Home Bancshares, Inc. (Conway, AR) Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2024

There are 14 speakers on the call.

Operator

company has asked me to remind everyone to refer to their cautionary note regarding forward looking statements.

Operator

You will find this on Page 3 of their Form 10 ks filed with the SEC in February 2024. At this time, all participants are in a listen only mode and this conference is being recorded. It is now my pleasure to turn the call over to Donna Townsville, 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 Stephen Tipton, Chief Executive Officer of Centennial Bank Kevin Hester, President and Chief Lending Officer Brian Davis, our Chief Financial Officer Tracy French, Chairman of Centennial Bank Chris Colton, President of CCFG and John Marshall, President of Shore Premier Finance. To open our discussion on the quarter today, we will begin with some remarks from our Chairman, John Allison.

Speaker 2

Thank you, Donna. Welcome, everyone. Welcome to Home Bancshares' Q3 2024 earnings release and conference call. The company had another great quarter. The quarter was very strong and would have finished as one of the best ever.

Speaker 2

That was until the last few days of September when the first of 2 disastrous hurricane took a swap across Florida, where Home has a little over $1,000,000,000 in customer loans. We felt it is prudent to move into hurricane mode as we have in past years when weather events affected the area where we did considerable business. Some of our customers are still involved in litigation over the claims from the last hurricane. We have closed the books for the end of the Q1 after the first hurricane when the reserve estimate that we made we thought was reasonable and then here comes Milton, number 2 hurricane and by the way in 2 weeks. We're always trying to get out in front of situations that may affect our earnings or our company in any way.

Speaker 2

We've dealt with these events over many years. We even have hurricane procedures and we've practiced for years that includes satellite phones, electric generators, 1-eight hundred wellness check-in numbers for employees, customer extensions and the reality of losses. We would prefer to have 5% plus reserve for the main area of the storm. We already had a reserve of 2% for the area and we're optimistic that we may not need over an additional 3%. Fingers crossed.

Speaker 2

As a result of our needed reserve, we will hopefully be in the $20,000,000 or less range. Please don't hold me that estimate because it's early and it's a fluid situation. We'll keep you updated as we hear more information and I would expect the flow of information to improve. And by the way, Kevin updated me, not only the hurricane, it spun up a lot of tornadoes outside of that and our orange grove that we've had for years sent some pictures of some of these orange trees that were damaged. So we don't know the extent of that as of yet.

Speaker 2

As the quarter was coming to an end, I was very pleased with the results I was saying with July August were nicely above forecast and September's data report was also running ahead. I was expecting $0.55 to $0.56 for the quarter. One should never count his money until all the highs in the barn. I knew better, but things were running pretty smooth, so I made a mistake and counted the money. We reported a 1.74 return on asset ROA and without the $16,700,000 reserve, our income would have been $112,578,000 That's an annualized income for the company of over $450,000,000 and ROA of 1.96.

Speaker 2

You can see why I was excited and then bam, here's the hurricane. A little disappointing, but as always, we do what's in the best interest of our shareholders, period. Well, here's the numbers and I think you'll agree with me, it was a good quarter ex hurricanes. Total revenue was $258,000,000 I didn't check, but that may be a world record. Brian, is that a top number?

Speaker 3

It is on core earnings. We had 1 quarter about 2 years ago, we had

Speaker 4

a $15,000,000 windfall and that would be slightly higher. But on core earnings, that is a record. Okay. On core earnings, that was

Speaker 2

the best ever. That's good. PPNR was $148,000,000 pretax pre provision net income. When you think about that, you put an ROA to that, that's $2,570,000,000 That's pretty impressive. We played with some numbers and I saw some analysts that Catherine sent out using that number.

Speaker 2

And so I put it in, it's 2.57 percent for us. When you think about that, that's 57.36 percent of total revenue goes to pretax, pre produced. That might be another world record, I don't know. Stephen will cover the numbers more specifically, but I'll just kind of take a broad brush to it. Margin was up for the quarter, yield on loans improved quarter over quarter, interest bearing deposits had a slight increase just to tick.

Speaker 2

Non interest expense for the Q3 of 2024 was $110,000,000 versus the Q2 of 24 $113,000,000 and the same quarter last year was 114.7 much improved. Efficiency ratio of 41.42%, also good improvement. Nonperforming SPAC as we continue to work through the Texas credits we told you about, the resolution of those credits will hopefully be resolved either in this quarter or the Q1 of 'twenty five. Because of our strong balance sheet, we're able to take our time and work through several of these credits, reducing the loss exposure versus having to sell the asset immediately that may have resulted in much bigger losses. Stay tuned, Kevin will talk more about that in the report.

Speaker 2

Strong capital ratio, I thought we're going to catch Jamie Dimon, we didn't. We're at 14.7 CET1 and he jumped on me, he was at 14.7, he jumped to 15.3. I think he's afraid we're after. The loan loss reserve stands at 2.11, tangible book for the Q3 of 'twenty four was $12.67 versus $10.90 for the Q3 of 'twenty 3. That's a $1.77 improvement year over year.

