176 million. Those are Home BancShares’ numbers. Switching over to Centennial Bank, our return on assets as adjusted is over 2% year-to-date; our non-GAAP efficiency ratio is 37% year-to-date, 336% coverage of our allowance for credit losses to non-performing loans, and we have a double-digit increase in our noninterest income, mortgage leading the way. Operating expenses are the same as last year, not including our unfunded commitment charge that was done. Always, the one I like to hear is total revenue of $533 million year-to-date, again pretty darn good for the first nine months. Kevin is going to give us an update since our fireside chat that Donna organized throughout this past quarter on loans, Chris and John will join in with the specialty groups of their areas. I would like to share that our group of lenders are doing a great job in managing their portfolios. They are in constant communication with our borrowers and customers. This company has always done that. We will call it as we see it. I go back to the word experience, so if customer needs assistance, we will work with them while protecting the bank. We have the experience in difficult times, and we’ve worked out several challenged institutions over the last 20-plus years. Our team is ready to assist in any need. Our allowance for credit losses is 2.29% when you add back our PPP loans, and our allowance for credit losses to non-performing coverage is 336%. While we may have some losses, our teams feel very good about these numbers and the balance sheet of our very healthy company. Brian and Stephen will give a little discussion on the margin as it still remains a top focus for the company. Just for an example, Johnny calls me, and he does a lot, in the morning, I say good morning, Johnny. He says, what's the margin? I’ll say, good morning Johnny. So that's how top of the line focused it is. Brian and Stephen will also give a little color on the deposits, our liquidity situation, and the strength of capital that the company has. There's one thing for certain. We will continue to manage a safe and sound company, managing all areas, income and expenses, while being in touch with our customers to provide the best returns to our shareholders. Donna?

Donna Townsell, Director of Investor Relations

Thank you, Tracy. Those are impressive numbers. Now, Brian Davis has some detail on how COVID-19 has impacted our margin. Brian?

Brian Davis, Chief Financial Officer

Thank you, Donna. Today, I'd like to give you some color as to how the uncertain times related to COVID-19 have negatively impacted the margin. First, the COVID-19 uncertainty and the resulting governmental response has created a tremendous amount of excess liquidity in the market. As a result of this excess liquidity, we had $713 million of additional interest-bearing cash in Q3 compared to normal times. This excess liquidity is 20 basis points dilutive to the margin. Second, as of September 30, 2020, we had $848 million of PPP loans. These loans are at 1%, plus the accretion of the origination fee. While these loans are a valuable assistance to our customers and carry no credit risk to our company, they are dilutive to the margin. The PPP loans were 6 basis points dilutive to the margin. As you can see from these two items, the uncertainty of the COVID-19 pandemic has caused a 26-basis-point decline in our net interest margin. This would pro forma our Q3 2020 margin at 4.18% compared to 4.32% for Q3 last year, or a 14-basis point decline, considering there was an 8 basis point drop related to the $3 million decline in interest income events from Q3 2019 to Q3 2020. I think the Company is doing an outstanding job of managing the margin. I'll conclude with a few remarks on capital. Our goal at Home BancShares is to be extremely well capitalized. I'm pleased to report the following strong capital information. The leverage ratio was 10.4%, which is 108% above the well-capitalized benchmark of 5%. Tier 1 capital was 13.2%, which is 65% above the well-capitalized benchmark of 8%. The total risk-based capital was 16.9%, which is 69% above the well-capitalized benchmark of 10%. With that said, I will turn the call back over to Donna.

Donna Townsell, Director of Investor Relations

Thank you, Brian. When you take out all the noise, it is nice to see that our margin is holding pretty steady, and that's a good report on capital. Now for a highly anticipated update to our loan portfolio is Kevin Hester.

