Home Bancshares, Inc. (Conway, AR) Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 13 speakers on the call.

Operator

Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated Third Quarter 2023 Earnings Call. The purpose

Speaker 1

of this call is to discuss

Operator

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 ks filed with the SEC in February 2023. At this time, all participants are in a listen only mode And this conference is being recorded.

Operator

It is now my pleasure to turn the call over to Donna Townsheil, Director of Investor Relations.

Speaker 1

Thank you. Good afternoon, and welcome to our Q3 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. 2023 continues to be tough for the banking sector with bank failures, interest rate and funding pressure and now potential credit concerns, This business is not for the faint of heart. Here at Home, we hold ourselves to a high standard and to provide some details on our Q3 performance is our Chairman, John

Speaker 2

Thank you. Welcome to the Q3 'twenty three earnings release and conference call. We'll discuss the results of the quarter. We'll talk about the year and what's going on in the bank space and then we'll open it up for Q and A. First, I'd like to pay respect to a mentor, a trusted professional investor, respected friend Entrusted ally, a person we all look to for guidance and advice, and we have total respect for her, She was above reproach.

Speaker 2

That is Sally Pope Davis, whose hand has guided Goldman Sachs Bank Stock Investing for many, many years. I said this at the Stevens Conference several weeks ago that having Sally in your stock as a long term investor was Like having the good housekeeping seal of approval on your stock. All of us at home will miss our leadership, her guidance, her professionalism and a straight talk Because you always knew where Sally stood because she had a way of letting you know. Not only us, but the entire industry will miss her too. We wish her happy in the retirement years and sincerely hope that life brings her many years of fulfillment.

Speaker 2

I have one other comment, it will not be the same without you, Sally. It will bring an emptiness that cannot be filled by anyone anymore. Let's go over the world and talk about banking. I asked last quarter what cost we can go wrong. I agree with Jamie Dimon.

Speaker 2

I read his information he put out and that in addition to being in a tough economic times, We're facing very perilous wars with Ukraine war and now the war with Israel. And that one has the potential Maybe it's getting out of control, hopefully not. The quarter was a little disappointing by Home Bikeshares' high standards because we always expect to be the best in the nation. But we continue to be an industry leader as we compare to other financial institutions. The 2 main culprits were operating expenses and interest expenses that caused a slight decrease in net income.

Speaker 2

Operating expenses are creeping up as evidenced With almost 46 percent efficiency ratio and interest expense is creeping up likewise as evidenced by the cost of interest bearing deposits from $2.27 in June to $2.55 at the end of the quarter. The good news is interest margin actually improved in the month of September as we've been working diligently to stop the bleeding And we're just starting to address the expense side issues. The lenders are doing their part by increasing revenue through repricing and Origination rates of new loans. I'm optimistic they will overcome the increase in interest expense in the 4th quarter. The expense of non income producing area of the bank will have to be addressed and these departments scrutinized.

Speaker 2

It's really pretty simple. If profits are going down, you either increase revenue or reduce expenses. There is no other way to increase profitability Or unless you just want to maintain the status quo. Someone said briefly, I hope if I'm lucky, this will work out. Well, hope is not a strategy and luck is not a plan.

Speaker 2

We must plan for what we want to do to improve. Liquidity remains strong and we've successfully reduced the However, on the expense side, we still have the same number of people as we did when we had a much larger asset base. Watching the newspaper ads, it appears others may not be in as Liquidity position is home because they'll pay almost any right just to get the money. Maybe profitability is not important to them. The margin fell 9 basis points during the quarter to 4.19 at September 30.

Speaker 2

However, the good news is we grew margin in September And Stephen will talk more about that in his remarks. Certainly, it appears that maybe the increases have slowed down. It could be a head fight. Stay tuned. Our TV and newspaper ads continue to promote the strength of home buying shares, which relates directly To safety and soundness of our customer deposits, many customers are innocently chasing rates on deposit without any consideration as to what happens if the big bad wolf shows up at the door.

Speaker 2

Many banks will be closed before the sunset today. If their bank is 100 percent loan to deposit and less than 9% capital, it could happen today, tomorrow or at any time. Home has an 86% loan to deposit and is sporting a powerful CET1 of 14%. That puts us in the top tier For you people who don't know what CET1 is, that's capital. That puts us in the top tier of all bikes in the U.

Speaker 2

S. Regardless of size. Our powerful capital number is demonstrated by the number one bank in America, JPMorgan Chase, has a CET1 capital ratio of 14.3%, just slightly above home. We're very proud of our Fortress balance sheet and we will continue to build on our strength. Jamie Dimon said he is steering his company to be ready for whatever comes his way and your company home is doing exactly the same thing.

Speaker 2

I quote Mr. Diamond, This may be the most dangerous time the world has seen in decades. We are in total agreement and are continuing to take the safe path And protect our depositors, hard earned money, our shareholders' investment and own and to ensure our employees have continued employment. Your bank will not be one of the SVB signatures or publics that did not have the ability to pay out uninsured deposits. Homes can pay out all insured policies and still have money left.

Speaker 2

I don't know how many banks can say that today, but I'm damn sure proud of our ability to do that and Firstly, commit that we will remain in that strong position on a go forward basis. In addition to that, Home would run a 1.20 return on assets after borrowing All the money that we needed to pay off the uninsured deposits. I think that's pretty good. Some banks would love that. That is not an acceptable number at Home Bancshares.

Speaker 2

Adding to the financial strength of Home is peer leading amounts of reserve for bad loans. Almost $300,000,000 or 2 percent of outstanding loans ranked us as one of the best in the country. A 2% reserve level has provided security for our company even during the great financial crisis of 2,005 through 2012. We had sufficient capital and reserves We came through that with hardly a bump. We're all expecting additional impact to the economy as the Fed continues to hold rates higher for longer while attempting the difficult process of making a safe landing.