Speaker 2

Dollars 0.77 of that came from AOCI and the dollar came from retained earnings. We earned $100,000,000 $0.50 a share after reserve for the 3rd quarter. So for the 1st 3 quarters, we're at $3.01 or $1.51 per share through the 1st 9 months. Loans continue to grow in our legacy footprint, $131,600,000 increase, while CCFG had $89,100,000 decline in balances, but they still remain with $2,000,000,000 of outstanding loans. We were disappointed last year by missing our goal of 400,000,000 dollars Those circumstances are outside our control.

Speaker 2

If you remember that being our payment to the Fed for the failed banks, plus the damage for the West Texas headwinds. The Fed also charged us with an additional assessment this year of approximately 2,300,000 that we overcame early in the year. But the hurricane reserve could cause us to miss for the year, hopefully not. All in, 2024 is shaping up to be a good year ex hurricane, an okay year with hurricanes in spite of all what's happened. In 20 days, I'm probably going to get off on political rights, but I got to do this.

Speaker 2

In 20 days, I'm going to elect a new President of the United States. And I think that we have a that will have a major impact on all our lives and our futures of our children and our grandchildren. 1 of the candidates wanting to substantially raise all taxes and even taxes on unrecognized gain. Inflation has already taxed the American public over 20% created by the crazy spending and firing up inflation like we've not seen since the late '70s. The coup was throwing Joe Biden in the ditch and crowning a new candidate that absolutely has no financial experience and appears to have no idea what's going on.

Speaker 2

Whether you like Donald Trump or not, I believe he has to win the race. We know what he did last time and he was business friendly. Watching both candidates through this short campaign has been very painful for all of us. But after watching, I cannot imagine anyone voting for Mrs. Harris.

Speaker 2

It's not about Democrats or Republicans, it's about saving our country. I think she will destroy all the good work that Chairman Powell and the committee has done to fight inflation. I'm afraid she will allow the snake to raise its head again. We have not killed the snake, but we've made an impact. 25 basis points probably would have been better than 50, But I think that may have been politics as usual usually happens during election years.

Speaker 2

Taxes, crime, immigration, gangs, open border, sex trafficking, increased regulations in place and need us to say more. We need to vote to stop the chaos. When you hear Walgreens announcing the closing of 25% of their 8,600 stores and one of the main reasons is Fed should tell us all we need to hear. If that's not enough, Sunday, an ABC host attempted to minimize illegal migration gains taken over apartment complexes in Aurora, Colorado, saying the incidents were limited to a handful of apartment complex and Donald Trump is the problem. I mean, you can't make this stuff up, enough of that.

Speaker 2

Our Texas lawsuit, we're totally engaged and await our day in court and let a jury decide the amount of damages done by what we perceive to be illegal activity by some West Texas individual. On stock buyback, the company purchased 1,000,000 shares for $26,900,000 That should put us below 199,000,000 shares. Brown, where are we now? We're like 198.8. 198.8.

Speaker 2

So we have continued to buy, Stephen, is that correct? You continue to bid in there.

Speaker 5

We have a 10b5-1 plan in place. It's not been active over the last couple of weeks, plan 2 once we get out of the blackout.

Speaker 2

I don't know where we're going with that, but we continue to buy stock and I guess we'll continue to hang in there. Our goal was to get it to 200. We've got it there. Now we're at 199. We may go to 195, I don't know what we'll see.

Speaker 2

We'll talk about it around the table. It was a good quarter. Thanks everybody for their support. Thanks everybody for the hard work that everybody put in. It was when you have those kind of revenues and you controlling expenses, it rolls into really

Speaker 3

a good quarter. So Donna, it's back to you.

Speaker 1

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

Speaker 5

Thanks, Donna. As Johnny mentioned, Home Bank shares in Centennial Bank had another great quarter. Congratulations to all of our bankers and employees for continuing to make Home and Centennial Bank 1 of the top performing banks in the country. As Johnny mentioned, total revenue increased again in Q3 to $258,000,000 and adjusted PPNR increased to $146,600,000 which is a 17% year over year increase. I'll start with the net interest margin as Johnny referenced in his comments.

Speaker 5

The reported NIM expanded 1 basis point in Q3 to 4.28 percent while we continue to hold healthy excess cash balances. Excluding the event income noted in the press release, the net interest margin was 4.27 percent for the quarter, an increase of 4 basis points from Q2 and exited the quarter in September at 4.30%. The yield on loans excluding event income improved 10 basis points to 7.59% in Q3 and outpaced the increase in total deposit costs by 6 basis points. During the quarter, total deposit costs increased 4 basis points to 2.31% and exited the quarter at 2.29%. Leading up to and since the recent FOMC announcement, our bankers have done an excellent job managing interest rates while being mindful of liquidity and overall customer relationship.

Speaker 5

We've worked through most of the negotiated deposit pricing and thus far it appears we've been able to offset the decline in rates on the asset side. Switching to liquidity and funding, deposits continue to be a key focus with our management team as they review lending opportunities as well as cross selling opportunities on nearly 5,000 accounts that we open each month. We continue to emphasize the strength of home and the comfort that that provides. Total deposits declined $250,000,000 for the quarter, most of which occurred in our Florida regions as seasonal outflows occurred with property management companies and municipal relationships. Non interest bearing balances ended at $3,940,000,000 and account for 23.5 percent of total deposits.