Kevin Hester, Chief Lending Officer

Thanks, Donna. Well, we're finally three quarters of the way through 2020; what a long and crazy year it's been. When we talked 90 days ago, I mentioned that both PPP and loan deferments would be entering a different phase in the third quarter. That, in fact, did occur. PPP forgiveness has begun, albeit slowly. We have submitted about 2% of our number of loans, or about 6% of our dollar balance. Due to anticipated submission relief on smaller loans, we began with the larger loans in the portfolio. Once all parties are ready to submit using the 3508S Form that was released by the SBA last week, we will begin submission on smaller loans as well. Regarding loan deferments, as of September 30, we have about 330 loans remaining on deferral, totaling about $930 million. Within that number, our loans totaling $347 million are only deferred principal, so they are currently paying their interest. This leaves about $583 million in loans that are on full principal and interest deferment, which is about 5% of the loan portfolio. Geographically, Arkansas regions make up 51% of the deferment balance, followed by Florida at 39%, with CCFG, Shore, and Alabama at 6%, 2%, and 1%, respectively. As a percentage of their respective portfolios, the community bank regions were 25% and 13% deferred, while CCFG and Shore were much lower at 3% and 2%, respectively. Based on industry, the only concentrations would be in hospitality with about half of the deferred balances at this time. The September 30th deferral number is down by 70% from the June deferral number of $3.18 billion. This decrease is even better than was anticipated when we spoke 90 days ago. Lastly, the current numbers as of October 13th show a further decline in the full principal and interest deferral balance of $64 million since month-end to a total of $519 million or 4.4% of the loan portfolio. As I mentioned previously, about half of our deferred balances or $475 million are in hospitality. About 30% of those balances are on principal deferment only. Comparing loans on deferment versus non-deferment, average occupancy over the summer was similar, but RevPAR was about 15% lower on average. In September, which in all our Florida markets we would expect to begin the off-season, shows a RevPAR decrease of only about 5% across the portfolio. This is a segment of our loan portfolio that I will continue to watch closely and provide additional color as warranted. Asset quality is still very strong. Past due loans were at 63 basis points, which is below the last 12-month average of 69 basis points. Non-performing assets increased 8 basis points from an all-time low of 39 basis points to 47 basis points, which is an increase of about $14 million. This consisted of two broadly syndicated C&I credits from the shared national credit review totaling about $6 million. A COVID-affected cinema credit and an Arkansas manufacturing credit of about $2 million. Any exposure that we feel is embedded in these credits is reflected in the individual impairment segment of CECL. As we continue to evaluate the loan portfolio through the pandemic, particularly the loans still on deferment, we are mindful of the regulatory relief provided under the CARES Act as it relates to credit modifications. This relief allows us the flexibility to provide prudent loan modifications tailored to each borrower that benefit all parties. Given that we see this pandemic overall as more of a timing event than a permanent demand shift, time is often the most important factor in these modifications. We are being creative in how we approach each situation. However, as we always do, we will continue to apply appropriate credit classification and nonaccrual standards in cases where the information indicates that the loan cannot be repaid under reasonable terms. In other words, we'll continue to call it as we see it, irrespective of the relief provided by the regulators. Mortgage continues to be a shining star for us with back-to-back record quarters in both loan closings and profitability. Loan closings were up 56% year-over-year, and September locks were higher than any month prior to 2020. Thanks to Keith Little and his group for their strong production and profitability. The remainder of 2020 will largely consist of executing PPP forgiveness and developing prudent loan modifications with evaluations of new opportunities in the post-COVID world sprinkled in. We like where we are from an asset quality perspective at this point in the pandemic and believe that 2021 will be a year to move forward. That concludes my remarks, and I'll turn it back over to you, Donna.

Donna Townsell, Director of Investor Relations

Thank you, Kevin. Having only 5% of the loan portfolio on full principal and interest deferral is remarkable. Up next, we have Chris Poulton with our CCFG division. Chris?