Speaker 2

Maintaining strong reserves is another spoken will to ensure Home will be a survivor through the next crisis as we have been through all the others. Not only a survivor, but to come out the other side stronger than what we went in. We're constantly watching for As you remember, 89 and 10, we were one of the biggest buyers of Feld Bikes in the country, and we're looking for opportunities, and we're seeing some. Another spoken of will of strength is protecting the growing tangible common equity, better known as TCE. Many institutions have not protected the TCE, allowing several to even go negative, Own Bancshares is proud Of continuing not only to hold on, but to grow ours during the fastest escalation of interest rates since the '80s.

Speaker 2

Over the past 12 months, we have paid out $143,300,000 in dividends. We have repurchased 2,250,000 900 shares of stock for $51,000,000 and have taken an additional mark to available for sale, or referred to as AFS, of $43,000,000 while still growing tangible common equity by 11%. We grew it $9.82 a share to $10.90 So that's a shout out to all of our people for an outstanding job in managing this company through an extremely Dangerous economy. If you want to throw in the kitchen sink and take all the additional losses of Happy's Bank Bond Book transaction that we As held to maturity, the mark to market would be approximately another $31,000,000 but still equates If we take that, it still equates to tangible common equity growth of 10.4% over the last 12 months. If it's true that bank stocks trade on a multiple of tangible book, one would expect home stock to be up about 10% because TCE is up.

Speaker 2

We're actually trading down about that same percentage. I think it's indicative of the fear that exists in this asset class. Earnings ability is certainly another spoken will, and we're continuing our march towards our steady goal at the 1st year $400,000,000 for the year. As my football coach used to say, the hay's in the barn, well, most of the hay's in the barn. For the big three quarters, we've earned $306,800,000 through the 1st three quarters.

Speaker 2

We earned $98,500,000 For the Q3 of the year, we're $0.49 a share. But if you add the last 4 quarters together, HomeAge produced a record Earnings of $415,000,000 or $2.05 a share, while fighting all the distractions we have encountered both on the economic and man made disruptions from some disgruntled foreign employees. Let's go to a few key numbers. Revenue was 245 point Forward down just to check. ROA, dollars 1.78, we like a $180,000,000 or better.

Speaker 2

NIM was $4.19,000,000 and return on tangible Comradect, it was 17.62%. Asset quality is still remaining strong with nonperforming assets at 0.42. Last time we talked, we had an office building. We just heard about an office building that possibly was going to we were going to get back. Looks like it's going to be a 4th quarter item and we're going to get it back in the 4th quarter.

Speaker 2

I traveled to see the asset, I walked the office building And I left quite happy with the location and condition of the property. Prime location, great parking garage, elevators, well kept. I don't expect much loss. Is any I'm able to be in it at below $23,000,000 between $22,000,000 $23,000,000 Well, time will tell whether it's worth, but I'm not expecting much loss. We had a new one that popped up, a marina in Dallas.

Speaker 2

This is new, probably too early to tell. I don't expect a loss here. If we underwrote it properly, which I'm sure we probably did, as hot as marinas and the marine business has been, I can't imagine a loss there. There's one other one we've been carrying on the books for some time, and Kevin's going to talk about it. Looks like he's got to maybe have a solution to that one.

Speaker 2

Loan demand has been about half of what it has been. We may be in the beginnings of a loan recession. Yields on loans were up to 6.98% from 6.48%, up 14 basis points last quarter. Loans were up slightly for the quarter, primarily CCFG. Chris and his crew came on.

Speaker 2

We're expecting loan growth in the 4th quarter. So far, I don't normally predict that because I usually make a mistake, but we are predicting some loan growth in the Q4, and we're now writing our loans in the high 9s and the lower 10s. M and A activity, we've been involved in several deals, but most of them just don't work at this time. Last quarter, there was some press about some comments Some press came out, I don't know where it came from, about some comments I made during 2018 about not Seeing a problem, I did say I didn't see a problem with CRE back then. Not sure what the purpose of taking an old quote and printing it 4 or 5 years later, It looked and smelled and acted like maybe a hit piece.

Speaker 2

We're 100% correct because there was not a problem with our CRE portfolio, but maybe Somebody is trying to make some money on the shorts. We'll keep you informed of that in the future. We always ask about what's going on in the regulation side, Examiners all think the world is cured by capital. And I guess if the CET1 was 100%, that would be correct. You probably not would expect this coming from me, but I'm inclined to be favorable to raising capital requirements.

Speaker 2

It appears to me that most bank failures All result of bad loans. So if there was some limit on loan to deposit ratios or loan to capital, they would not be able to stretch themselves into these kind of problems. I would not be opposed to some kind of restraint because the world is full of 108% loan to deposit banks with less than 9% capital. If they can't control themselves, somebody needs control. I also think they should be forced to hit a certain level of profitability before they can expand their franchise.

Speaker 2

Now I think those ideas had possibilities of helping and would be meaningful rather than some of the mess we do from time to time that really doesn't mean anything. It appears they usually show up light and the dollar is short. It's the old story. Some people make things happen, some people watch things happen And other people say, what happened? Am I supposed to say back to you, Donna, or back to you, Donna?

Speaker 1

Thank you for those comments, Johnny. Stephen Tipton will speak next with some details on our operations.

Speaker 3

Thanks, Donna. I'll start with the net interest margin as you referenced in Johnny's comments. Reported NIM was down 9 basis points to 4.19 in Q3, but included about $500,000 of net event expense This quarter due to a couple of non accruals that Kevin will mention in his remarks. Normalizing for those event items, the net interest margin would have declined 6 basis points on a linked quarter basis. We continue to closely monitor asset repricing against the increase in cost on the funding side.