Speaker 5

Alternative funding sources remain extremely strong with broker deposits still only comprising 2.3% of liabilities and the loan to deposit ratio still stands below historical levels at 88.7% as of September 30. On the asset side, in period loan balances increased $43,000,000 highlighted by nearly $100,000,000 in growth from the community bank regions along with solid growth from Shore Premier offsetting what we see as a temporary decline in CCFG balances. Our loan originations, we saw volume of $1,130,000,000 in Q3 similar to Q2 with a little more than half coming from the Community Bank regions. Yields originations remained strong with an average coupon of 8.96% in Q3. Payoff volume picked up slightly to a total of 699,000,000 although a portion of what we expected to see this past quarter appears to have pushed into the 4th year.

Speaker 5

Closing with the previously mentioned strength of our company, all capital ratios improved and remain extremely strong with the tangible common equity ratio of 11.78 percent, leverage ratio of 12.54%, CET1 ratio of 14.65% and a total risk based capital ratio of 18.28%. Couple that with reserve coverage of 2.11 percent and over 3 times coverage on non performing loans, we are in a strong position to capitalize on future opportunities. With that, Donna, I'll turn it back over to you.

Speaker 1

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

Speaker 3

Thanks, Donna. Good afternoon, everyone.

Speaker 6

We often discuss that one

Speaker 3

of the strengths of our company is that we have multiple engines or regions that can independently help us reach our combined goals. As Stephen mentioned, this quarter was Texas, Arkansas and Shore that drove our loan growth. At other times, CCFG and Florida are the drivers. This kind of diversity is a real positive for our company. Of note, late in the quarter, I noticed a slight slowing of early deal flow and it is beginning to show in our pipeline for this quarter.

Speaker 3

Combined with an increase in projected payoffs, I believe that 4th quarter could be flat to down slightly. Moving on to asset quality. The metrics declined slightly this quarter with increases in non performing loans and assets of 10 basis points and 7 basis points respectively. This is due primarily to a Texas hotel moving to non performing that is one of a trio of hotels to a related ownership group that we've been working with for a few quarters. 1 of those hotels sold this quarter and another is in the process of selling, so we're hopeful that we can continue to achieve a good outcome with this relationship, but it could take some more time.

Speaker 3

We expected to complete the construction of the multifamily project that is in OREO, which is located north of the DSW Metroplex in the Q3, but a delay with an unreasonable local utility has pushed this completion into the Q4. The timing delay does not appear to change our overall outcome, which will be to move it out of OREO by year end to a buyer that we have ready to contract. We continue to expect no worse than a small loss on this exit. Other Texas issues that we've been working through include a completed multifamily project closer to the DFW Metroplex that has experienced a decline in occupancy and a South Texas C and I relationship that has had multiple recent operating issues, but has a very profitable history. These regional issues have our full attention and as Johnny said, because of our strong balance sheet, we were able to take our time and work through these credits in the best way possible.

Speaker 3

The considerable experience that we gained working through failed bank portfolios serves us well in working through these issues. Lastly, the California office that is in OREO continues to improve. Occupancy is approaching 70% after an existing tenant took another half of one floor and it is cash flow positive. We are negotiating with another potential tenant that would take it above 80%. Switching to a discussion regarding the recent hurricanes.

Speaker 3

We are thankful that none of our employees were injured by hurricanes Helene and Milton and that the damage to our branches was limited in nature. This is clearly not the case across all of this widespread area impacted by these two storms. Hurricane Helene took a swipe up the West Coast of Florida where we have a substantial presence and then proceeded inland into Georgia and North Carolina where it inflicted major flooding damage. We have approximately $1,500,000,000 in loans in these counties within the FEMA designated disaster areas from Helene with almost 90% of those loans in Florida. Less than 2 weeks after Helene, Hurricane Milton cut a swath west to east across the peninsula of Florida, hitting some of the same areas on the Central West Coast of Florida hit by Helene.

Speaker 3

By continuing through to the Atlantic Coast side, remaining a hurricane through its exit of the mainland. We have $1,800,000,000 in Florida loans in the FEMA designated disaster areas from Milton. There's about $1,100,000,000 in loans that were subject to both hurricanes. So the total in loans that's subject to either one of the hurricanes is about $2,200,000,000 We dusted off our disaster deferral procedures and have them implemented on these loans. And as you saw in the press release last week, we established an approximate $16,700,000 reserve for the loan subject to Hurricane Helene.

Speaker 3

Areas from Tampa Bay North were the hardest hit by Helene and we were assessing damages in that area when Milton threatened less than 2 weeks later. A late turn to the south by Milton took the brunt of the storm south of Tampa and areas from Bradenton southward appear to be the worst hit there along with random places across the interior of the state hit by tornadoes spawned from landfall. We are continuing to reach out to affected customers, we're touring damage where possible and we're implementing our past playbook. Past history tells us that it takes 6 to 12 months to fully assess the credit impacts of these events. I know it's hard to imagine, but we still have customers who are dealing with insurance claims from past hurricanes.