Chris Poulton, President of CCFG

Thank you, Donna. During the quarter, we progressed through the initial stages of COVID response and began to see how the market in our portfolio will address recovery. Overall, the portfolio was down slightly at $72 million for the quarter with ending balances of just under $1.7 billion. Specifically, we saw C&I balances fall by approximately $130 million as corporate borrowers who had previously drawn on facilities for liquidity purposes repaid some of those borrowings during the quarter. Balances fell from a high of $515 million to $386 million at the end of the quarter. Conversely, we saw CRE balances rise by $56 million due to a combination of continued draws, an increase in production and moderated payoffs. Going forward, we'd expect these trends to continue with C&I balances declining and CRE balances potentially continuing to expand. During the third quarter, we saw loan production and demand increase. We originated $140 million in new loans, which was up about $30 million from Q2. As important, our pipeline of new opportunities continues to grow. We're seeing borrowers adjust their business plans to a new post-COVID reality. As a result, borrowers are once again looking to move projects and opportunities forward. As I mentioned last quarter, the timelines on new loans have expanded, and we continue to observe that loans generally take longer to complete and require a bit more work in structuring. However, we hope to see the benefits of this come through during Q4 and into next year. As a reminder, we initially built our platform to be flexible and responsive to changes in market conditions. We've always focused first on risk management with the philosophy that markets can pivot at any time and for any reason. Responding to these changes requires prudent initial credit underwriting combined with an agile approach to portfolio management and composition. The benefits of product, asset class, and regional diversity in our portfolio continue to allow us to manage risk and seek new opportunities as they emerge. While each individual market is experiencing different current and long-term risks, we will continue to balance confidence with cautiousness as we build our portfolio now and for the future. Donna, I'll turn the call back to you.

Donna Townsell, Director of Investor Relations

It's good to hear that your pipeline continues to grow, Chris. And luckily, your underwriting standards have always been strong, and that diligence pays off during times like these. So that's good to hear. Now, we'll turn to John Marshall for an update on the boating world.

John Marshall, President of Shore Premier Finance

Thank you, Donna, and good afternoon. For the Shore Premier Marine Finance unit, the third quarter was punctuated by significantly elevated retail loan closings exacerbating already depleted commercial dealer inventories. To the numbers, we funded $91 million in retail loans in the quarter compared to $93 million in the full first half of 2020 and $145 million in the full year 2019. In the turbulent COVID environment, the record retail production was necessary to absorb portfolio contraction due to repayments, prepayments, and shrinking commercial inventories. So the net result was the end of the quarter about where we started with $920 million in loans. Good news in the feverish buying frenzy, as you would expect, retail buyers have been less sensitive to financing rates, and we've observed a steady expansion in our spreads over the benchmark five-year treasury. Let's call it 3.69% spread in the first quarter, 4.25% in the second quarter, 4.47% in the just concluded third quarter, and a respectable 4.73% spread for the month of September. Further good news is the asset quality of the marine book. Origination FICOs grew from 7.76% to 7.78% in the quarter, and any COVID related deferrals resumed payments in July at the start of the quarter. Each month in the quarter, we've seen a steady improvement in delinquencies from 74 basis points to 67 basis points and all the way down to 24 basis points in September. Non-performing loans similarly improved each month from 49 basis points to 48 basis points to 43 basis points. There is some evidence of rationality returning in the fourth quarter as retail sales abate and are replaced by dealer inventories as European factories resume shipments to North America. Our opportunity as credit line utilizations recover to industry norms, jumping from the current 30% up to the normal 62%, is net growth close to $80 million in the next six to nine months. So with that update, I conclude my remarks, Donna, and return the conversation to you.

Donna Townsell, Director of Investor Relations

Thank you, John. And now Stephen Tipton will discuss liquidity and its effects on the net interest margin along with the funding cost.