Speaker 3

On a month to month basis, we saw a little more pressure in August on the NIM and actually had slight improvement in September with the core net interest margin at 4.19. During the quarter, total deposit costs increased 23 basis points to 1.87% While the yield on loans excluding event income increased 18 basis points to 6.99%. On a monthly basis, Total deposit costs increased 7 basis points in September to 196, while the yield on loans excluding event income increased 11 basis points to 7.08%. We're pleased to see the results in the loan yield as efforts from repricing maturities and discipline on new production begins to show in our results. Additional loan repricing opportunities continue this quarter With over $200,000,000 maturing at 5% or below and we've got a little over $800,000,000 between now and the end of next year at 5% or below.

Speaker 3

So there's definitely opportunity there. Switching to liquidity and funding, we continue to manage the interest rate environment we're in today Trying to strike a balance between the rate competition is offering and fostering our own relationships. In many of the markets we are in 6% deposit rates are beginning to be the new normal. Total deposits declined $478,000,000 in the quarter With the decline occurring in July August, the Texas and Florida regions saw the majority of the decline, while the Arkansas regions continue to be a little more stable like we saw in the prior quarter. Non interest bearing balances accounted for about 2 thirds of the decline in deposits in the quarter and stand at 26% of total deposit balances down from 27% in Q2.

Speaker 3

Alternative funding sources remain extremely strong with broker deposits only comprising 2.4 percent of total liabilities. We allowed $65,000,000 in broker balances to roll out in July and continue to work on customer relationships that provide long term value. The focus in loan committees and discussions amongst all of our Regional President continues to be on deposit gathering, core customer growth and retention. On the asset side, As Johnny mentioned, loan origination volume slowed in Q3 with approximately $660,000,000 in commitments compared to $1,340,000,000 last quarter. Yields on originations continue to improve with an average coupon of 8.98 percent in Q3.

Speaker 3

Correspondingly, payoff volume declined in Q3 to a total of $578,000,000 in payoffs And the yield on new loans was in excess of 150 basis points higher than the outgoing rate from those payoffs. Closing with previously mentioned strength of the company, all capital ratios improved in the quarter, notably with the TCE ratio of 10.76 percent and a total risk based capital ratio of 17.6%. With that Donna, I'll turn

Speaker 4

it back over to you.

Speaker 1

Thank you, Stephen. And now Kevin Hester will share information from the lending side of the house.

Speaker 5

Thanks, Donna, and good afternoon, everyone. Many times through the years, I've characterized our approach to lending as conservative. We always preach to our lenders that we want asset quality, profitability and growth in that order. In 2017, when most banks were loosening credit standards, we were tightening. I believe that all of this was put us in a position for a time like today.

Speaker 5

We knew that the free money days would come to an end and that interest rates would increase. However, there was no way to anticipate the giveaway money days of COVID that would create massive inflation. No one anticipated the level of interest rate increases that would be required to reverse the inflation caused by these poor fiscal and social governmental decisions. It is unreasonable to expect debt service increases of over 100% wouldn't test even the most conservative of underwriting processes. We will see that this is the case, especially if the interest rate scenario is truly higher for longer.

Speaker 5

During the last couple of months, we've been evaluating 3 credits. The first is the office building in California that Johnny has talked about. It's Class A property in a desirable location. We will move this property into OREO during the Q4 at a balance of just below $23,000,000 which is about 70% of the new appraised value. Cash flow is not breakeven at present, We are optimistic that there is a path to disposition at little or no loss.

Speaker 5

The second is a Miami property of about $7,000,000 that is prime for redevelopment. The appraisal indicates that the land value exceeds our loan balance and it is also in a desirable area. While we will move this into OREO in the Q4 as well, we are currently evaluating an offer that is above our carrying balance, so we don't expect any meaningful loss from here. The last one is a marina that Johnny mentioned on a lake near the Texas Oklahoma border that is in the $9,000,000 range. Recent financial information indicates that the project is viable and it appears that our issue could be coming from something outside our relationship.

Speaker 5

We are continuing to evaluate this situation and we'll adjust our approach as we gain more information. With these three loans on non NPAs did increase 14 basis points to 0.42% this quarter. However, past dues only increased 3 basis points on a linked quarter basis, indicating a reduction in activity outside these three loans. Even with this NPA increase, the allowance for credit losses Still provides a stellar 314% coverage of non performing loans. I do believe that our preparation and discipline will pay off in the long run and will result in fewer asset quality issues with less severity than would otherwise be the case.

Speaker 5

Combine this with the best in class loan loss reserve And very high capital ratios and I believe that we're in a great position as the remainder of this interest rate cycle plays out. Donna, that's all I have and I'll turn it back to you.

Speaker 1

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

Speaker 2

First, you got to turn the mic.

Speaker 6

Johnny, I don't think there's anything that you didn't cover, Steve and Kevin covered for the banks. But all I know is Our group and outstanding bankers have stayed focused and we will do what's the best thing for the shareholder.

Speaker 2

Brian, any comments?

Speaker 5

No, I'm good. I think you said it all.

Speaker 2

Thank you, Donna. I think we're ready for Q and A.

Operator

Thank Our first question comes from the line of Stephen Scouten with Piper Sandler. Your line is now open.

Speaker 4

Hey, good afternoon, everyone. Appreciate the time.

Speaker 5

Hi, Steven.

Speaker 4

I guess, You guys already have one of the better efficiency ratios in the industry, but it sounds like maybe there could be A closer look at really every aspect of the business. Would you expect any sort of larger scale efficiency plan? Are we going Is Donna going to get names of the efficiency ratios are once again? What are we looking at there on the expense front?

Speaker 6

Steve, this is Tracy. I mean, I think for the past several years, we've had some growth You know that's going on, as Johnny mentioned, we even had some recent activity that could have made our company grow a little bit more if that opportunities would come across With the economic times today, it's certainly past time to reevaluate a lot of Areas of the bank that we're going to we have started that and we will address that As soon as we possibly can. So always room for improvement.

Speaker 2

And I didn't get Okay. Steven, you thought I got in a field position at the end of last quarter and curled up. I didn't do that. I want you to know that. Isn't that what you thought, Steve?