Speaker 3

The cleanup and rebuild is a long process, but this is not new to us and we are confident that the areas will come back stronger than before. Nana, 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

No, it was this is a great quarter. If we haven't had

Speaker 3

the hurricanes, we would have it would have

Speaker 2

really been an outstanding quarter. As you can see, I've got excited. I counted our money, count how much money we're going to own before we the final day of the quarter and hurricanes hit. So a little disappointing, but it wasn't our people did the job. I mean, I'll make sure people did a hell of a job for the quarter.

Speaker 2

Great run rate, great numbers, all good and we'll overcome it. Maybe we get lucky and we put that back in income someday or if we have to make more a better allocation, we'll do that too, whatever is in the best interest of our shareholders. Anybody else got anything? Tracy, you got a comment? No, good report at all.

Speaker 4

Brian? No, I thought it was a good quarter.

Speaker 2

Steven, you got anything else to say?

Speaker 7

I don't.

Speaker 4

Donna, you're

Speaker 2

going to wrap it up?

Speaker 1

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

Operator

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

Operator

Your line is open.

Speaker 8

Thanks. Good afternoon, everyone. Appreciate the update here this afternoon. Curious, Johnny, kind of how you're thinking about M and A today, if there's any change to kind of your outlook, your views on what BTFP could do in the 1st part of next year? And then maybe conversely, if Trump does win the presidency, if you think any regulatory relief could kind of propel you to be more aggressive on the M and A front or maybe what it would take for you to get more aggressive?

Speaker 2

Well, we're looking today. I mean, we're looking at opportunities today and to get more aggressive, they just have the deals just have to work, right? They just have to work. Everybody's price has gone up. Ours has gone up and everybody else's price has gone up and that probably will make more people think about doing M and A.

Speaker 2

And I suspect that we'll hopefully find something, if not this year, early next year to do. Regulatory wise, it was much easier to do a transaction when President Trump was in. We had better support there and that will take a while to change if the administration changes. But I'm optimistic that we could see that could be a kick to M and A activity if Trump wins comes back in. They've been really slow.

Speaker 2

Regulators have been slow in approving deals. It seems like they've gotten a little quicker later lately, doesn't it? You guys seem that they moved on some of them were hanging out there for a long time. They finally got them done and got them closed. So I don't know if that answers your question, but we're certainly looking.

Speaker 2

As I said last quarter and I'll say it again this quarter, when you run basically without the extra reserve of $196,000,000 ROI on $23,000,000,000 worth of assets. This team just needs some more assets. So we just need to glean, find the right trade and pick up some more assets and let them fix. I don't care what kind of shape the banks in, we just need them to fix it, it depends on the price, right. We'll buy anything from something that needs help to something that's really operating in a good fashion.

Speaker 2

So it all depends on the price, Stephen, you know how we do. So we'll work with your people on some steps. That's right.

Speaker 8

Makes sense. Makes sense. Okay, that's very helpful, Johnny. And then maybe one probably more for Stephen, I guess, is just kind of can you talk a little bit about how you think the NIM can trend from here if we get let's call it 100, 150 basis points of cut. How you're thinking about loan betas and deposit betas from here?

Speaker 8

I know Johnny you look at the NIM on like a daily basis, but how do we think about that over the next, let's call it 12 to 18 months?

Speaker 5

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

Speaker 2

I know it's early

Speaker 7

in the

Speaker 2

quarter, but the 1st 15 days or so of the quarter, we're actually a little ahead of where we were last month. So we've had adjustments as you in loan yields and cost of funds. And it looks like we're almost matched up. We were up a couple of $100,000 is all, but it looks like they're matched up. So I'm pretty pleased with what that's early, right?

Speaker 2

So there will be a lot of adjustments to that, but that as of right now, it looks pretty good, Steven.

Speaker 8

Got it. Okay. That's helpful. And I don't think you're guilty of counting the hay before is in the barn. Hay is in the barn.

Speaker 8

It just might not be a net income, but it's still in capital. So that's still the bank's money and it's a great quarter. Well done.

Speaker 2

I couldn't tell you how excited I was watching those numbers come in the 1st 2 months of the quarter. And then I'm watching my data report and I'm saying we're going to

Speaker 3

ring the bell this quarter. We're going

Speaker 2

to ring the bell. But it's you're at the high cylinder, you're at the high cylinder, just in a different category right now. Thank you for that. Thanks for

Speaker 9

the color, guys.

Operator

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

Speaker 6

Hey, good afternoon, everyone. Wanted to just start on the loan growth outlook and it sounds like CFG might continue to have some payoffs in 4Q that will keep the Q4 anyway flattish to maybe down a little bit. Can you guys talk about the outlook for 'twenty five? Maybe I know it's a little bit early and there's obviously a lot to figure out with where rates end up and all that kind of stuff, but is the pipeline for CFG strong enough to outrun any payoffs as you guys see it past the Q4 or maybe just any color you guys see it as you think about loan generation in the 25?

Speaker 3

Hey, Brett, this is Kevin. I'll give a little bit of color from our perspective on the community bank side, and then I'll let Chris talk about New York. We've had as you saw this quarter, we've had a good year in the community bank footprint, and I think that will still continue. I think there's a little softness this quarter. I can't really pin it on anything.

