Home Bancshares, Inc. (Conway, AR) Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 12 speakers on the call.

Operator

Greetings, ladies and gentlemen. Welcome to the Home Bancshares Incorporated First Quarter 2024 Earnings Call. Purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning.

Operator

The company presenters will begin with their prepared remarks, then answer to any questions. Any questions. The company has asked to remind everyone to refer to the cautionary notes regarding forward looking statements. You will find this note on Page 3 of the Form 10 ks filed with the SEC in February 2024. At this time, all participants are in listen only mode and this conference call 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 Q1 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 Polton, 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, and welcome, everyone. Welcome to Home Bancshares' 1st quarter earnings release and conference call. We released our results this morning prior to market opening and overall it was a good start to a volatile year. Anytime you conduct the trends with positive results across the board of net interest income, revenue, EPS, margin, increases in both loans and deposits, while maintaining our strong liquidity position and reducing expenses by over $3,000,000 below the Q1 of last year, 23, is a big win. Home with our fortress balance sheet is one of the strongest banks in America and having the ability to pay out all uninsured deposits should provide comfort for all our customers and shareholders.

Speaker 2

As I've said in the past, we will not be the highest when it comes to paying rates on your money, but you will not have to worry about getting your money anytime you need it. During this crisis, we have never run a CD ad paying these outrageous, unprofitable prices for deposits like many troubled banks are doing today. This did not happen by luck. Your management team has maintained, as we're achieving, remained very conservative during what appears to be a mere image of the inflationary Volcker times of the late '70s early '80s. Would have been active in recognizing the danger of the Volcker years and have managed accordingly.

Speaker 2

This one is not over yet and will not be over this year. Inflation is and will continue to be with us for the foreseeable future. Our government is totally responsible for this situation. Irresponsible spending is the direct cause of all our inflation in this country. Both Republicans and Democrats and more so Democrats are spending like drunken sailors and even trying to relieve student debt in an attempt to buy votes with our money.

Speaker 2

They caused it and now Powell and the Fed is desperately trying to stop by avoiding a recession. Really, they should all be punished for their action. Their stupidity is the reason for inflationary problem. The problem is that most of them couldn't run a washing machine. The buck stops with them.

Speaker 2

We have not felt the full impact of the increase of oil prices rolling into our economy. Coming from the manufacturing business, the impact of oil is not just at the service station as we learn through experiences past oil spikes, but multitudes of products derived from oil or byproducts thereof. Early this year, the market was signaling 6 cuts. Let me say this, if we had to have 6 cuts, Donna, this country would have been in lots of trouble. I made that statement earlier in front of her and she said, we wouldn't have been in trouble.

Speaker 2

And I said, I didn't say us. She said, we'll make clear that we say the country would have been in trouble. We called for hire for longer before that was popular. We forecasted 1 and not more than 2 rate cuts. I'm beginning to believe that may be high.

Speaker 2

The only caveat coming is politics. I think instead of cutting rates because it's not the right time, the Fed needs to consider raising rates again. President Clinton, when inflation was sticking its ugly head up during his term, surprised everyone with a 50 basis point jump in rates when no one expected it. Within a short period of time, he dropped back 25 basis points, but he did stop in placing. They say the President has no control over the Fed or the Chairman, but it did during the Reagan administration.

Speaker 2

When Volcker was calling the White House to meet with President Reagan by Chief of Staff, Jim Bakker. The meeting took place in the library and not the Oval Office. And according to Volker, the President never said a word. Bakker asked Volker to sit down and then he looked at him and said, the President of the United States is ordering you not to raise rates during the election year. End of meeting.

Speaker 2

I just finished the book and that little jewel was in, I thought I'd share it with you because it does, maybe politics do involve themselves. By the way, Volker thinks the reason for the library meeting was not was because there's no recording device in that room. And as Richard Nixon found out in the later year, there was one in the Oval Office that paved the way for the Watergate fiasco. The profitability of our bank is simply based on earnings, revenue and expenses. I understand that's a simple approach to looking at our company, but how much revenue was generated over the quarter and how much did it cost us to generate that revenue?

Speaker 2

There analyze the efficiency ratio. How much does it cost to make a dollar. We have to give credit where credit is due and that belongs to the revenue side and the retail side of our company. Our loan teams have continued to write loans in a way that is accretive to our overall yield. As a result, it has been pleasing to watch the overall yield of the entire book continue up to hit a new high of 7.34 percent and that is without any event income, I believe, Stephen, is that correct?

Speaker 2

Correct. All while maintaining strong asset quality. Congratulations to our entire lending team. It is because of you and your strong relationship that you've developed 1 on 1 with our customers. You continue to answer the call to do the best for our owner shareholders and provide opportunities for Home to remain one of America's best and most profitable companies.

Speaker 2

During the quarter, our lenders originated $954,000,000 in loans at a record rate of 9.28 percent, only about 40% of that funded, I think, less than half? Yes, sir. We appreciate the support of our customers and our shareholders as we protect the strength of our fortress balance sheet during some of the most volatile times in Home's 25 year history. However, if we did not have deposits, which I call the raw material, I come from the manufacturing business, so I look at deposits as raw material, Simply, we would not be able to loan any money. There comes the value of the retail areas by bank.