Speaker 4

I was just worried you thought banking wasn't any fun anymore. I was worried you're just tired of it.

Speaker 2

I'm not sure if I've ever had as much fun.

Speaker 4

I'll leave that one there. How about loan growth? I know you said it felt like maybe there wasn't a lot of demand out there, but in the same vein, it feels like a lot of your competitors are pulling back a good bit on the growth front. Do you feel like there might be opportunities out there for you guys to be More aggressive in spots to kind of pick your battles, if you will, in some areas where you could add loan growth, DTFG or otherwise?

Speaker 5

Hey, Steven, this is Kevin. The 4th quarter looks pretty decent from that perspective. We see our pipeline You're out that far and know what we got closing. So Q4 is going to be pretty good past that. I mean, It's all about opportunities and where the market goes and we'll take what we can get.

Speaker 5

We're not projecting big loan growth. That's not the time of the market we're in, but this quarter does look pretty good.

Speaker 2

You're getting some higher rates now on these loans and particularly on some of the projects people are looking at, we're getting some Higher rates and that's meaningful. We've watched the last three quarters not keep up with interest expense and We're as I said, we've fought in that battle to stop the bleeding and we may be getting close to doing that. I've watched the 7 Our lenders have done really a good job on the $750,000,000 from June to December getting pricing on that Up 300 basis points to 500 basis points on those. So I really don't think we're going to kind of be flat here for a while. It's the Fed probably a good time to be flat.

Speaker 2

We got we're repricing people at 4.5 going to 9.5. That's a shock. That hadn't hit the market yet. That has not hit. And we got I don't know what's repricing next year is about $1,000,000,000

Speaker 6

Stephen, you have

Speaker 3

Yes, below $5,000,000,000 we've got between $800,000,000,000 that's coming due this fixed rate That will have an opportunity to improve significantly.

Speaker 2

Our lenders really done a really pretty good job. I have to they've not pretty good. They've really done a good job They understand what it takes and they're getting it done. So we're catching up. We're just catching up with I almost said that I thought we had troughed on the cost of interest expense, but that may not be right, but we're damn sure getting closer to it.

Speaker 2

So We're trying. We look

Speaker 3

at that report every day

Speaker 2

and we're trying to get there.

Speaker 4

Got it. And with those re pricing that $800,000,000 to $1,000,000,000 I mean are there many concessions That you feel like you'll have to give as those loans reprice. I mean, it just feels like it'd be tough for that many loans To go from, let's say, under 5% to 9% or what have you, do you think there's a portion of that that you'll have to do it, call it, 7% or somewhere in the middle to keep them working right?

Speaker 5

I mean there could be a few Stephen, we haven't seen We've repriced quite a bit of stuff this last two quarters and we really haven't seen very much of that. So I don't anticipate a lot of it. There could be whatever now and then that does look that way, but I don't expect it to be widespread. If you remember, we're Pretty low leveraged even back in that timeframe. So it will test our underwriting, but I don't think it will break it very often.

Speaker 6

I think Kevin hit it on the head there. We didn't create the interest rate increase, it's happened, right? Most of the customers that we talk to, they're good business people. So they understand what's Going to happen or what's happened. So, Kevin and the team's got their lenders Working those a little bit ahead of game than normal just to make sure we're in

Speaker 2

the right spot. So we actually feel fairly good

Speaker 3

about it.

Speaker 2

I think I've only seen one ask. I think I've only seen one ask. There may have been another ask, but I've only seen one, Which I think is outstanding. Kevin made a good point. We're low leverage.

Speaker 2

They may let some stuff go, but they're fine. I'm going to let that low leverage stuff go. They're probably going to keep it. I mean, if you got high leverage on the stock, they're probably going to go away or could come back. You think about the office building that Yes.

Speaker 4

That's definitely a testament to the underwriting.

Speaker 2

Yes. That is a testament. That was originally a $50,000,000 appraisal. It's now $34,000,000 or $35,000,000 appraisal. So we're in at 70.

Speaker 2

And we've been in there at 80 on the front end, we've been at 110, 120 now. So we're in we're very pleased with What's going on in that space? Bruce, do you want to talk about that a little bit on that one office building? I don't think you've got any other office buildings, do you?

Speaker 7

No, not really. This is our one. We had cash flow and we lent on it. That serves me right. We don't usually like cash flow, but yes, no, happy to talk The asset, we got involved in that asset in 2016 when we financed the NPL purchase and our borrower converted the NPL to an REO.

Speaker 7

Was 50% leased then. They took it to 100% leased and had about a $70 something million value against that. And it has it's on a ground lease. The ground lease was Resetting in 2020, we gave them some time to get through the ground lease reset and we got through that. There was a pay down obligation associated with that, which they met.

Speaker 7

And then we kind of got into the pandemic and 1 of the tenants in 2022 left, which put us back to 50% occupied. And kind of after that, our borrower Lost a little interest in the property and really kind of started to focus on trying to fill it up with We would consider to be slightly above market rents. And so we kind of got to the point over the last maybe 6 months or a year with that borrower that They needed to show some better effort on improving the value of the property and we had an opportunity to probably Sort of modify and extend, etcetera, but we really got to the point we felt like the property value was either deteriorating or not improving and we didn't think that Our current borrower was going to be the right party to do that. We don't take it lightly when we take things back, but at the same time, you can't be afraid to do so, especially at our leverage. The loan was I think at about $27,000,000 or so.

Speaker 7

So we negotiated A return of the property that came with some obligations from our borrower. We brought it down under $23,000,000 now, so between $22,000,000 $23,000,000 And we'll kind of work it there from there as is values we just got an appraisal of $32,000,000 which is Down 55% from its peak, but it's down 55%. We're still at 70%. We feel like there's some opportunity there. We were fortunate also that our existing office space in LA, the lease was maturing at the end of this year.