Stephen Tipton, Chief Operating Officer

Thank you, Donna. I'll give color on deposit activity, re-pricing efforts and trends, and a few additional details on the balance sheet today. On the heels of tremendous deposit growth in Q2, we carried much of the liquidity build through the quarter, which I'll discuss later in our comments related to the net interest margin. We saw end-period deposit outflows of $240 million in the third quarter, particularly related to liquidity management and corporate deposits, along with a few seasonal items we have touched on in the past, such as tax payments, school funding, and general spending. After the flourish of activity in Q2, account opening volume is back to a more normal level, allowing our bankers to focus on supporting our customers, both in-branch in person and virtually. Our presidents and their teams continue to analyze the deposit base for opportunities to improve granularity, mix and costs as we operate in this near-zero interest rate environment. Switching to funding costs, interest-bearing deposits averaged 54 basis points in Q3, down 10 basis points on a linked-quarter basis, and we continue to see improvement in costs on a monthly basis. As I mentioned last quarter, we have a nice opportunity for re-pricing in our time deposit portfolio. We have $595 million maturing in the fourth quarter of 2020 at an average rate of 1.56% and another $200 million in January that has over 1.5%. Switching to loans, we saw total production of $550 million in Q3, with approximately $410 million coming from the Community Bank and Shore Premier footprints. Payout volume at $711 million was in line with prior quarters and has been highlighted by a larger contribution from our Florida and Shore Premier regions than in prior quarters. In Brian Davis' remarks, he discussed a great comparison on the NIM to more normal times. I would like to also touch on the linked-quarter comparison and our operating highlights we released this morning. The net interest margin pressure in Q3 was primarily related to continued excess liquidity, lack of event income, and the impact from premium amortization and lower reinvestment rates in the investment portfolio. With a few additional small items as reported, we have reconciled 14 of the 19 basis points decline on a linked-quarter comparison. On a core basis, and excluding event income, the loan yield declined 8 basis points, while the total deposit cost declined 7 basis points. As Tracy mentioned, monitoring and managing the net interest margin at Home is a daily conversation among our team. Discipline around loan pricing, capital allocation, and a constant review on funding has, and will, continue to be our focus. And with that, I'll turn it back over to you, Donna.

Donna Townsell, Director of Investor Relations

Thank you, Stephen. Well, now let's turn the mic over to Chairman, John Allison, who will share, among other things, I think, a new metric that he's begun tracking, and we hope to hear more information about that. Mr. Chairman?

John Allison, Chairman

Thanks for being with us today, and I appreciate your ongoing support. As you've heard from our team, I don't have much to add at this time. We're navigating through the pandemic and have concerns about the performance of certain asset classes. CECL is uncertain, yet the Company achieved another record quarter. Adjusted for CECL, Home earned $0.47 this quarter, matching last quarter's earnings of $0.47. Over the past year, our earnings showed consistency, starting at 44, followed by 42, then 43, and 44 again. Last quarter, we were at 47 adjusted for CECL, and this quarter remains the same, marking two of the best consecutive quarters in our 21-year history. As noted in the press release, I’m tracking a new metric, which, while not GAAP-compliant, offers valuable insight. I refer to it as P5NR, meaning pretax, pre-provision profit percentage. This metric reflects how much cash is available after accounting for taxes and potential loan loss allocations. To simplify, it is the net total revenue divided by pretax, pre-provision income. This quarter, our PPNR reached a record of $104.4 million, with net total revenue hitting another record at $176.1 million. Dividing the $104 million by the $176 million gives us 59.28%, which is quite consistent with last quarter's 59.3%. Is that correct, Donna?

Donna Townsell, Director of Investor Relations

Yes.