Speaker 2

During these volatile times, the punches can go about anywhere they want to go and get any rate in turn. It just depends on how much risk they want to take because many of the banks that are running high priced CDAs may not be able to pay out all insured deposits. I was headed to my grandstand game at Greenbrier the other night and there's a sign hanging outside of one of these mines that's 6.1%. No other than to be proper at 6.1%. So it is anybody that's got signs out over 5.4%, you can borrow what's the rates of borrowing money today, 5.4%, 5.4%.

Speaker 2

That's Fed funds, yes. Fed Funds at 5.4. So if you're paying more than that, to me that says, I have borrowed all the money I can borrow and I got to get some money from the customers whether it's safe or not. Our retail staff who deals directly 1 on 1 with our customer has built relationships with them and has been able to hold deposits at some lower cost because our customers trust us to protect their personal deposits by having the ability again to pay out all uninsured deposits. In this cycle, deposits have been key.

Speaker 2

Lack of available deposits is what took down SVB, Signature and Republic. Early in the pandemic, we were flush with excess deposits, but we were afraid that the excess deposits would eventually run off by our customers spending that money. That's pretty much exactly what happened. And we were suddenly scrambling to have enough deposits for our loans plus being able to pay out uninsured deposit. I thought of the days when we did not even begin to recognize the importance of deposits as I watched SVB and Signature Banks being taken apart in a matter of days.

Speaker 2

I remember us trying to move some deposits out of our bank, how wrong and misinformed can one be. Protecting and holding our deposits and not putting depositors' money into long term securities are the main reasons Home Bancshares is in the great financial position that it is today. There will be no need for the expense side if there were no revenue. The last part of this company is revenue. Nothing happens until something is sold.

Speaker 2

There is nothing to account for. There is nothing to regulate. There is no need to hire people. The expense side's sole reason for existence is to account for and accommodate the retail and revenue side of this bank. We have worked together as efficiently as possible and not against each other to support our retail and revenue horses.

Speaker 2

They are the ones that make it happen. They are the lane makers. They don't deal from a desk in the back office. They're on the fine lines 1 on 1 with the customers. I have some concerns about where we are today in this cycle, not home particularly, but I'm concerned about what happens to the 100 and 1000 of zombie banks that can no longer access the Federal Lending Program, the BTFP?

Speaker 2

Will cost of funds continue to escalate? Will CDR rates go to 7, 8, 9? Will this bring about bank failures that would have probably we would have probably experienced if the Fed hadn't backed up the truck with the program before? Have these banks recovered to a point that they'll be able to pay some or all of their uninsured deposits? As scary as it has been, it could get worse.

Speaker 2

I think the Fed will be forced to extend the program or face many bank failures. I can assure you, Home will be one of the good banks helping the regulators to clean up the mess. These banks with 8% or less capital and 110% loan deposit may wish they had found a partner before it was too late. When you look at margins of some banks, you see some with a 2 handle and believe it or not, there's some in Arkansas with a 1 handle. What were they thinking?

Speaker 2

I guess, better said, they weren't thinking at all. There are entirely too many banks running around in the market doing stupid things to appear to not have a clue what they're doing. Don't shoot many, but I'm strongly in favor of capital requirements being raised into the teens. I call them clutter banks because they don't have a clue in most instances and they just get in everybody's way and continue to do silly and stupid things. As serious as things are, trends at home are positive and appear headed in the right direction with deposits, loans, margin efficiency, net interest income, expenses, asset quality.

Speaker 2

We're going to have a little bump coming out of Texas. We've got a few things you got to clean up in the state of Texas. It is very manageable, but some things which we early on, they just weren't dealt with and they need to be dealt with. So we've made some loans that shouldn't have been made and we'll have to deal with those. And I think Kevin is going

Speaker 3

to talk about that in

Speaker 2

a little bit or some of them. Let's scale the numbers. Earnings were a little over $100,000,000 I think we even budgeted, Brian. We budgeted down, didn't we?

Speaker 4

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

Speaker 2

Everybody went along and said, Johnny, I didn't think we were going to do that. I thought we'd beat that, and I'm proud we did. Revenue was $246,400,000 It was a beat. Net interest income was $205,500,000 and that trend continues appears it's continuing only in April. Reserve alone 2% or $290,000,000 and we had $3.63 for every $1 of non performing loans.

Speaker 2

We did loan growth and deposit growth was about $80,000,000 each for the quarter, good balance. Loans originated for the quarter were, as I said earlier, were $954,000,000 at 9.28%. Great job, Kevin, your team. Return on assets, $178,000,000 and efficiency ratio better at $44.22 That's much better than where we were. We're up in the $46 s and $47 s and we were headed in the wrong direction, but we've stemmed that off.

Speaker 2

EPS of $0.50 per share. Margin apples to apples, Stephen, was 4.21 and I'm not going to get into the math how we get there, but I think it was 4.13 last time and you had 2 basis net income, which was $4.11 And if you all remember, we did the ARM that was 10 basis points. So apples to apples is 4.21, I think is what it was. Tangible book value of $11.79 return on tangible common equity of $17.22 and capital of 14 point 3%. That's a little improvement from last quarter.

Speaker 2

Tangible book value of $11.79 and we closed 4 branches in March And they were closed towards the middle of the month and maybe we'll see some more savings coming out of that. We'll take the blame for a lot of expenses to get out of control. And worse than that, we'll take responsibility for not taking actions earlier. Sometimes we don't see the forest for the trees. Even though we started late, non interest expense for the Q1 of 'twenty four was less than the Q1 of 'twenty three by over $3,000,000 Keeping expenses under control will be an ongoing project here.