Speaker 7

So we're moving out of our Property we're moving into this property will be there on-site and start to work towards stabilizing this Property, we have a good relationship with the owner. That was not the case. Our borrower did not have a good relationship with them. And so I think everybody is working towards now the same goal, which is let's improve the value of the property and we'll use it until we lease the rest of it up. But We like the location.

Speaker 7

We think it's a good property and I think you can't be afraid to step in and do these things every once in a while.

Speaker 4

Yes. Okay. That's great color. Thanks so much. Appreciate the color guys and glad to see you're still out there fighting Johnny.

Speaker 4

Keep it up.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is now open.

Speaker 8

Hey, thanks guys. Good afternoon. I want to ask about the event income that was highlighted. I think you mentioned it was negative in the 3rd quarter, had been positive for a while. Just any color on kind of the drivers?

Speaker 8

I think you mentioned the non accrual reversal. Just also remind me in a normal quarter When that is positive, just remind me what that represents and what kind of outlook we should expect here? Thanks.

Speaker 3

Hey, Matt. This is Stephen Tipton. It was about $1,000,000 in non accrual interest from the two credits that Kevin talked about During the quarter, so I think it was $500,000 or so net negative. So it would have been $1,500,000 It bounces Between $500,000 and several 1000000 a quarter just depending on the pace at which loans pay off and we may Accelerate origination fee income. So, a little hard to target going forward, but I don't recall it being a negative number anytime in our history here.

Speaker 3

So, Would not expect that going forward. That was the it was just from those two credits.

Speaker 8

So it sounds like Stephen that can be a result of in a normal quarter, it can be a result of origination Or a pay down, not either one I'm sorry, not one or the other, but both. Is that right?

Speaker 3

Yes, that's fair.

Speaker 8

Okay. And then I guess, Stephen, sticking with you on the non interest bearing deposits, still some outflow in the 3rd quarter, it looks like the end of period balance is still a little below the average balance in the 3rd quarter. Just any color on what you're seeing there throughout The quarter, any thoughts on kind of where we go from here?

Speaker 3

Yes. I mean, I think it's just a general combination of Customers seeking higher yields, and we've seen some here lately that our competition is offering A rate of interest on demand deposits, which has not historically been a thing or hasn't in a long time. And so You're having to combat some of that, but as Tracy and I look every day, every month, I mean, I think a lot of it is just general Customer spend too, when we look at current balance versus average balance Yes, over the last 12 months or so, I mean broadly you're seeing a lot of those balances are off 20%, 25%. And I think a lot of that is just general business customer spend there. It may have a little trend downward from here, but we're managing the interest rate aspect of it Best we can every day.

Speaker 5

Go ahead.

Speaker 3

No, go ahead. Matt, I was going to say Johnny hit on the asset side of things. I mean, I think that's we said for a long time In the cycle that we're in, interest rates have gone up. We negotiate with customers one off. We're going to have to continue to pay that.

Speaker 3

I main thing is just to try to offset that on new originations with PR and what we're able to pull through on renewals.

Speaker 8

And it sounds like you found some maybe I'm sorry, go ahead.

Speaker 2

Go ahead,

Speaker 5

Well, I was just going

Speaker 8

to ask about just margin stability overall. I think you mentioned in September you found some Margin stability, curious kind of what kind of confidence you have that we'll see some more stability in the Q4 or could that be more like early next year?

Speaker 3

Tracy is laughing at the end of the table. Some optimism I think just from September Being up a couple of ticks from August and kind of being in line with where it was for the quarter. But I think we'll take that on a weekly, monthly basis as we work through the deposit side.

Speaker 2

We had a customer walked in and one of our banks had put A customer that I don't get along with and he didn't get along with me and we don't like each other, But he walked in and put $2,000,000 in our bank and he said, I know it's safe. You're right, it's safe. So I don't know if our ads are working or not, but we're playing that we're working that side of it pretty hard. We have you don't see any I mean, our ads are all strength ads. We're going to be here if the big bad wolf shows up home, we'll be open in the morning.

Speaker 2

Yes.

Speaker 9

Okay, guys. Thanks for your help.

Speaker 2

You bet, Matt.

Operator

Thank you. Our next question comes from the line of Brady Gailey with KBW. Your line is now open.

Speaker 5

Hey, thank you. Good afternoon, guys. I wanted to start on M and A. I know Johnny, you mentioned You're having a couple of recent conversations. You also mentioned there's some banks out there with negative tangible common equity.

Speaker 5

Are those deals even possible to do without government assistance? Does the math even line up for that to make sense for a strong buyer like home?

Speaker 2

No. I mean, they get to a point they get to a point where that you can't do them. I mean, they just We're on a trade with great people, great market, but we it just as rates have gone up, It has just killed their buying book. So it makes it it was possible at one point in time, but Since we met them, I mean, it's probably impacted another couple of $100,000,000 So Just tough. I mean, it's tough.

Speaker 2

I feel for them. I really feel for them. Good people, good markets, good bank, Well, they just made a mistake that the people who are no longer there made a mistake, not the people there made a mistake, but The people that are gone made the mistake. It this won't they just you can't They don't work. They don't work.

Speaker 2

And I hate it. I really was I was excited about the opportunity in these markets, but it just they don't work. That one didn't we looked at we were really involved in 3 transactions at the time and We were so focused on the bigger one that when it reached a point of no return, so to speak, We let those others run off and we might should have moved on one of those. So I haven't heard if either one of those other 2 sold yet or not.

Speaker 5

Okay. And then moving on, it feels like you'll have a shot at hitting your $400,000,000 And earnings for 2023 goal, which is great. Any idea what that goal will look like next year? It feels like another $400,000,000 would probably be tough to hit, but any idea about your goal and the way you're thinking about next year?

Speaker 2

We don't normally go backwards. I'm not a guy that looks at going backwards. I look at going forward. So I would expect something better. We expect something better.

