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

Home Bancshares, Inc. (Conway, AR) (NYSE:HOMB) Q3 2023 Earnings Call Transcript October 19, 2023

Home Bancshares, Inc. (Conway, AR) beats earnings expectations. Reported EPS is $0.49, expectations were $0.47.

Operator: Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Third Quarter 2023 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The Company presenters will begin with prepared remarks, then entertain questions. [Operator Instructions] The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page three of their Form 10-K filed with the SEC in February 2023. At this time, all participants are in a listen-only mode and this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Donna Townsell: Thank you. Good afternoon, and welcome to our third quarter conference call. With me for today’s discussion is our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Stephen Tipton, Chief Operating Officer; Kevin Hester, Chief Lending Officer; Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. 2023 continues to be tough for the banking sector. With bank failures, interest rate and funding pressure and now potential credit concerns, this business is not for the faint of heart. And here at home, we hold ourselves to the high standards. And to provide some details on our third quarter performance is our Chairman, John Allison.

John Allison: Thank you. Welcome to the third quarter of ‘23 earnings release and conference call. We’ll discuss the results of the quarter, we’ll talk about the year and what’s going on in the bank space, and then we’ll open it up for Q&A. First, I’d like to pay respect to a mentor, a trusted professional investor, respected friend, and trusted ally. A person we all look to for guidance and advice, and we have total respect for her, and she was above reproach. And it is Sally Pope Davis, whose hands has guided Goldman Sachs Bank stock investment for many, many years. I’ve said this at the Stephens Conference several weeks ago that having Sally in your stock as a long-term investor was like having the Good Housekeeping Seal of approval on your stock.

All of us at Home will miss her leadership, her guidance, her professionalism, and her straight talk, because you always knew where Sally stood because she had a way of letting you know. Not only us, but the entire industry will miss her, too. We wish her happiness in her retirement years and sincerely hope that life brings her many years of fulfillment. I have one other comment. It will not be the same without you Sally. It will bring an emptiness that cannot be filled by anyone anymore, a skill that the world will talk about banking. I asked her last quarter, what possibly can go wrong? I agree with Jamie Damon. I read his information that he put out and that in addition to being in a tough economic times, we’re facing very perilous war with Ukraine war and now the war with Israel.

And that one has the potential maybe of getting out of control, hopefully not. The quarter was a little disappointed by Home BancShares’ high standards because we always expect to be the best in the nation. But we continue to be an industry-leader as we compare to other financial institutions. The two main culprits were operating expenses and interest expenses that caused a slight decrease in net income. Operating expenses are creeping up as evidenced with almost 46% efficiency ratio and interest expense is creeping up likewise, as evidenced by the cost of interest-bearing deposits from 2.27% in June to 2.55% at the end-of-the quarter. The good news is, interest margin actually improved in the month of September, as we’ve been working diligently to stop the bleeding, and we’re just starting to address the expense side issues.

The lenders are doing their part by increasing revenue through repricing and higher origination rates of new loans. I’m optimistic they will overcome the increase in interest expense in the fourth quarter. The expense of non-income producing area of bank will have to be addressed, and each department scrutinized. It’s really pretty simple, if profits are going down, you either increase revenue or reduce expenses. There is no other way to increase profitability or – unless you just want to maintain the status quo. Someone said recently,” I hope that if I’m lucky, this will work out.” Well, hope is not a strategy and luck is not a plan. We must plan for what we want to do to improve. Liquidity remains strong, and we successfully reduced the size of our asset-base by letting the high-price money go to those willing to pay almost anything for it.

However, on the expense side, we still have the same number of people as we did when we had a much larger asset base. Watching the newspaper ads, it appears that others may not be in as good a liquidity position as Home, because they’re paying almost any rate just to get the money. Maybe profitability is not important to them. The margin fell nine basis points during the quarter to 4.19% at September 30. However, the good news is, we grew margin in September, and Stephen will talk more about that in his remarks. Certainly, it appears that maybe the increases have slowed down. However, it could be a head-fight, stay tuned. Our TV and newspaper ads continue to promote the strength of Home BancShares, which relates directly to safety and soundness of our customer deposits.

Many customers are initially chasing rates on deposit without any consideration as to what happens if the big bad wolf shows up at the door. Many banks will be closed before the sun set today. If their bank has a 100% loan-to-deposit and less than 9% capital, it could happen today, tomorrow or at any time. Home has an 86% loan-to-deposit and is supporting a powerful CET1 of 14%, that puts us in the top-tier – for you people who don’t know what CET three is, that’s capital. That puts us in the top tier of all banks in the U.S., regardless of size. Our powerful capital number is demonstrated by the #1 bank in America, JPMorgan Chase has a CET1 capital ratio of 14.3%, just slightly above Home. We’re very proud of our fortress balance sheet and we will continue to build on our strength.