Speaker 2

Because of our earnings being off and expenses continued unabated last year, the Board decided it's best to hold any dividend increase until later this year. As you know and would expect, my wife was not happy with that decision at all, no dividend increase. We'll ask the Board of Directors to address that again in the future.

Speaker 5

Donnie, it wasn't quite as good as

Speaker 2

I wanted, but I'll take it. I'm sure there may be a few banks that might outperform us this quarter, but if so, it will be a very small group and those that beat us, congratulations to them in a tough environment. It has been a tough couple of years attempting to overcome the damage done to our company by a group of less Texas individuals. The lawsuit we filed against the individuals is and will continue going forward until our shareholders receive proper restitution for acts of others. We have the fiduciary responsibility to protect our shareholders from what appears to be intentional damage, which includes possible criminal charges.

Speaker 2

This is a matter for the court at law and juries to decide and we're able to be on the resolve. With this top performing team of revenue horses and deposit gathers coupled with their strong relationships with their customer base, I would expect similar positive results next quarter. Trends are continuing to look pretty good and showing improvement in the revenue area in April. I hope that will hold throughout the quarter. If that holds, we'll have another great quarter and we could be off on really a good year.

Speaker 2

I want to thank everyone. One change from next year, Ms. Donna, is we're going to report our earnings the night before. We've done it the same way this time as we have in the past, but we're going to change that next

Speaker 6

quarter. Yes.

Speaker 2

Okay. And I'll give it back to you.

Speaker 1

Okay. Well, thank you for the colorful commentary as usual. And I

Speaker 6

actually think it's a great start to

Speaker 1

the year if trends continue. So I expect that from this team. Now Stephen Tipton will share operational results.

Speaker 7

Thanks, Donna. I'll start with the net interest margin that Johnny referenced in his comments. As we discussed on the January earnings call, we added approximately $500,000,000 in cash through borrowings late in Q4. That cash that excess cash affected the Q4 net interest margin by 1 basis point and the Q1 twenty twenty four net interest margin by 10 basis points as we had the cash for a full quarter. Additionally, we had event income in Q1 2024 that accounted for a 2 basis point increase to the margin.

Speaker 7

Normalizing for those items, we would have seen a nice 3 basis point improvement in the margin on a linked quarter basis. We continue to closely monitor asset repricing against the increasing cost on the funding side. The yield on loans excluding the event income improved to 7.34% in Q1 and outpaced the increase in total deposit cost by a couple of basis points. During the quarter, total deposit costs increased 13 basis points to 2.22 percent, while the yield on loans excluding event income increased 15 basis points to 7.34%. We will continue to negotiate pricing with core customers as we have been, but we are encouraged to see the pace of increases on the deposit side begin to moderate.

Speaker 7

Switching to liquidity and funding, it was great to see an increase in deposits again in Q1 with solid growth from several of the Florida, Texas and Arkansas regions. Total deposits increased $78,000,000 for the quarter. The deposit mix movement was similar to prior quarters as CDs continue to be in focus for the consumer. Non interest bearing balances grew by $30,000,000 in Q1 and account for 24.4 percent of total deposits. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.2% of liabilities.

Speaker 7

The loan to deposit ratio was in line with the prior quarter standing at 86% as of March 31. On the asset side, in period loan balances increased $89,000,000 led by growth from CCFG, Shore along with several individual regions within the community bank markets. On loan originations, as Johnny mentioned, we saw volume of $954,000,000 in Q1 with approximately 2 thirds of the closing volume coming from the community bank regions. Yields on those originations continue to improve with an average coupon of 9.28% in Q1. Payoff volume declining from Q4 was a total of $549,000,000 which is appears to be the lowest level we've seen in nearly 5 years.

Speaker 7

Closing, with the previously mentioned strength of our company, all capital ratios remain extremely strong with a tangible common equity ratio of 11.06%, a leverage ratio of 12.3% and a total risk based capital ratio of 17.9%. We repurchased 1,026,000 shares in Q1 under our repurchase plan and we've repurchased about 400,000 or so, so far this month through our 10b5-1 plan. So we continue to be active there. With that, Donna, I will turn it back over to you.

Speaker 1

Thank you, Stephen. Now, Kevin,

Speaker 2

we had 13 basis points increase in cost of funds, but Kevin's team got us and Chris's team got us 15 basis points on the yield side. So that's what I call out running the cost of funds. Sorry, I didn't mean to interrupt. Kevin, go ahead.

Speaker 1

Go ahead, Kevin.

Speaker 3

All right. Thanks, Donna. Good afternoon, everyone. As Johnny said, it is pretty simple. At the end of the day, it's just revenue and expense.

Speaker 3

On the expense side, our producers continue to get the job done. We continue to see improvement in loan yield and in net interest margin when adjusted for the Fed arbitrage. Volume was impactful as well resulting in a 3rd consecutive quarter of loan growth. I'm encouraged that we're continuing to see very good opportunities in our high growth markets. Leverage is the question, but fortunately there is plenty of equity available to get deals done today.

Speaker 3

The synergies that we've seen in our legacy footprint are becoming evident in post acquisition happy. It took us a little longer to get there due to the orchestrated exodus. But when you continue to focus on the right things, it's just a matter of time before it clicks and you see the benefit. On the expense side, in the Q4, we took the opportunity in what I would consider to be a challenging M and A market to make some overhead adjustments. Those changes really bore fruit in this quarter.