Speaker 3

We've got a couple of regions that are still they're still pretty hot as far as opportunities go. But just across the group, I'm seeing a little bit of softness this quarter. I do think that that will come back next year. And obviously, a lot of this depends on how much the rates drop, what the expectation of that's going to be. And so I can't really tell you what that looks like.

Speaker 3

But I do think hours in 25, we'll see in the Community Bank footprint a continuation of what we've been doing the last 4 or 6 quarters. Chris, you want to give him some color on what you're seeing?

Speaker 10

Sure. Happy to. Thanks for the question. We certainly hope we have payoffs because when we make the loan, we intend to get repaid. And so I think we've always said that the future of the business, we may shrink a little bit and then grow.

Speaker 10

I think that's generally what we see happen. We've already originated this year over $1,000,000,000 which is generally what our sort of yearly target is. So we're running quite ahead. We emptied out our pipeline a little bit in the Q3 because I want to move some stuff out and get focused on the rest of the year. I think we'll have a pretty good solid end to the rest of the year and build the pipeline going into next year.

Speaker 10

So that's a long way of saying, my guess is we probably come down a little bit from here and then go back up. Gross never really been our goal. We're going put good assets on. We're going to get repaid. We're going to put that money back out and good Lord willing.

Speaker 10

Over time, that's resulted in growth. So my expectation is I don't see anything different about that. I think we'll probably slowly grow over time just as we've always done. But in between that, we may be up, down a little bit here and there, but we don't look at anything as having changed dramatically.

Speaker 7

Okay. That's helpful guys.

Speaker 6

And then just on the deposit side, I know flows were lower this quarter and there were submittal drawdowns. How much was that related how much was the drawdown related to municipal? And then just as you guys see it, any initiatives to grow deposits from here in any business lines or anything that would bolster your deposit growth? Not that the balance sheet needs

Speaker 5

the excess liquidity, but just was just curious how

Speaker 6

you guys think about the funding base from here?

Speaker 5

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

Speaker 2

Well, just how much

Speaker 6

it came down this quarter and then just yes, about linked quarter balance would be great. Okay.

Speaker 5

Sure. Munis were down about $100,000,000 $150,000,000 or so for the quarter. I think we ended $9.30 at a little over $2,800,000,000 We've been in the $3,000,000,000 range. So some of that's normal flow, normal spend just at times throughout the year. In terms of overall strategy, I mean, I think we're staying the course with select opportunities here and there.

Speaker 5

I mean, lot of we've said for a long time in the counties that we operate in Florida are very liquid and at times have opportunities to bring some of those in. Conversations with our lenders and our presidents are ongoing every day, every week at loan committees. And so I think that's still our approach and we'll continue to work that base as we have.

Speaker 2

We're seeing Okay.

Operator

Great. Appreciate all the color.

Speaker 2

They're still running at these people are still running at. I think some of the money may deposits are back up. That's kind of the backup this month. So that's kind of the effect of it. There are real customers doing real business with us and we don't some of that money may have gone out.

Speaker 2

We may have lost some of that money that went out to some of these people trying to cover their for their program that they got to pay off in March of next year, the Fed lending program. So we may have lost some money to some of those people doing that, quite honestly. What we predicted was maybe it happened to us a little bit because they want to get higher rate CD right now and lock it in as rates are coming down. So that's what we thought might happen, maybe happen to us a little bit. So not much, but some of it could have been.

Speaker 6

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

Speaker 2

Thank you. I hope you get feeling better. Thanks for joining.

Operator

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

Speaker 11

thanks. Good afternoon. I wanted to ask more about the operating expenses. I think the core was $110,000,000 down 4% year over year. So really good cost controls.

Speaker 11

Any more color on just the drivers of where you're seeing the cost saves? The bank already has an efficient platform. So I'm just surprised you're continuing to find more opportunities there.

Speaker 5

Hey, Matt, this is Steve. I mean, obviously some of it ebbs and flows with headcount, which is the biggest driver of non interest expense. And I'd say, looking forward, we're at a good base there. There are a couple of large IT contracts that we're working through that we're not there yet in terms of final pricing and negotiation, but is some potential there for some meaningful savings to take place at some point in 2025 beyond.

Speaker 11

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

Speaker 3

Hey, this is Kevin. No, I mean, we may I think we may have added one to the list this quarter that we're discussing with you guys. But primarily, it's the stuff that we've been talking about the last 2, 3 quarters.

Speaker 11

And as far as the resolution on some of those, it sounds like we should expect some kind of resolution in the next quarter or 2 on a number of those. Did I interpret that right, Kevin?

Speaker 3

Yes, certainly one of them and possibly a second one. Some of these things, they just take a little while to work out. You think you see a path and you're working towards it and you think that path leads you to 90 days and it turns into 100 and 80. But we're still in each of those situations, we're on track and we're working through the plan and sometimes the plan just takes you a little longer than you'd like.

Speaker 2

I think it looks a little different by the end of Q1. We just got to get the issues resolved. And I think most of them are basically resolved at this point in time. The hotel deals, the one hotel got sold, the other one we put to non performing and I think that's going to work itself out also. These are just some Texas hotels that we did a while back.

Speaker 11

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

Speaker 2

I think new that I'm seeing. Let me put it to you that way. Nothing new that I'm seeing. Same stuff.