Jamie Dimon said he is steering his company to be ready for whatever comes his way and your company Home is doing exactly the same thing. I’ll quote Mr. Dimon, “This may be the most dangerous time the world has seen in decades.” We are in total agreement and are continuing to take the safe path and protect our depositor’s hard earned money, our shareholders’ investment in Home, and to ensure our employees have continued employment. Your bank will not be one of the SVB, Signature or Republics that did not have the ability to pay out uninsured depositors. Homes can pay out all uninsured depositors and still have money left. I don’t know how many banks can say that today, but I’m damn sure proud of our ability to do that and personally commit that we will remain in that strong position on a go-forward basis.

In addition to that, Home would run a 1.20% return on assets after borrowing all the money that we needed to pay-off the uninsured deposits. I think that’s pretty good. Some banks would love that. That is not an acceptable number at Home BancShares. Adding to the financial strength of Home is peer-leading amounts of reserve for bad loans. Almost $300 million of 2% of outstanding loans ranks us as one of the best in the country. That 2% reserve level has provided security for our company, even during the great financial crisis of 2005 through 2012. We had sufficient capital and reserves and we came through that with hardly a bump. We’re all expecting additional impact to the economy if the Fed continues to hold rates higher for longer, while attempting the difficult process of making a safe landing.

Maintaining strong reserves is another spoke in the wheel to ensure Home will be a survivor through the next crisis as we have been through all the others. Not only a survivor, but to come out the other side stronger than what we went in. We’re constantly watching for opportunities. If you remember ‘08, ‘09 and ‘10, we were one of the biggest buyers of failed banks in the country and we’re looking for opportunities, and we’re seeing some. Another spoke in the wheel of strength is protecting the growing tangible common equity better known as TCE. While many institutions have not protected their TCE, allowing several to even go negative, Home BancShares is proud of continuing not only to hold loan, but to grow ours during the fastest escalation of interest rates since the ‘80s.

Over the past 12 months, we have paid out $143.3 million in dividends. We’ve repurchased 2,250,900 shares of stock for $51 million and have taken an additional mark to available-for-sale or referred to as AFS of $43 million, while still growing tangible common equity by 11% We grew it from $9.82 a share to $10.90. So that’s a shout-out to all of our people, for an outstanding job in managing this company through an extremely dangerous economy. If you want to throw in the kitchen sink theory and take all the additional losses of Happy Bank Bond book transaction that we hold as held-to-maturity, the mark-to-market would be approximately another $31 million that still equates – if we take that, it still equates to tangible common equity growth of 10.4% over the last 12 months.

If it’s true that bank stocks trade on a multiple tangible book, one would expect Home stock to be up about 10%, because TCE is up. We’re actually trading down about that same percentage. I think it’s indicative of the fear that exists in this asset class. Earnings ability is certainly another spoke in the wheel and we’re continuing our march towards our stated goal at the first year of $400 million for the year. As my football coach, used to say the hay is in the barn. Well, most of the hay is in the barn. For the big three quarters, we’ve earned $306.8 million through the first three quarters. We earned $98.5 million for the third quarter of the year or $0.49 a share. But if you add the last four quarters together, Home has produced a record earnings of $415 million or $2.05 a share, while fighting all the distractions we have encountered, both on the economic and man-made disruptions from some disgruntled former employees.

Let’s go to few key numbers. Revenue was $245.4 million, down just a tick. ROA 1.78%, we like a 1.80% or better. NIM was 4.19%, and the return on tangible common equity was 17.62%. Asset quality is still remaining strong with non-performing assets at 0.42%. The last time we talked, we had an office building. We just heard about an office building that possibly was going – we were going to get back. It looks like it’s going to be a fourth quarter item and we’re going to get it back in OREO in the fourth quarter. I travelled to see the asset. I walked the office building and I left quite happy with the location and condition of the property; prime location, great parking garage, elevators, well-kept. I don’t expect much loss if any, I think we’re going to be in it at below $23 million – between $22 million and $23 million.

So, the time will tell what it’s worth, but I’m not expecting much loss. We had a new one that popped up, a marina in Dallas. This is new, probably too early to tell. I don’t expect a loss here. If we underwrote it probably, which I’m sure we probably did, as hot as marinas and the marine business has been, I can’t imagine a loss there. There’s one other one we’ve been carrying on the books for some time and Kevin is going to talk about it. Looks like he has got a – maybe have a solution to that one. Loan demand has been about half of what it has been. We may be in the beginnings of a loan recession. Yields on loans were up to 6.98% from 6.48%, up 14 basis points last quarter. Loans were up slightly for the quarter, primarily CCFG, that Chris and his crew came on.