Speaker 3

The effects of improvement on both sides of the ledger are impactful. We will continue to look for opportunities to be more efficient as that has been our hallmark, but there are definitely opportunities to bring on producers who fit our culture and we're not hesitant to do so. While asset quality remains solid overall, we saw a marginal increase in non performing loans, up 11 basis points to 0.55%. This increase was centered in a few smaller happy credits. Interestingly, as a reminder, we noted early in the acquisition that while they may have had a higher level relative level of problem credits compared to home, it did not correlate exactly with losses as a significant level of problems were resolved in between due diligence and closing.

Speaker 3

We will see if that phenomenon continues as we move forward. We recognize that a higher for longer scenario puts more pressure on many projects. We fully expect that we'll see an occasional problem arise from time to time, but we're confident in our underwriting and in our geographies. And in addition, we have a fortress balance sheet with plenty of capital and a 2% allowance for credit losses. Lastly, an update on the 3 credits that we discussed last quarter.

Speaker 3

Subsequent to quarter end, the Oklahoma Marina note sale has closed and as we anticipated, it cleared out the balance that existed at quarter end. The Miami property is still under contract and there's no change in the timing of the approvals needed to close. I would anticipate that's probably a second half of the year item. I will turn it over to Chris Poulton to give an update on the California property and then a general update on CCFG. Chris?

Speaker 8

Thank you, Kevin. Happy to provide an update. As I reported during last quarter's call, during the Q4 last year, we transferred into REO the leasehold interest in approximately 50% occupied office building located on Ocean Avenue in Santa Monica, California. At that time, we identified 3 immediate priorities for the property. The first was to resolve some outstanding legacy litigation between the fee owner and our prior borrower.

Speaker 8

The second was that we were going to move our LA based West Coast regional office to the facility. And the third was we wanted to engage with the existing tenants to determine their potential needs and stabilize existing tenancy. During the quarter, we made progress on all three of these areas. First, the outstanding legacy litigation was resolved with the landlord withdrawing their claim against the bank. The second is we did complete our office relocation in February upon the termination of our prior office space lease.

Speaker 8

And the third is that in discussions with the existing office tenants, they expressed a desire to remain in the building longer term and potentially expand their existing space. In the coming months, we'll shift our focus to finalizing lease extensions and expansion for existing tenant, as appropriate and determine the remaining available space for lease. We anticipate at least one floor being available for lease and have begun marketing this space in the past few weeks. We've had hosted a number of showings. And while showings don't necessarily equal leases, and we do expect it may take some time to lease the available spaces, it's encouraging that there appears to be increasing interest in our well located office space in the Santa Monica submarket.

Speaker 8

We'll continue to provide some updates on this building as we go forward. But I think we're at least encouraged that we were able to accomplish what we wanted to in a fairly short period of time. Overall for CCFG, we continue to see a good pipeline and good demand for our product. I think as many of you know from prior conversations, kind of during these types of times or when we get to see some interesting transactions. And so I think we've done well.

Speaker 8

In the Q1, we'll see that continue on into the Q2, though I do expect that eventually slows down a little bit, but we continue to be encouraged with the quality of product that we see. And we continue to see some nice payoffs and paydowns in the Thank you,

Speaker 1

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

Speaker 2

Well, I just want to say anytime that you can on all offensive measures, so to speak, or revenue side of it, we hit every button, every one

Speaker 5

of them. Like there was

Speaker 2

8 or 9 buttons, we hit them all. And we had loan growth and we had loan growth and we had deposit growth. So that was positive. Asset quality remained strong. We had we worked on expense side, we made a big impact on the expense side.

Speaker 2

So I don't really have much to fuss about for the quarter. I think I said on my other remarks a while ago, any questions? So there's not you can ask about anything you want to ask because I think we got good answers for all of them. And I'm through there, Donna, and you're

Operator

Our first question comes from Catherine Mealor with KBW. Your line is open. Please go ahead.

Speaker 6

Thanks. Good afternoon.

Speaker 2

Good afternoon, Catherine. Welcome.

Speaker 6

Thanks. Brady always said this was his favorite conference call and now I understand. I'm so glad I could be a part of this now. Really appreciate your comments, Johnny. I wanted to start maybe with credit and think I appreciate the update on those 3 credits and then commentary on the small increase in NPAs.

Speaker 6

I was curious if you could just give us an update. I know mid quarter there was an increase in classified assets that you highlighted in your 10 ks and I think it was mostly related to 1 credit. But I just wanted to see if you could give us an update on that. And then also if there was any change in classified into quarter?

Speaker 3

Hey, Catherine, this is Kevin Hester. Overall, I'll handle the overall question first. Overall, classifieds down probably close to $25,000,000 in total. Specifically, the one credit that we talked about in the Q4 that was the large increase. We're continuing to work through that from just from an overall perspective.

Speaker 3

It's a daily process of managing their cash flows and we're continuing I think we saw a $10,000,000 or so drop in the operating line and we're continuing to work to get additional collateral and shore that up. So we feel like it's going just like we expected to. We knew it would take a couple of 3 quarters to work through the issues that evident there and we think we're on track and on progress.

Speaker 2

There's 2 pieces of that credit. One of them is tugboats and barges that were well collateralized on the other side of credit and semi collateralized on that piece. But Kevin has and we've built the policy if you classify one piece of credit, you classify it all. So really, we have great equity in the barges and the tugs. So that's the biggest that's the lion's share.