Speaker 2

It has been frustrating here for the last three quarters watching the interest expense Keep nipping. Even though we're getting I mean, we're record revenue. It's just interest expense nipping it. And I think that has slowed that interest expense has slowed and I don't think the Fed is going to raise. I don't think they're going to raise rates.

Speaker 2

So, I think we may be stabilizing in here somewhere and we've got some as we continue to reprice our book And the new loans coming on stream are all in the 10s range, 9.5, 10 range Plus fees. So, I'm optimistic that we can do that and Tracy is committed to decreasing the expenses here at this company. So we're going to work on that. We have not done that in years. And it's not we just not that we don't pay attention to it, we just let it creep up Over a period of time, it is time to reevaluate every segment of this company and determine if we want to Continue to keep it or get rid of it or what we want to do.

Speaker 2

It's just that kind of time. I'd say where everybody is doing that, not only us, but I see it being done everywhere. I saw where FPK is up $20,000,000 out. They redid some nice Chris did a nice job, Barry. We did some $70 something million worth of bonds or securities and he That $20,000,000 in expenses out of his $12,000,000,000 asset company.

Speaker 2

So hopefully, we can find some room in there to cut some out and pick up some Expense side, we haven't looked at that in a long time and we're going to we're diving into it.

Speaker 5

And so expenses are an opportunity, I mean, you just mentioned a bond restructuring. Is that something That potentially would be on the table as well for home?

Speaker 2

Well, it's interesting. We have an executive call every day at 10:10 and a couple of days ago, Tracy mentioned that and he said, we looked at that a while back and I said, yes, we didn't get too serious about it. And after watching what FDK did, they did a pretty nice job with that. We're looking at some if you replace a 2% bond with a 10% loan, that's a pretty that got my attention. So I've asked our securities department to look at that and bring it to the executive committee and let's see what makes sense and what doesn't make sense.

Speaker 2

So The answer to that is yes, we may look at that. I mean, if we got some 10% loans out here, we can take some 2% Securities and sell them, I don't know how much the loss will be on, but and if they're short, maybe it's not a lot of loss, but Put them back into 10% yield in securities, that'd be you get earned back pretty quick. We're looking at

Speaker 3

it, Marty.

Speaker 5

Okay, great. Thanks for the color.

Speaker 9

You bet.

Operator

Thank you. Our next question comes from Jon G. Arfstrom with RBC. Your line is now open.

Speaker 10

Just want to understand the, just so I fully get the change in non performers. So the California building And the Miami property are the 2 that went into non performing loans, is that right? That drove the $30,000,000 increase, those 2?

Speaker 5

Plus the Marina.

Speaker 10

Plus the Marina. Okay.

Speaker 5

Yes. The 3 credits that I talked about earlier are the 3 that are the new additions of any size.

Speaker 2

It is the office building that we have that we've got about 225 or 7 something in. It's the marina that just popped up out of Dallas. I can't imagine. I'm a boat freak, so I can't imagine losing money on a marina. And it's indicated to us that the guy had other problems that caused this problem.

Speaker 2

So I don't know about that. We'll look at that. And the other one was we've been messing around with this Property down in Florida for some time, it's about $7,000,000 and we have an offer on that that is above Our current value of $7,000,000 So hopefully that may be gone here before too long. That's the 3 pieces of property. Okay.

Speaker 2

So I haven't seen them, but I'm going to go see it. I know the Florida property and I went to look at the California property. I just wanted to see it's the 1st office building we've ever had. I just want to go see it, touch it and feel it. And you can tell by the address, it's 1733 Ocean Avenue.

Speaker 2

So it's on the ocean. It's Class A office space.

Speaker 10

Yes. And you're moving in. I like it.

Speaker 2

I don't think we're going to have a loss in that property.

Speaker 10

Okay. So next quarter is 30,000,000 rolls out of NPL Into OREO around that level, is that the right way to think about it?

Speaker 5

At least 20. Not sure about the green at this point. It's still early. The other 2 are further along

Speaker 10

than that. Okay. Anything else in credit You're worried about and I know you're prepped for it and I've been through Florida with you guys when it was really dire, but anything else That you're concerned about. And when you look out in the future, Johnny or Kevin or Tracy, what do you think Credit looks like in 2024 for you and the industry.

Speaker 5

John, I want to make sure I had the right number on the NPAs. It's 2 of the 3 credits, the 23 and the 7 We'll move in the Q4. The Marine, I'm not sure about. As far as the rest

Speaker 4

of the

Speaker 5

portfolio, past dues are They've been up a little bit a couple of quarters, a quarter ago. They were back down this quarter. The only thing I see is that our portfolio mortgage product has a little higher past dues in the middle of the quarter. It's some of it is the foreign national portfolio product that we've done in Florida For a decade, those are at lower loan to values than the rest of our portfolio. So Yes.

Speaker 5

And they're in Florida, so I'm not concerned about them, but they have picked up past due wise a little bit last couple of quarters. I mean, other than that, Yes, it's just these just the three credits that we've talked about for the last couple of months.

Speaker 2

I don't know if you're wrong. We have an offer. Kevin has an offer on the Florida property for more than our share in value. And I don't I mean, I'm very pleased with I don't like taking property back. You can tell, I only had one property to go I already knew the Florida property, We're probably going to look at it.

Speaker 2

So I want to go look at it. I want to walk it, walk through it, smell it, touch it, and I'm pleased with what I saw. So and we're now 70% loan to value in this appraisal, Which is a recent appraisal. So we feel good about that. You think about it, had we done an eighty-twenty, we'd be upside down now, but we didn't.

Speaker 2

We did fifty-fifty almost on that trade. So anyway, I think we're in good shape. I concern myself with a little bit I have a guy with a 4.5% loan and suddenly it's 9%. And as Kevin said, if you don't think that's going Not create some problems somewhere, you're being awfully naive. So we haven't seen it.