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

We were a 100% correct because there was not a problem with our CRE portfolio. But maybe somebody is trying to make some money on the shores. We’ll keep you informed of that in the future. We always ask about what’s going on in the regulation side, and examiners all think the world is cured by capital and I guess if the CET1 was a 100%, that would be correct. You probably not want to expect this coming from me, but I’m inclined to be favorable to raising capital requirements. It appears to me the most bank failures are a result of bad loans. So, if there was some limit on loan-to-deposit ratios or loan-to-capital, they will not be able to stretch themselves into these kind of problems. I would not be opposed to some kind of restraint because the world is full of 108% loan-to-deposit base and less than 9% capital.

If they can’t control themselves, somebody needs to control them. I also think they should be forced that they hit a certain level of profitability before they can expand their franchise. Now I think those ideas have possibilities of helping and would be meaningful rather than some of the math we do from time-to-time that really doesn’t mean anything. It appears they usually show up late and a dollar short. It’s the old story. Some people make things happen, some people watch things happen and other people say, what happened? Am I supposed to say, back to you, Donna or back to you Mike?

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

Stephen Tipton: Thanks, Donna. I’ll start with the net interest margin, as you referenced in Johnny’s comments. Reported NIM was down nine basis points to 4.19% in Q3, but included about $0.5 million of net event expense this quarter due to a couple of non-accruals that Kevin will mention in his remarks. Normalizing for those event items, the net interest margin would have declined six basis points on a linked- quarter basis. We continue to closely monitor asset repricing against the increase in cost on the funding side. On a month-to-month basis, we saw a little more pressure in August on the NIM and actually had a slight improvement in September with the core net interest margin at 4.19% During the quarter, total deposit costs increased 23 basis points to 1.87%, while the yield on loans, excluding event income, increased 18 basis-points to 6.99%.

On a monthly basis, total deposit costs increased seven basis points in September to 1.96%, while the yield on loans, excluding event income, increased 11 basis points to 7.08%. We’re pleased to see the results in the loan yield as efforts from repricing maturities and discipline on new production begins to show in our results. Additional loan repricing opportunities continue this quarter, with over $200 million maturing at 5% or below, and we’ve got a little over $800 million between now and the end of next year at 5% or below. So there’s definitely opportunity there. Switching to liquidity and funding, we continue to manage the interest rate environment we’re in today, trying to strike a balance between the rate competition is offering and fostering our own relationships.

In many of the markets we are in, 6% deposit rates are beginning to be the new normal. Total deposits declined $478 million in the quarter, with the decline occurring in July and August. The Texas and Florida regions saw the majority of the decline, while the Arkansas regions continue to be a little more stable like we saw in prior quarters. Noninterest-bearing balances accounted for about 2/3 of the decline in deposits in the quarter and stand at 26% of total deposit balances, down from 27% in Q2. Alternative funding sources remain extremely strong with broker deposits only comprising 2.4% of total liabilities. We allowed $65 million in brokered balances to roll-out in July, and continue to work on customer relationships that provide long-term value.

The focus in loan committees and discussions amongst all of our regional presidents continues to be on deposit gathering, core customer growth and retention. On the asset side, as Johnny mentioned, loan origination volume slowed in Q3 with approximately $660 million in commitments compared to $1.34 billion last quarter. Yields on originations continue to improve with an average coupon of 8.98% in Q3. Correspondingly, payoff volume declined in Q3 to a total of $578 million in payoffs, and the yield on new loans was in excess of 150 basis points higher than the outgoing rate on those payoffs. Closing with previously mentioned strength of the company, all capital ratios improved in the quarter, notably with the TCE ratio of 10.76% and a total risk-based capital ratio of 17.6%.

And with that, Donna, I’ll turn it back over to you.

Donna Townsell: Thank you, Stephen. And now, Kevin Hester will share information from the lending side.

Kevin Hester: Thanks, Donna, and good afternoon, everyone. Many times through the years, I’ve characterized our approach to lending as conservative. We always preach to our lenders that we want asset quality, profitability and growth in that order. In 2017, when most banks were loosening credit standards, we were tightening. I believe that all of this was to put us in a position for a time like today. We knew that the free money days would come to an end and that interest rates would increase. However, there was no way to anticipate the giveaway money days of COVID that would create massive inflation. No one anticipated the level of interest rate increases that would be required to reverse the inflation caused by these poor fiscal and social governmental decisions.

It is unreasonable to expect debt service increases of over 100% wouldn’t test even the most conservative of underwriting processes. We will see that this is the case, especially if the interest-rate scenario is truly higher for longer. During the last couple of months, we’ve been evaluating three credits. The first is the office building in California that Johnny has talked about. It’s a Class A property in a desirable location. We will move this property into OREO during the fourth quarter at a balance of just below $23 million, which is about 70% of the new appraised value. Cash flow is not breakeven at present, but we’re optimistic that there is a path to disposition at little or no loss. The second is the Miami property of about $7 million that is primed for redevelopment.