Speaker 2

The balance of it is $47,000,000 $50,000,000 is a line of credit. So the exposure really, I mean, if we I wouldn't classify much, we do everything that the asset, the other assets because I think we're fine there. I mean, if you try to buy barge today, it takes you 2 years or a tugboat. So the value of those things are pretty strong. So anyway, that's our customer.

Speaker 2

They kind of bumped their head going through the process and they ship a lot of material out of the country and the bridge that they ship through they use to transport got closed for some reason and that threw them into a loop. So we pulled the line of credit and they were able to get other lines of credit to continue to operate. And we should we're told we're going to see pay downs in the $20 plus 1,000,000,000 mark this month. So we'll see we'll let you know when that happens. But if there's an exposure there, I think it's limited.

Speaker 2

I'd say, un collateralized might be $30,000,000 total. So but they're paying and it's working. So, so far so good. That was it. That's the status of it.

Speaker 6

Great. Appreciate that. And then a question on the margin. Margins relatively stable if you kind of back out some of the excess liquidity. As you think about deposit costs going into the next couple of quarters, it feels like many of your peers have talked about this quarter still seeing pressure on deposit costs, but we're a quarter or 2 away from that stabilizing.

Speaker 6

Can you talk a little bit about where you think you are in that process, assuming let's just say rates are stable for the rest of the year kind of outside of any increases that you're mentioning Johnny or even cut. But if rates are just stable for the rest of the year, where do you think your deposit costs finally kind of peak?

Speaker 7

Hey, Catherine, this is Stephen Tipton. I think it's the same sentiment that you're hearing from others. Certainly, in this past quarter, the pace of the increases was less. I think we were up 4 basis points in January and 4 in February, and we're really pretty flat in March. And those are down from high single digit, low double digit increases throughout the year last year.

Speaker 7

So it slowed some. We still have CD portfolio, although fairly small relative to the overall that is maturing each month and we're having to work those and we talked about that earlier on a selected negotiated basis. So there's some lift there, but we're able to also as liquidity kind of holds in well here, we're able to kind of rationalize some of the top end of money markets and those kinds of things that we've had over the years. And I think that's what we saw in March. We're able to we're actually able to go in and lower a few rates here and there and that helped offset some of the continued increase.

Speaker 7

So low single digits, I think, would be what we would target from here. And then just overall, like Johnny mentioned in our opening comments, just outrunning on the asset side, outrunning anything that happens on the funding side.

Speaker 2

That running is continuing into April too, Catherine. It is the first we compare data reports, so we're looking at the 1st 10 or 15 days, 17 days, whatever it is, of April compared to the 1st 17 days of January. And where were we? And we're up nicely in the 1st 17 days. We have some large credits repricing this quarter and right now, matter of fact, that should be significant repricing, some 4.5% going to 9%, 4.5% going to 8.5%.

Speaker 2

And so we're seeing some significant repricing there. That should give us a boost. Another plus I didn't talk about, I meant to talk about is that we've been working on our office building in Amarillo, Texas, and it looks like we have a large tenant and we have 240,000 square feet. It looks like we have a large tenant, cross your fingers, we might get that leased up. So that could be a real plus for us in the Texas market too.

Speaker 2

That's just another side of it.

Speaker 6

Great, helpful. All right. Thank you very much.

Speaker 3

Thank you.

Operator

We now turn to Brett Rabatin with Hope Group. Your line is open. Please go ahead.

Speaker 4

Hey, good afternoon, everyone.

Speaker 2

Hi, Brett.

Speaker 4

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

Speaker 2

I think it's a fair number. We will not hire anybody else right now and we're going to continue to work on expenses. So it's an ongoing effort here. If you don't have an ongoing effort, it gets away from me like it did, it got away from us. So that's a I think that's a reasonable number.

Speaker 2

Actually, the forecast was a bigger number than that given to me. And when I saw the 3, it's real money. So it was 100 and I don't know, 50, 60, 70 people reduction in force. So that will continue on. So I mean, the real problem is for all banks is inflation is after us and insurance, everything is up, everything is all expenses are up.

Speaker 2

So we were able to cut $3,000,000 out in the quarter and hopefully that's $3,000,000 below the Q1 last year. So I think that's quite an achievement and hopefully in the Q4 hopefully and last year too, I'm sorry. So it will be good to see if we can continue that. We plan on continuing that. I don't plan on that to get away from it again.

Speaker 2

That's my point.

Speaker 9

Okay.

Speaker 2

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

Speaker 4

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

Speaker 3

Hey, Brett, this is Kevin. So yes, what we do is a lot different than what you might have seen in the news that there was an issue particularly in that if you remember our stuff is primarily Coast Guard registered 26.5 feet and up. I mean, we're talking about average loan size of 7.50. All of our dealer advances are supported by the original MSO as well as in almost every case by manufacturers repurchase agreement. So a little different than the smaller space where you're dealing with titled boats and trailer real stuff.

Speaker 3

So that I think is the big difference from that perspective. Certainly, I think the inventory has been easier for our folks to get, which has been to them a good thing because they hadn't been able to in a lot of cases, they didn't have anything to sell. So I think I've not seen in any of the annual reviews that I've seen, I've not seen any weakness from that perspective.