Speaker 2

We have not seen it. And I mean, all of this dollar's rate increase is

Speaker 6

not priced in right now.

Speaker 2

I mean, we're continuing to increase and we got $1,000,000,000 worth next year to reprice. It's not all in the marketplace yet. So these people who are sitting out there with a 4.5% loan today are pretty or 5% are pretty happy with it. Even though they fussed at the time, they want a lower rate, they're pretty damn happy with the rate on it now. So I don't anticipate, who knows, but Who's in better shape in the country to fight that battle in home if there is a problem?

Speaker 5

We went through the loans that repriced the 3rd and 4th quarters. We went through those and had a significant increase coming. We went through those 2 quarters ago, didn't see a significant issue. We're doing the same thing now for the credits that mature next year That Steven was talking about that $800,000,000 to $1,000,000,000 we're looking at the larger ones of those now just to see if we We're going to have any issues and that way we'll be ahead of the curve if that happens to be the case.

Speaker 2

You take $1,000,000,000 worth of loans and you raise it 400 to 500 basis points, it generates lots of money for the ModelMark. So we're optimistic we'll catch up.

Speaker 10

Okay. Well, it's good you were careful 12 18 months ago. I know you've talked about that in the past. Absolutely. Just one more.

Speaker 10

Yes. Yes. I know it was hard at the time, but because we'd ask about loan growth every quarter and weren't doing it, but it makes sense today.

Speaker 7

Chris, just one

Speaker 2

question. We're going straight into Bitcoin and FinTech like I told you to RBC.

Speaker 4

All right.

Speaker 10

It's funny. You just resisted all of the temptations, which is good. Chris, what are you seeing on your pipelines And the quality of the pipelines. And that's all I had, but just curious.

Speaker 5

Yes, sure, John. We look at a lot.

Speaker 7

We get the phone rings a lot. We take a look at a lot. What we've we had some growth this Big growth this quarter was all the growth was in our Facilities business on the Real Estate side. We have facilities out to lenders and serial acquirers, etcetera, and they're active, especially on the loan on loan side. So Most of the growth we had were banks aren't necessarily getting aggressive on things, but that opens up opportunity for non bank lenders and Those people need friends too and we provide back.

Speaker 7

I like that trade today because it lets us come in at a very, very low basis And it's helpful to the borrower as well. Our product is useful To the extent that we can help people achieve their goals and their returns and sometimes a senior loan at 5 over at 40% cost isn't going to help the underlying borrower achieve their goals. But By partnering up with some non bank folks that go make that loan, a little higher leverage, a little higher cost and a little different structure and then we come in behind that at lower leverage, we're helping everybody. So We're seeing good demand for that product. We like it.

Speaker 7

We'll continue to probably While at the pipeline today, there's a number of asset adds on our facilities that we'll look at today. We're continuing to look at other single asset New opportunities, I think somebody mentioned earlier about loan growth and about getting aggressive for loan growth. I think You don't need to get aggressive today to make loans. You need to be patient today to make loans. And I think that's what we're seeing more than anything is we'll be patient and we're happy to help people achieve their goals, but we're not going to get aggressive.

Speaker 10

Okay. Thanks for everything. Appreciate it.

Speaker 2

Thanks, John.

Operator

Thank you. Our next question comes from Michael Rose with Raymond James. Your line is now open.

Speaker 11

Hey, good morning or good afternoon guys. Thanks for taking a quick question here. Just, Stephen, I just want to dig into The deposits, I'm sure like everybody else, I'm getting bombarded by 5.5% and 6% CD rates and Yes, your loan to deposit ratio has cropped up a little bit. Obviously, the mix has changed a little bit. Just wanted to get some assumptions and kind of outlook as we think about Next year as it relates to betas where that mix could trough and what you guys are doing to just make sure that loaner deposit ratio doesn't Yes, really accelerate from here.

Speaker 11

I know there's not a lot of loan growth, so that helps. But just wanted to see what the strategies are and any updates on the deposit side? Thanks.

Speaker 3

No, that's fair. Hey, Michael. I mean, certainly if you look back over the 1st part of this year, we were clipping Yes, 10 basis points to 12 basis points a month in terms of an increase on interest bearing deposit costs that Slowed a little bit, just in terms of the number here lately. The calls and the conversations haven't necessarily, so maybe that's just Yes, something as yields have drifted up over the course of the year. I mean, I think we've said for the better part of the year.

Speaker 3

So we were at 20% or 21%, I think, non interest bearing deposits to total kind of pre pandemic. And so that said, it's logical to think that maybe it drifts back that direction. But It certainly is the number one conversation we have on a daily, weekly basis with the presidents, the folks that are out driving The business in the field, and like I mentioned at loan committees in terms of deposit gathering And opportunities there. We've had a nice relationship in Texas that Yes, functionally started from scratch give or take. That's grown to be a good $20,000,000 $30,000,000 relationship today just over the last month or so.

Speaker 3

So it's those targeted type things that are tied to loan relationships that are probably going to drive volume over time at least we think.

Speaker 11

Great. That's helpful. And then maybe just as a follow-up. Johnny, at the beginning of The call, I think you've obviously pointed out something that's fairly obvious to most of us that the only way to expand profitability is to either grow revenues or cut expenses. Yes.

Speaker 11

You spent some time maybe talking about the expense side, but just maybe as it relates to the fee income side, are there Areas that you can invest in or deepen your presence in that might help just on the revenue side? Thanks.

Speaker 2

Well, it's primarily we've not bought any securities to speak of right now. Primarily That's an opportunity on several loans. The advantage we have is we got the ability to fund them And not everybody's got the ability out there today to fund these loans. And when you start talking about 10 plus percent of loans that gets our attention here. It's a good loans period.

Speaker 2

We underwrite. We don't change our underwriting standards because it's got a tenant from it, I can assure you that. So I think that's Primarily where we're going to go, we looked around for other opportunities. We're constantly looking for other opportunities. There's got to be some more Fall out through this crisis, Michael, you see it like I see it, there's got to be some more fallout and got to be some opportunities coming up.