John Allison, Chairman

We are performing consistently. Home BancShares is allocating nearly 60% of its total net revenue to taxes. I encourage you to compare this to other corporations, as it highlights the significance of margin and noninterest income, and demonstrates the company's earnings potential. It's impressive that we are managing to achieve 59.28% of net revenue. There are other positive figures for the quarter worth mentioning. Ex-CECL, the Company generated $79.61 million, close to $80 million, with an EPS of $0.47. Our loan reserve remains strong at 2.29, which we slightly increased this quarter, with $14 million in charge-offs and around $10 million added. We plan to maintain this next quarter unless there are changes. There seems to be increasing transparency regarding asset quality. We have a return on tangible common equity of 18.29 and a return on assets adjusted of 1.91 million. We're in the process of building a new branch in Marathon, Florida. We haven't raised the building down yet, nor have we bought any stock. People often ask how we consistently perform well every quarter, and I've never stated this before, but experience is irreplaceable. For instance, our Bank Board and the Centennial Bank Board together have a collective 374 years of experience. This extensive experience helps guide us effectively. Additionally, our directors own 13,911,939 shares, constituting 8.42% of the company’s total outstanding stock. One director was not included in this count, so the percentage is actually a bit higher. This ownership doesn’t even account for our affiliates or branches in Cabot and Little Rock, likely raising the total to over a million shares or almost 10% owned by our directors, which reflects their vested interest in the company. Speaking of experience, our President Group has over 150 years of banking experience. If we consider my team, including Donna, Steven, Tracy, myself, Kevin, and Brian Davis, we collectively contribute 102 years of experience. Combined, that's an impressive total of 626 years in banking. This exceptional team is why we continue to succeed. Recently, I discussed this with Donna, and the amount of experience is truly notable. While education is valuable, nothing compares to hands-on experience. We had another solid quarter and are witnessing greater transparency. We did see a slight increase in non-performing loans, notably related to movie theaters, and one specific $2 million manufacturing loan in Jonesboro may default. Overall, our loan performance has been stable. Inflation rose slightly in September, emphasizing the need for caution. Although the Federal Reserve is doing its best to keep rates down, there's uncertainty about managing that effectively. If the market sees 2% and 3% loans, we might have challenges in the future. We are focused on maintaining our rates and working on our margin. I believe we've performed well operationally, and it appears 2021 will be a positive year for the banking sector based on initial reports. Donna, or anyone else, do you have any comments? Tracy, do you have anything to add?

Tracy French, President and CEO of Centennial Bank

I think you covered it all pretty well on the PPP.

Donna Townsell, Director of Investor Relations

Well said, Tracy. With that, Gary, I think we'll go to Q&A.

Operator, Operator

We will now begin the question-and-answer session.

John Allison, Chairman

Thank you, Gary. Before we go forward, I have one comment to make, if I could.

Operator, Operator

Absolutely, sir.

John Allison, Chairman

I met Joe Biden a while ago. I called Joe Biden to clarify our reserve numbers: we put $14 million in reserve and charged off $4 million. I just got it upside down and backwards like my friend, Joe.

Brady Gailey, Analyst

Why don't we start with loan growth? If you look at it, ex-PPP, loans have been down in that 9% to 10% range annualized for the last couple of quarters. Johnny, it sounds like you're being pretty conservative here. Should we continue to expect some more loan shrinkage going forward?

John Allison, Chairman

Probably some, until it clears up. I am kind of like Chris. Some of those projects that you could get done in four months now take six or eight months to get done and may not get done. So, I think we are seeing loan shrinkage. There's nothing wrong with getting your money back. Until we get a vaccine and things turn around, I'm really comfortable doing what we're doing.

Kevin Hester, Chief Lending Officer

I would agree with that. I think there are going to be some opportunities next year with the repositioning of assets when you start seeing things shake out. We’re not quite there yet because people are still in deferment in a lot of cases. So, I think we're just kind of in this odd space where you're still in the pandemic and you haven't come out. There are not a lot of great opportunities and we're focusing on margin and trying to be profitable.

John Allison, Chairman

So, we've been extremely conservative over the last three or four years, as you know, and that certainly has paid off for our asset quality. We haven't lost a penny yet, though we probably will, as I've said in the past. But so far, this pandemic with the $2 million manufacturing loan in Northeast Arkansas didn't have anything to do with the pandemic. It was just a loan that blew up. But outside of that, we've seen our movie theaters are probably going to take a loss at some point in time in the future, but what we've done in the past is paying dividends for us in the future.