Speaker 4

Okay. That's helpful. And if I could sneak in one last one. Johnny, your comments around capital were a little confusing to me because you put off the dividend increase, but it also seems like you're less optimistic on M and A in the near term and your capital ratios are really, really strong at 14.3 BT1. Just curious how you think about you've done a little buyback here continued in the Q2, but how you think about capital levels and what you might do to stop that those ratios from continuing to move higher?

Speaker 2

Well, because we make a lot of money, we have the ability to buy back $22,000,000 worth of stock for the quarter, paid $36,000,000 in dividends and what's the other button? AOCI. Yes, AOCI hit us for about $25,000,000 and still grew capital. So I think we're going to sit with our strong capital base for a period of time here. I think it's the right thing to do.

Speaker 2

There wasn't any opportunities to speak up for us when the Fed backed up the trucks and came in with their lending program. But if they impact next March, everybody has to pay off those people that they're not going to get they're not going to put that $0.50 security up and get $1 for it, they're going

Speaker 3

to get $0.45 for it

Speaker 2

or something. So they got I think that world would change. So I think we sit continue to build capital and we continue to sit where we are and look for opportunities

Speaker 3

for our company because

Speaker 2

I think there's got to be some. I think there has to be some opportunities for homebuyer. I I mean, we were all dressed up and ready to play when all the banks started having their problems and we had the capital and the ability and the expertise to go to acquisitions. So we didn't get to play because the Fed backed up the truck. Well, if in fact they pulled the truck out next March.

Speaker 2

I think you could see lots of bank failures on the horizon. So we're just we're hanging out for that. We're just continuing to do what we do. We're making damn good money as you can see. The company is running really well.

Speaker 2

Someone said what happens if rates stay where they are? I said we just continue doing what we're doing. So I think we're really sitting in a good position. You see the quarter you have to admit we hit on every button on the quarter. So I think we'll continue to hit on every button going forward here and have a really, really good year for home Bancshares.

Speaker 2

So if we found the right trade to do it, we'd trade today, but it's awfully difficult to do a transaction in this market unless you find somebody who's really in trouble and you pick that piece up. So I think we're going to see some of that though, particularly if the Fed stops that program So that's going to change the world for 1,000 of banks. I think there'll be more bank failures if that happens. So my prediction is the Fed will extend it. I hope that answers your question, Brett, but that's the way I'm seeing the world right now.

Speaker 5

Yes. No,

Speaker 4

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

Speaker 2

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

Operator

Our next question comes from Jon Arfstrom with RBC. Your line is open. Please go ahead.

Speaker 10

Hey, thanks. Good afternoon. Hey, John. Question for me, a question for maybe Johnny or Stephen. If the Fed doesn't do anything on rates, can the margin just grind higher over time?

Speaker 10

And I'm thinking more medium term. It seems like the ingredients are all there with the slowing deposit cost pressures and the higher loan yields. But how do you think about that?

Speaker 2

Well, I'll speak to let Steven speak to it. We've got major price adjustments coming on our loans right now that are going to add 1,000,000 of dollars of income to between now and the end of the year on rate adjustments, on some stuff that was written fixed rate, 5 year fixed in the 4.75% range, it's going up significantly. So I suspect as Stephen is working on the deposit side and Kevin's working on the loan side, they just continue to, in my opinion, do a great job and are improving the margin. So I'm going to predict that the margin is going to be where it is or higher. And I think we're working towards that goal.

Speaker 2

And I think everybody is pushing that way. I don't want it to go backwards. It's not going backwards right now. So I don't want it to go backwards, but I'll let Steve, he deals with it every day and I just kind of generally deal with it.

Speaker 7

No, I think that's fair. I mean, we've got I think we talked about it last year. We had $1,000,000,000 or so over about a 5 quarter period in loans that that were repricing. We've got about $700,000,000 less than $700,000,000 for the rest of the year that's below $6,000,000 that's blended in. Johnny mentioned we've got some bigger credits that are in the 4s that are coming up, but there's below 6, there's 700,000,000 that provided that we keep the credit that we should be able to get some pretty big improvement from a spread standpoint there.

Speaker 7

And then again, absent no material moves and indexed deposits that we have to think tied to the people of that funds, if we just hang out here where we're at, feel like the loan side can offset what happens on the deposit side.

Speaker 10

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

Speaker 3

I mean, as you would expect, I mean, nobody likes the rate going from 4s to something in the 7s, 8s or 9s. But I mean, it is the reality and everybody's it's going to happen wherever they go. So it's just part of the timing. Pipelines are good. I won't speak for Chris.

Speaker 3

I'll let him speak for his. But from the community bank standpoint, I mean, we're in really good markets in the Southeast. So I mean, we're still seeing really good activity and we're able to structure things the way we need to for the most part. I mean, you see some crazy thing every now and then, but we're able to structure things the way we should and get the pricing that we're looking for as evidenced by what we did this quarter. So I'm encouraged that this is going to be be able to keep doing that for a while.

Speaker 10

Okay, good. And Chris, if I heard you correctly, it's a couple. Go ahead, Johnny.

Speaker 2

I didn't mean to interrupt you, John. I was going to ask you to tell, we're going to try to get it up, get the margin up if we can.

Speaker 10

Yes. Is there a Johnny Prime today? Are you satisfied?

Speaker 2

We're kind of Johnny Prime. We just had to put it back in. That's funny, I forgot Johnny Prime. We actually have it when we're still on the books at Johnny Prime.