Speaker 2

I mean, our regulators told Tracy said, I think I've said this before, but just months ago, we said, save your money. But I've Talked to some people lately. There may be some more stuff coming. I think there's another bank that blew up here in the last week or so and I think there'll be more coming. So Hopefully, we'll get an opportunity to play in that arena and we've got the muscle to play.

Speaker 2

So that's You got to be careful. You want to spend your money, spend it properly in the right direction. So you remember 'eight, 'nine, 'ten, 'eleven, how much money we made on those trades in that time. So I believe that I believe there's going to be another bite at the apple here before long. M and A is kind of off the table.

Speaker 2

By the time you mark all this It makes it really difficult. So maybe it's going to be government kind of stuff that you do, but we're open to whatever makes sense. You know that. You know how we're business people up first and bankers second. So if it's an opportunity that makes sense for home, we'll do it.

Speaker 2

I hope I got you. No.

Speaker 11

Yes. No, totally makes sense and hopefully make some money on this Property on Ocean Avenue looks pretty sweet, a lot better than my office here in Gray, Illinois. So thanks for taking my questions.

Speaker 2

If you want to move out there to that property, we'll I'll fly you out and we'll get the east side of lease. I'm thinking about Chris moved his office in there, so the bank is fine. I'm thinking about charging him up on the bank is fine to get it cash flowing positive.

Speaker 11

I got all the property taxes I need here in Illinois. So I'm good. Thanks, guys.

Speaker 3

Okay.

Speaker 2

Thanks. Appreciate you.

Operator

Thank you. Our next question comes from the line of Brian Martin with Janney. Your line is now open.

Speaker 9

Hey, good afternoon guys. Say, most of mine have been answered, just a few items here. Just back to the fee income for one section, It was a pretty notable decline in the other line item in the fee income section. So I thought maybe you could give a little bit of color on that. I think Brian talked about last quarter, The equity investments were a bit elevated, but even with that, it still seemed like it was a greater decline on the fee income side.

Speaker 9

I'm curious if there's anything else in there.

Speaker 12

No, I'll give you the answer to that. It's down $9,000,000 And you're right, we had $7,500,000 in our equity investments last quarter versus $858,000,000 this quarter. So that's a decline of $6,600,000 The other piece of the decline is we had BOLI life insurance income from a debt benefit last quarter of $2,800,000 and we had another one this quarter and it was 338,000 And that's a decline of $2,500,000,000 I mean $2,500,000 And so those two combined are the primary decrease of the $9,000,000

Speaker 2

Got you.

Speaker 9

Okay. That's helpful. I appreciate it, Brian. And then just on maybe over I guess for the criticizing classified trends, I mean, Can you give any color on the trends this quarter, obviously with the NPAs going up to classifieds, but maybe just criticize or is it similar trends that you're Seeing there anything on the criticized side?

Speaker 5

There's been a little bit From a smaller standpoint, nothing that I would call systemic, but I mean, it's just some of the smaller stuff, Both on the classified and criticized. I mean, I think you'll see those numbers. But I mean, we've been really low over the past 4 to 8 quarters. So anything is an increase.

Speaker 2

We had Got you. Okay. So small. We had some of the resold the property And he left and criticized over the member care deals just to be sure it's abundant to safety.

Speaker 5

So Yes. Those are the memory care deals we did 2 quarters ago. And I mean, we still left them in there just because we want them To prove out, right, even with the new equity and everything we expect there. So we're As we do with everything else, we're pretty conservative in our grading.

Speaker 9

Yes. Okay. I just want to make sure of that. And then, lastly, just So I have the right numbers. On the loans that are renewing in the Q4, what's renewing in the Q4 versus all of next year?

Speaker 9

And then So just all roughly going from 5% type of level to the new rates are 9.5% to 10%. Is that Accurate?

Speaker 3

Yes. That's Brian, this is Steven. I think there's about 200 and little over $200,000,000 $203,000,000 that's 5 range or below that's maturing this quarter and then it's a little over $800,000,000 next year. So we should be able to pull those up 400 ish plus basis points We talked about earlier.

Speaker 2

Got it.

Speaker 9

Yes. Okay, perfect. That's all I had then. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you. There are no questions registered at this time. So I will pass the conference Back over to Mr. Allison for closing remarks.

Speaker 2

Thank you very much. I really think we've said it all today. Thank you for your attendance and I want to say hello to our friends in Lubbock, Texas today. They're on the phone. So Anyway, I appreciate everyone's support of Homebuy Shares and give us We'll talk to you in 90 days.

Speaker 2

Thank you.

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Key Takeaways

  • Home Bancshares reported Q3 net income of $98.5 million ($0.49 per share), down slightly on a 46% efficiency ratio and higher operating and interest expenses; net interest margin fell 9 bps to 4.19% but showed sequential improvement in September.
  • Interest‐bearing deposit costs rose to 2.55%, leading the bank to reprice over $200 million of maturing loans in Q3 and prepare to reset about $800 million of loans at below-5% yields over the next 12 months.
  • Deposits declined by $478 million in Q3 (noninterest-bearing balances down to 26% of total), though liquidity remains strong with brokered deposits at just 2.4% of liabilities.
  • Capital and reserves are peer-leading, with an 86% loan-to-deposit ratio, a 14% CET1 ratio—comparable to top national banks—and nearly $300 million (2% of loans) in reserves covering 314% of nonperforming assets.
  • Nonperforming assets rose to 0.42% due to three credits (an office building, a marina and a Florida redevelopment site) moving to nonaccrual, but management expects minimal losses given its conservative underwriting and reserve coverage.
AI Generated. May Contain Errors.
Earnings Conference Call
Home Bancshares, Inc. (Conway, AR) Q3 2023
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