Brady Gailey, Analyst

Yes, got it. That makes sense. So, you mentioned holding the margin. If you look through the noise, it looks like the core margin was down only 5 basis points on a linked quarter. Do you think going forward you're going to be able to hold the core margin or do you think we should expect to see some modest shrinkage in the core margin going forward?

Stephen Tipton, Chief Operating Officer

Yes, I think our last comment about what we were able to do in terms of deposit costs related to loan yields, and those matching fairly well. We do have still a pretty good opportunity to push on deposit rates both via the CDs that are maturing, and then we still have over $1 billion that's over 50 basis points on the checking and savings side that are either on contract or that we are working through on a negotiated basis. So, there's still opportunity there to bring some of that down. The wildcard will be the impact from the investment portfolio and kind of where reinvestment rates and those cash flows come in over the next six months or a year.

John Allison, Chairman

The investment portfolio is the problem. We're writing at about 150 in there. So, we're putting it on the books at 150. Tracy, every time he meets with his Presidents, he talks about rates. Anything we write below our average yield right now is 514, ex-PPP. So, anything we write below 514 is dilutive.

Brady Gailey, Analyst

That sounds fair. And then lastly for me, you have Biden leading in the polls, and he's talking about increasing the corporate tax rate to 28% from 21%. If that happens, any idea what the tax rate impact would be for Home?

Brian Davis, Chief Financial Officer

What you would want to do is take the full 7%, which would really increase it by 7%. We might find it interesting to recall when we had the Donald Trump tax cut, as we had a significant write-off of deferred tax assets. We would likely recoup about half of that write-off because we would end up increasing our deferred tax assets. However, for us, it would mean most of that 7% increase in the tax rate.

Matt Olney, Analyst

I want to circle back on the credit discussion. Could you clarify the overall balances for special mention loans and classified loans as of 930? Just trying to see if there's any negative migration during the quarter.

Kevin Hester, Chief Lending Officer

Yes, there's been significant movement on the second deferrals, which is to be expected. It's definitely a case-by-case situation. It largely depends on factors such as the borrower's cash reserves, their operating projections moving forward, and their handling of the deferred interest. We're still looking at around $500 million in the second deferral, and our special mentions increased by about $150 million in the third quarter, while substandard loans rose by roughly $50 million. Comparing that to the more than $500 million in second principal, we see about a 40% migration. We know that many borrowers are likely to transition back to payments after the second deferral, and those borrowers may not migrate. However, some borrowers may require additional assistance after the second 90 days, and those are the ones we anticipate will migrate further to a special mention or substandard classification at this time.

Matt Olney, Analyst

Got it, that's helpful. And on the reserve build from here, I think we're almost at 230. Once we exclude some of the PPP stuff, I'm curious if you think we've peaked from here and if not, how close we are to peaking?

John Allison, Chairman

Well, we'll take charge-offs when we see them. When we see a charge-off, we're not building a stack of charge-offs over here that we're going to hit at some point. When we see them, we'll take them. I think we did see some non-perform losses. You may see additional losses on our movie theaters at some point in time in the future, but I've observed that our past behavior is paying dividends for us in the future, and I'm confident in the underlying quality. When we see it, we'll call it, Kevin?

Kevin Hester, Chief Lending Officer

And Matt, the encouraging thing we're seeing on these deferrals is that the majority of the cases so far are paying their interest up-to-date before we go into the longer-term modification. If they're not paying up-to-date, they're paying it over a very short time going forward. So, that's very encouraging to me that we have somebody that's got the ability.

John Allison, Chairman

We have one that was on full deferral, and he's come back on interest and principal; operations are back open again. It's about a $70 million credit, and he's off and running. So that happens. The turnaround was pretty good. We deferred him. He got on his feet, got his business back open again. The worst thing that could happen, not talking politics, but the worst thing that could happen is a complete shutdown again. That would not be good for any of us.

Stephen Scouten, Analyst

How are things in Georgia? I see a lot of negative headlines around COVID numbers. I'm wondering how the state is from a staying open perspective?