Speaker 10

All right. All right. It was a nice quarter. Thank you. Appreciate it.

Speaker 9

Thank you very much.

Operator

Our next question comes from Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.

Speaker 9

Hey, good afternoon, everyone. I guess, I don't mind have missed it, might have some technology issues during some of Kevin's statements. But did you guys talk further about these bumps that you referenced Johnny out of the state of Texas and what that looks like?

Speaker 2

Not really. No, I'll give you a little

Speaker 3

bit of color. I mean, there's probably half a dozen credits this quarter that went non performing that were not last quarter. They were all $3,000,000 or less and almost all of them were out of Texas market some of them we've been talking about for a while, couple of them not. But nothing that I'm overly concerned about, but still it's stuff you have to work through. So

Speaker 2

we will just continue to do that. Some of that, Stephen, just kind of from the time we closed TAPI, it's kind of been on and off and we are paying and they're not paying as well. And so we've kind of tightened up with our Texas loan officers to get them straightened up or get them out and get cleaned up. But it's not I mean, if we lost all of them, it might be $8,500,000 $9,000,000 We lost it all. So it's not huge to us, but just want to get cleaned up.

Speaker 2

That's it. That's it. That's the only thing we're doing.

Speaker 5

I mean,

Speaker 2

some of them ran along and kind of milking the deal. It's time to get them fixed.

Speaker 9

Okay. So are these kind of legacy credits or was it something you identified in terms of how those lenders were operating in those Texas markets that you wanted to change moving forward?

Speaker 2

Both. Yes. And you got

Speaker 3

to remember, they had acquisitions on their books as well. So they were they had just finished an acquisition of a Centennial Bank oddly enough that they were working through. So some of those are acquisitions to them as well.

Speaker 2

That's correct. That is correct. And 2 of these loans that bother me in fact is one of them was made about the time we closed 2 of them were made about the time we closed the transaction. So there are loans that we would not have made today. One of them is the Marina and it's sold, it's gone.

Speaker 2

We got that deal, Kevin got that deal closed out. I own a bottle of Whistle Pet. So I told him to get that sold and done before then in the quarter, I'd get him some Whistle Penny. So anyway, I owe him. So you can send me some so I can pay him.

Speaker 2

But the other one was about $11,000,000 apartment complex that just didn't I don't know if it's going to be all right or not. So but it's not in the world. I mean, if there might be a loss and there might not be. But if there is, I mean, it's a 1,000,000 or plus $1,000,000 or minus $1,000,000 So it's just getting it cleaned up. That's really it.

Speaker 2

It's just drug along. You remember, I read every line of every class by the asset that Happy had before we bought the bank. And some of them are that old stuff that's just hadn't been cleaned up, moved between Nothing big.

Speaker 3

He read the due diligence. He read all the due diligence problem loans that we had. And by the time we got to the first asset quality meeting after acquisition, a lot of those had cleaned up. And so that's the comment that I made a few minutes ago is that, that's been their history. They had relative to us, they had more problem loans than we had.

Speaker 3

But a lot of it didn't necessarily translate to losses. They've cleaned a lot of stuff up through the time. And part of that's they're in a good market just like we are in Arkansas, Florida. So we'll see if that continues and I'd expect that it will.

Speaker 2

But You're right. When you suddenly move into 7%, 8%, 9%, 10% interest rates, you're going to see some cracks come. The difference is the difference now between 2004 and 2005 is nobody had any money in the deal in 2004 and 2015 and they got money in these deals. People got money in these deals. It might be 20%, probably there's no equity in some of those today because interest rates at high levels they are, but there's not big losses that are made.

Speaker 2

So I mean in 3, 4 and 5, I don't nobody putting money in the deal and when we had loan problems, they just threw the keys. So that doesn't happen anymore. And we haven't had anybody throw us the keys on the marina. They threw us the keys on the marina. So but we're out of it.

Speaker 2

We're gone. We're done. So Kevin worked up well and we all got our hands into that one. But Kevin let us and got us out. He's got buyers of that stuff.

Speaker 2

So anyway, so far so good.

Speaker 9

Okay, good. And then I guess my only other question is really thinking about growth moving forward. I mean, Chris and the CCFG team had a nice little quarter and the organic growth, I mean, legacy markets grew a little bit. So I mean, is that growth a function of you guys having been patient and having liquidity put to work when others don't? Or is it more you guys getting a little more constructive on the overall environment or maybe a little bit of both?

Speaker 3

I'll let Chris speak to his dynamic. But from the Community Bank standpoint, it's I think it's the former. I mean, we hear a lot of folks not in the market on certain things and we're as we always do, we're in the market. We've always got money to loan. So we're going to do it in our way and we're going to make it right.

Speaker 3

But I think it's the first part that we've got money to loan and other folks have stepped on the sidelines for a while. Chris, do

Speaker 2

you want to jump in there?

Speaker 8

Yes. Kevin, I couldn't have said it better. I mean, last year, I think we did $750,000,000 in volume last year, which is down kind of from what we normally do. But part of that was because we just didn't like some of the things and there were some people doing some things, etcetera. And we felt like at some point, the mark would come back our way.

Speaker 8

And so having not lent the money last year, we have the money available to lend this year. I can't say that's true for everybody. Will it change as the year goes on? Yes, I think people come back into the market if they start to feel better about it. I think we have the benefit of never feeling good about the market, so.

Speaker 3

Thank you.