Operator

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

Speaker 12

Hey, thanks. Good afternoon.

Speaker 11

Hi, John.

Speaker 12

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

Speaker 2

From the loss perspective on the 1 North Dallas, dollars 600,000 or $700,000 maybe $12,000,000 or $15,000,000

Speaker 3

asset. Yes. Altogether, we're talking about $200 ish million altogether.

Speaker 12

Okay, good. That's helpful. Another thing I wanted to clarify, Johnny, you said in the prepared comments something about maybe $20,000,000 needed for the hurricanes. And I didn't know if you're signaling that there's another elevated provision to come for Milton next quarter or that you feel like you already have enough in reserves. Can you just clarify that?

Speaker 2

I said we might have to have an additional $20,000,000 is what I said. I don't know that. I just I would just kind of getting out there, just throwing it out. I don't know that. It's too early for us at this point.

Speaker 2

It may not be anymore. We had some where was the place we got the most damage, Kevin?

Speaker 3

Anna Maria Island. Anna Maria Island, yes.

Speaker 2

We got pretty I talked to him yesterday, our customer. He said I'm going to be fine and he has business interruption in addition to coverage on his units. So that's good. He said, I have that with their I do business interruption with every house. It has a bunch of house, a bunch of big in the rental property.

Speaker 2

So primarily single family and a few hotels he owns. But he didn't seem he wasn't there. He was actually in Arizona. He said, I don't think I can do there. He said, I just went to Arizona for a few days.

Speaker 2

So he doesn't seem to be worried about it at all. That's I wasn't sure if he had business interruption. I just wanted to make sure he did. So could there be a loss there somewhere? Maybe.

Speaker 2

I always suspect there's going to be a loss. Something's going to sneak up on us that happens, that just happens.

Speaker 3

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

Speaker 2

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

Speaker 12

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

Speaker 2

I think that's probably pretty close. I think, I think, dollars 0.50 $3,000,000 $4,000 $0.05 $0.06 I think that's about where we are right now until we get I mean, John, think about it, that's a $1.96 ROA. I can't ask for anything better than that really. So we need to I need to get this team some assets, if they get another $2,000,000,000 $3,000,000 $5,000,000,000 $7,000,000,000 worth of assets. It will take them a while as it always does this group to get it where they want it.

Speaker 2

And that would be my that's what we'd be looking for. We'd be looking for something in that size $2,000,000,000 $3,000,000 $4,000,000 $5,000,000,000 $6,000,000,000 in a market that we think is a good market, either in an existing market or maybe something outside of this that touches one of the markets we're in. So I mean when they brought a $196,000,000 we get them another $5,000,000,000 with assets, you can see what happens.

Speaker 12

Yes, they're hungry, Johnny. You got to feed them, get them some assets.

Speaker 3

I'm going to get them, I'm going

Speaker 2

to bring them, put them in a bonus program together here for long.

Operator

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

Speaker 1

Thanks. Good afternoon.

Speaker 13

Hi, Catherine. Thanks for your ROI.

Speaker 2

I appreciate your ROI on the PPNR.

Speaker 13

Well, you're the one giving us a 250 PPNR. So it's not me, it's you. But on that, I wanted to dig into the margin a little bit. Your asset sensitive, you have a really high margin, you're asset sensitive. And so I think it's natural for us to want to model a margin that moves down over the next year, still higher than peers, but kind of trend down.

Speaker 13

And you're right, your loan and deposit betas have been evenly matched both at about 40% over this cycle. And so as we think about this easing cycle, is it fair to think about loan and deposit betas kind of still at that 40% beta? Or is there maybe some maybe you had to talk about especially on the loan side, I don't think we've talked a lot on the loan side on this call on just the benefit of fixed rate repricing and new loan origination pricing. Is there a chance that the loan beta could be actually a lot lower as we move into the next year just given that offset?

Speaker 5

Catherine, this is Steven. Yes, there's still some opportunity on the loan repricing side. We've got about $300,000,000 or so this quarter that's below 6%. We've got a couple of $100,000,000 I guess all in total, there's probably $1,000,000,000 over the next three quarters that is in the low to mid 6s that we should get some lift on presumably. I guess we hadn't talked competition wise, but we're starting to hear from some of our presidents or different footprints that competition's pricing out the curve now and you're seeing some stuff in the 6s and 7s, but so we'll have to deal with that.

Speaker 5

But there's still some opportunity there on the repricing side. Yes, I think we said earlier on the call, I mean, I think it's flattish in the range that we're at today, would be pleased with. I think it depends how deposits behave and liquidity profile and if we're able to continue to be aggressive on dropping rates on the deposit side.

Speaker 13

And on the loan side, I know you've said before that about, I think it's 34% of your loans are floating and repriced immediately. Can you kind of break that down to is that mostly tied to SOFR? And then maybe give us the next bucket of adjustable or variable rate loans versus fixed? If there's a way to kind of hit this

Speaker 5

3 buckets and Sure. So it's about $5,500,000,000 or so that are variable rate change in the next 2 quarters or so. We've got some adjustable stuff in there too. But just talking about what's strictly purely variables about $5,000,000,000 $5,500,000,000 there's $2,800,000,000 that's tied to Wall Street Journal Prime and the vast majority of the rest is tied to SOFR. All of Chris' portfolio, dollars $21,000,000,000 is tied to SOFR and then we've got about $700,000,000 or so in the community bank group that's tied to SOFR.