John Allison, Chairman

Well, we're open. The state is open. COVID numbers have been moving up and down, but we're open. And so far, so good at Home BancShares. We've had about 30 cases, all over the company-wide out of 2,000 people. Everybody's doing well; we haven't lost anybody. It's pretty high. But everyone is being careful. We're wearing masks, gloves, social distancing, and doing those things that we need to do to protect our staff and our other people.

Stephen Scouten, Analyst

Most businesses, small businesses, restaurants, all that stuff kind of still open where you are today?

John Allison, Chairman

That's correct. Yes. I was dining with a customer last night that has a lot of different businesses across the state and actually had some in Florida. The same thing Kevin just mentioned: that if you're in the hospitality industry in an area that is not getting the travel coming through, it's not as good as it should be. But the other pieces of this puzzle are making things meet just fine.

Kevin Hester, Chief Lending Officer

And in fact, if they do it right, target towards the ones that really needed, particularly hotels and restaurants.

Stephen Scouten, Analyst

I'm curious what you guys are thinking on the capital front here today. Obviously, TC climbing nicely here this quarter, thinking about your pre-tax pre-provision ROA or your new P5 number there, Johnny, it seems like capital is going to continue to build.

John Allison, Chairman

We have a 10:10 call every morning, and that was the topic of discussion this morning on the 10:10 call, and we've looked at our capital ratios, and they're powerful. If you've looked at them, I mean, all our capital ratios are solid. The choice is, do you want to take care of your shareholders, right? What's in the best interest of the shareholders? Do we need to go buy $200 million or $300 million worth of stock? Do we need to not buy stock? Do we need to increase our dividend? If we do an M&A, if we could do an M&A deal that makes sense, we'd probably do that. But that discussion has been ongoing every morning this morning. I want to ensure fairness in our actions. When I heard President Trump say that banks shouldn't be buying back their stock, we decided to stop our stock repurchases. Since then, we have not bought back any shares. I anticipated that the situation might worsen to the point where banks would need a support program. While it hasn’t become that dire, some banks have started repurchasing their stock, but not Home BancShares. I was concerned that any forthcoming program would exclude those who had been buying back their stock. That has been the main reason we haven't engaged in stock repurchases. Many larger banks are currently prohibited from doing so. We need to consider our shareholders. We haven't increased the dividend in a long time; we made that decision to protect it while assessing the pandemic's potential impacts, which have turned out to be less severe than I feared.

Stephen Scouten, Analyst

Maybe last question for me, you talked about reserve levels there. I mean it seems like you got more than enough to me, honestly, here today, but I'm wondering the effects of CECL. Once we get maybe the excess reserve from pandemic and deferred loans, where do you think in a CECL environment that loan reserve could normalize over time?

John Allison, Chairman

I’m not sure if CECL is the right approach. Did it lead us to increase our reserves? Absolutely. However, Home has always built up significant reserves. Even during times when loan losses were dropping to 40 or 30 basis points, we maintained our reserves around one. Today, we announced record earnings, yet the stock price fell. It seems earnings don’t matter much anymore. So, why not build reserves? It doesn’t seem to affect anything. We've talked to several analysts about our record quarter, which resulted in $0.47, and in my view, we didn’t need to add another $14 million to reserves, but we chose to build them anyway and will likely do so again next quarter. Unless we notice something unusual, I think there is becoming a bit more clarity regarding asset quality.

Michael Rose, Analyst

Just a couple of quick ones here. Kevin, PPP forgiveness, you've talked about how it's started. What do you expect for forgiveness and kind of the cadence on that?

Kevin Hester, Chief Lending Officer

I think we're going to get a lot of it submitted this quarter. From what we're seeing coming back from the SBA at this point, it's largely going to be a first-quarter item, I think, from a cash coming back standpoint.

Jon Arfstrom, Analyst

Just a couple of quick ones here. Kevin, PPP forgiveness, you've talked about how it's started. What do you expect for forgiveness and kind of the cadence and timing on that?