Speaker 9

Yes. You're very consistent there, Chris. So thank you guys for the color.

Speaker 2

Hi. Thank you, Steven.

Operator

Our next question comes from Brian Martin with Janney. Your line is open. Please go ahead.

Speaker 5

Hey, guys. Good afternoon.

Speaker 6

Hey, Brian. Hey, Brian.

Speaker 5

Hey, Brian. Kevin, just on those credits hey, Johnny, those credits you talked about in Texas, Kevin, what's the small, I guess, Johnny mentioned one number, but what's the exposure or was he talking Johnny, were you talking more about the loss content? I thought you said about $8,000,000 or $10,000,000 Just trying to get an idea of how much exposure there is to those credits versus maybe if you're talking about the loss content, I'm not sure.

Speaker 3

So I was talking about the increase in non performing loans quarter to quarter. He was talking more about overall exposure. If everything that we see in our asset quality meetings just went in the toilet. So we were talking about 2 different things.

Speaker 5

Okay. So the total that total exposure of those 6 those half dozen credits, what how big is that exposure as you kind of look at it and then there's some potential loss on that, but

Speaker 3

you said exposure I mean, a couple $2,000,000 $3,000,000 I would think. I mean, at this point, I'm not convinced we're going to lose anything in any of those credits that were the change this quarter. But they're I believe they're all real estate secured and there's going to be some level of even if you foreclosed on everyone, there's going to be some level of recovery that you have. So I don't think it's going to be a material number. Just really I was really referencing the change in balances quarter to quarter.

Speaker 2

Yes, that's referencing. I got it. Okay. It was a max loss, so okay.

Speaker 5

Yes. Okay. That's helpful. Thank you. And then just on in terms of the on the margin with the bank term lending program, I guess, what's kind of your outlook there?

Speaker 5

I know, Johnny, you said you think it continues. I think last quarter it was would you keep it? Would you not continue to use it? So I guess right now it's in the numbers. I guess is your expectation that you kind of continue that and that drag that we're seeing on the percentage versus the dollars you're getting, just kind of continue to think about that being status quo for the near term or?

Speaker 11

This is Brian. I'd say there's probably going to

Speaker 3

be status quo for at least

Speaker 11

a couple of quarters. If there's no drops in the fed funds rate, we might as well hang on

Speaker 2

to the money. We'll have

Speaker 11

to pay it back, I believe, on January 16.

Speaker 2

But right

Speaker 11

now, we've got a positive arbitrage on it. So there's no real reason to pay it back unless rates go down.

Speaker 5

Yes, we got to make sure that. Okay.

Speaker 2

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

Speaker 5

Got you. Okay. And Stephen, I think you mentioned repricing opportunity. I think you said $600,000,000 or $700,000,000 this year that you got a pretty nice pickup on. Is there does that feed into 'twenty five as well?

Speaker 5

Will there still be that type of opportunity when you look at what's repricing in 'twenty five?

Speaker 7

It begins to step up and pick up the last couple of years production at a little higher rates when you get out into 2025. So we really just kind of focused on near term this quarter, next couple of quarters.

Speaker 5

Got you. Okay. And I think you mentioned the deposit stabilized. I mean your thought is back half of the year is kind of was that reading between the lines what you're suggesting, Stephen, on what you see there?

Speaker 7

From a balance standpoint or from a rate standpoint? Just to make sure we're clear.

Speaker 5

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

Speaker 7

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

Speaker 5

Yes. Okay. All right. And then last one.

Speaker 2

The trend should continue. It should continue with the repricing, big repricings that we've got sitting in front of us right now. So that it ought to be another kick. We're already up running well. We ought to get another kick here in the next 30 days.

Speaker 5

Yes, understood. Okay. And then last one for me was just on just the expenses and the improvement you saw this quarter. And if there are the overhead you cut and I guess if we think about where there's opportunity further opportunity if there is any on the expense side. I mean, what if it's not overhead, I guess, where else are there potential opportunities as you kind of continue to work on that expense side?

Speaker 2

We went from 38% efficiency to 46%, 47% efficiency and we had to come back and we're at 44% for this quarter. We're pleased with $3,000,000 but if you can pull $3,000,000 out in 90 days, there may be more. I'm not saying there is more, I'm just saying there may be more. But to operate this quarter $3,000,000 less than we did last year at this time, I think that speaks pretty well for what we're doing because you know we've had increases. You know we've had increases in all kind of everybody is getting these increases now.

Speaker 2

So I think that's probably a good run rate. I wouldn't expect it to go up. I think that's probably a good run rate. If it goes up, we'll do something else. We'll figure out something else to do.

Speaker 5

Yes. Okay, perfect. Got it. Thanks for the color. I appreciate it.

Speaker 2

Thank you. Appreciate your support.

Operator

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

Speaker 2

Thank you everyone for your support. We've been a good quarter. We're pretty happy around home bank shares right now with what we see. I don't this may be the best quarter the corporation's ever had. So when you look at all the we hit on all the offensive buttons, bam, bam, bam, bam, bam, and then the decrease in expenses and you look at the impact that's made to the company, maybe our shareholders get a dividend increase for too long here.

Speaker 2

So my wife would appreciate that, I can assure you that. Anyway, appreciate everybody's support. We'll talk to you in 90 days.

Operator

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

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Earnings Conference Call
Home Bancshares, Inc. (Conway, AR) Q1 2024
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