Speaker 13

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

Speaker 5

The vast majority is going to be 4 plus, probably 4.4 on

Speaker 3

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

Speaker 12

over.

Speaker 13

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

Speaker 3

Yes.

Speaker 13

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

Speaker 5

Largely negotiated money market type products. We've got a kind of a standard corporate product that we've used for years now that has about $1,300,000,000 in it. We're able to pass essentially all of this last rate increase to the balances there and then utilize negotiated interest bearing checking savings money markets. Yes, you're to the point earlier on CDs, I mean, we've seen rates come in some there, but you've still got peers here locally doing 4.60, 4.70 and some community banks here and there that are still close to 5%. So our group has done a good job in terms of being able to negotiate there and keep the overall in the sub 4% range.

Speaker 2

It appears that

Speaker 13

Chris, you've all got great things and congrats on a great quarter. Let's go ahead, Johnny.

Speaker 2

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

Speaker 2

So until it spins on me, Catherine, we'll stay ahead to what we're doing.

Speaker 13

It's working so far. Thanks so much.

Speaker 2

Thank you. Thanks, Catherine.

Operator

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

Speaker 7

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

Speaker 5

Sure. Yes. There's about $3,000,000,000 or so that's tied to either 91 day T bill or reference to Fed funds. Most of that is municipal, but we've got a few other products that are directly indexed to those.

Speaker 7

Okay. And I think you mentioned, I think it's about $1,000,000,000 of loans, I think, maybe last quarter as they repriced in 2025. I guess the with the new rates today kind of you're hearing from your Presidents, I mean, you were thinking before the rates were around, pickup might be going around 9%. I mean, where are the newer rates today that you're kind of thinking that the ones that are repricing will move up to what type of range are you thinking is reasonable given what you're hearing now in terms of the rate environment?

Speaker 5

Well, on renewal, I mean, we should be able to land in the 8.8 in the quarter range. But again, I think a lot of this is kind of subject to what we hear and see from competition. I'll let Kevin give a little more color on what he's seeing.

Speaker 3

I think Stephen said a minute ago, we're beginning to see some folks go out the curve a little bit and try to fix at a in the high 6s, low to mid 7s and extended out a few years with some prepayment penalties. I think we're seeing some of that and I don't know how much of that will continue if you get another rate drop here before the end of the year. So that will be part of the things that we're having to fight for sure.

Speaker 7

Yes. Okay. All right. And maybe just one for Johnny. Johnny, just on the M and A, I mean, in terms of kind of opportunities, whether you're I think you're seeing it, can you just remind us, is there market wise, where you're kind of more focused today?

Speaker 7

And then just maybe kind of size of transaction, is it kind of drifted smaller versus bigger? Just how are you what are the opportunities today, I guess maybe is a better question?

Speaker 2

Well, presently we're looking at 1 end market and 1 out market. So there would be in market would be of course no our market outside would be something that is a state that touches a state we're already in. So we wouldn't be leaping over a state I wouldn't think. So we're just playing with it right now. Look, it'd be interesting to say, I think we're going to see some boards of directors telling management staff.

Speaker 2

I think we're I think they're going to say, hey, we just slipped through another one here with this tough time. We're going we need to get somebody get it in good strong hands and get a good strong dividend. And at least that's my belief. Where we go from here, I don't know, but one's outside and one's inside the market.

Speaker 7

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

Speaker 2

I just liked it. One is out of market. I like their footprint. I liked their footprint. I thought it looked intriguing.

Speaker 2

The market has got good growth. So, I mean, we look at everything and I was just reading about this one out of market market and I kept reading about it and I thought, that's really a pretty interesting story there. And I verified that the information was correct and what kind of growth they were getting there. So, it's got my attention. Okay.

Speaker 7

And then yes, and got you. In the last two, which is on the expense side, I think you said that the maybe I missed I didn't hear what you guys said earlier in terms of kind of the outlook on expenses kind of really good progress and trends here. Just kind of the current levels are sustainable. Is there something to think about embedded in the numbers that we should think about as you go into 25% or kind of current levels okay?

Speaker 2

I think we had a little windfall this quarter. I think the 111 and change number

Speaker 4

is a good number.

Speaker 2

We've asked last quarter, we said 111 is the number. So 111 and change is probably the realistic number.

Speaker 7

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

Speaker 2

Well, there's always a flow, how they transition. They go from past due and they go to non performing and then they go out the door, right? So, I mean, there's always a transition of those things working their way through. I would have thought that we would have had certainly the project north of Dallas because it's finished and we had 2 offers and we're a contract I think on that. So I would have thought that would have been gone, but that'll go out, so it makes it come in.

Speaker 2

I think we've got about $200,000,000 probably total that we're dealing with. That'll be going in and out and around before it's all said and done. So do I think there's any giant loss in any of it? One credit could have some loss in it that bothers me, but outside of that, I don't think there'll be much loss in any of these credits. One of my we got an apartment project, I think we can lose a couple of $1,000,000 on that deal.

Speaker 2

I think that can happen. We only got one big one out there that concerns me and we'll just have to wait and see how that works out. They've certainly improved what they were doing in the past. They're getting better. So we're seeing improvement in that credit.

Speaker 2

So that one may not be a problem in a month or 2 or it may be a problem. We'll just have to see.

Speaker 3

Hey, Brian, this is Kevin. They're all I'm just going to say they're all substandard. So we'll work them. They could there could be some level of it that goes to non accrual before it goes out of here. But as far as loss goes, I think Johnny has given you the thoughts we have on losses and ultimately that's the biggest concern, right?

Speaker 7

Yes. No, for sure. Got it. Okay. And Stephen, just last one, just thinking about it right.

Speaker 7

I know your expectation or your hope is the plan to hold the margin kind of where it's at here, just kind of fighting the rate cuts. I guess the risk that I guess where is the bigger risk if you're not able to biggest risk to not holding it stable, kind of where is the rubber meets the road there in terms of if you don't meet that objective, what's the biggest risk to not achieving that?

Speaker 5

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

Speaker 3

term. Kevin? Yes. So from the good standpoint is from Chris' portfolio and then from our construction portfolio, we're going to do a spread over sulfur and that spread is going to stay pretty much where it is. So, rates are going to come down, that rate is going

Speaker 6

to come down with it, but it's still going to

Speaker 3

be the spread that we've been enjoying largely I believe. So, and that's a big chunk of our business. It's the mini perm stuff that Steven was talking about. That's the stuff we'll have to compete with the rest of the market on and we typically do a good job on that and get the most we can get. So I think we'll continue to do that.

Speaker 7

Yes. And Kevin, what's the breakdown on that in terms of what pieces of mini perm pieces versus the Chris' pieces, what about $1,900,000,000 I think you talked someone said mentioned earlier?

Speaker 3

Yes, Chris, I mean, Chris, dollars 2,000,000,000 range and construction is $2,500,000,000 ish, maybe a little higher than that. So I mean, you're talking about probably $5,000,000,000 dollars that is tied to a margin over sulfur and we'll continue to do what we're doing there.

Speaker 7

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

Speaker 7

Thanks, Brian. Thank you.

Operator

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

Speaker 9

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

Speaker 3

Yes. As far as what we have in the portfolio, I've not heard of anything so far. You can imagine his stuff is spread out quite a bit. We've got dealers across the country and we've got credit across the country. So I've not heard of anything so far as far as damage goes.

Speaker 3

As far as the market goes, I mean, I can't really think of anything negative. I mean, this is kind of the boat show season. So they're in the middle of doing a lot of their boat shows for and planning for next year. So I've not heard anything negative from this perspective.

Speaker 9

All right. All right.

Speaker 7

Pump sales

Speaker 2

coming out of it, Michael. I mean, some of these belts got I'm sure they're torn up. So there's going to there'll probably some new sales coming out of this.

Speaker 9

Got it. The only other thing I picked up on is the loaner deposit ratio is a little

Speaker 8

bit higher than it's been in

Speaker 9

a couple of years. I know historically you guys have run closer to 100%. But any concern there? Or is that kind of a comfortable place to be? I just worry about if loan demand does pick up.

Speaker 9

I know we're not trying to push any ropes right now, but at some point it likely will. And just wanted to get a sense for if there's any discomfort if the loaner deposit ratio were to move higher? Thanks.

Speaker 5

Hey, Michael, this is Steve. No, not necessarily. I mean, you mentioned we've I mean, it's been a little while, but we've run well over 100 in years past and board approved limits are in that range. I think what gives us comfort near term is borrowing availability. What I mentioned earlier about just the liquidity in some of the markets that we're in today, it's out there and you may have to pay a price to get it, but there's certainly liquidity in the markets that we're in.

Speaker 5

We've just chosen to kind of stay hooked to our strategy here over the last many number of years in terms of just dealing with customers one off. So at $88,000,000 $89,000,000 doesn't give us any discomfort today.

Speaker 2

All

Speaker 9

right. I guess that's it other than Johnny. I'm a little surprised that you said a 196 ROI was good. I've never heard you say

Speaker 4

it's good enough. So a little surprised that you're not setting the bar higher, but certainly understand.

Speaker 3

Thank you, Michael.

Operator

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

Speaker 2

Thanks, everyone. Good quarter. Hope we

Speaker 3

have another good quarter, miss.

Speaker 2

I hope our people in the Carolinas and Georgia and Florida come through this without it's pretty tragic what happened particularly in the mountains of the Carolinas. So anyway, wish them the best and

Speaker 4

we'll talk to you next quarter. Tricia, you got a

Speaker 2

comment, you didn't comment. You got anything you want? No comment. No comment. All good.

Speaker 2

You bet you can do better than $196,000,000 ROA? It's always been our goal to get better. Yes. Very simple. We got to get better.

Speaker 2

Brian, you got any comments?

Speaker 4

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

Speaker 2

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

Operator

This concludes the Home Bancshares Incorporated's 3rd quarter 2024 earnings call. Thank you to everyone who was able to join us. You may now disconnect your lines.

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Home Bancshares, Inc. (Conway, AR) Q3 2024
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