The appraisal indicates that the land value exceeds our loan balance, and it is also in a desirable area. While we will move this into OREO in the fourth quarter as well, are currently evaluating an offer that is above our carrying balance, so we don’t expect any meaningful loss from here. The last one is a marina that Johnny mentioned on a lake near the Texas Oklahoma border that is in the $9 million range. Recent financial information indicates that the project is viable and it appears that our issue could be coming from something outside our relationship. We are continuing to evaluate this situation and we’ll adjust our approach as we gain more information. With these three loans on nonaccrual, NPAs did increase 14 basis points to 0.42% this quarter.

However, past dues only increased three basis points on a linked-quarter basis, indicating a reduction in activity outside these three loans. Even with this NPA increase, the allowance for credit losses still provides a stellar 314% coverage of non-performing loans. I do believe that our preparation and discipline will pay off in the long run and will result in fewer asset quality issues with less severity than would otherwise be the case. Combine this with the best-in-class loan-loss reserve and very high capital ratios, and I believe that we’re in a great position as the remainder of this interest- rate cycle plays out. Donna, that’s all I have and I’ll turn it back to you.

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

John Allison: Tracy, you got anything? Got a comment.

Tracy French: Johnny, I don’t think there’s anything that you didn’t cover or Stephen. Kevin covered for the Banks. But, all I know is our group of outstanding bankers will stay focused and we will do what’s the best thing for the shareholders. Brian. Any comments?

Brian Davis: No, I’m good. I think you said it all.

John Allison: Thank you, Donna. I think we’re ready for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Stephen Scouten with Piper Sandler.

Stephen Scouten: Good afternoon, everyone. Appreciate the time. I guess you guys already have one of the better efficiency ratios in the industry, but it sounds like maybe there could be a closer look at really every aspect of the business. Would you expect any sort of larger scale efficiency plan? Are we going to – is Donna going to get named, the efficiency ratios are once again? What are we looking at there on the expense front?

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

John Allison: And I didn’t get – Stephen, I didn’t get – you thought I got in the fetal position at the end of last quarter and curled up. I didn’t do that. I want you to know that. I want you to know…

Tracy French: I’m not going to tell them all that you didn’t do that.

John Allison: Isn’t that what you thought, Stephen.

Stephen Scouten: I was just worried, you thought banking wasn’t any fun anymore. I was worried you’re just tired of it.

John Allison: I don’t know if I’ve ever had as much fun.

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

Kevin Hester: Stephen, this is Kevin. The fourth quarter looks pretty decent from that perspective. We see our pipeline out that far and know what we’re going to close. And so, fourth quarter is going to be pretty good. Past that, I mean it’s all about opportunities and where the market goes and we’ll take what we can get. We’re not projecting big loan growth. That’s not the time of the market we’re in, but this quarter does look pretty good.

John Allison: You’re getting some high rates now on these loans and particularly on some of the projects people are looking at, we’re getting some higher rates and that’s meaningful. We watched the last three quarters that not keep up with interest expense. And we – as I said, we’re fighting that battle to stop the bleeding and we may be getting close to doing that. I watched the seven – our lenders have done really a good job on the $750million, at least from June to December getting pricing on that, up 400 basis points to 500 basis points on those. So, I really don’t think we’re going to kind of be flat here for a while, if the Fed – probably a good time to be flat. We’re repricing people at 4.5% going to 9.5%. That’s a shock. That hadn’t hit the market yet. That has not hit and we got, I don’t know, what’s – repricing next year is about $1 billion? Stephen, do you have numbers?

Stephen Tipton: Yes, below 5%. We’ve got between $800 and $1 billion that’s coming due, that’s fixed rate that will have an opportunity to improve significantly.

John Allison: Our lenders have really done a really pretty good job. I have to – they’ve done a pretty good – they’ve really done a good job of getting that. And they understand what it takes and they’re getting it done. So we’re catching up. We’re just catching up with the – I almost said that I thought we troughed on the cost of interest expense, but that may not be right. But we’re damn sure getting closer to it. So we’re trying. We look at that report every day. We’re trying to get there.

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

Kevin Hester: I mean, there could be a few, Stephen. We haven’t seen – we’ve repriced quite a bit of stuff this last two quarters, and we really haven’t seen very much of that. So I don’t anticipate a lot of it. There could be one every now and then that just looked that way. But I don’t expect it to be widespread. If you remember, we’re pretty low leveraged even back in that time frame. So, it’ll test our underwriting, but I don’t think it’ll break it very often.

John Allison: I think Kevin hit it on the head there. Hey, we didn’t create the interest rate increase, it happened. Right. It’s a way of life. But most of the customers that we talk to, they’re good business people. So they understand what’s going to happen or what’s happened. So, Kevin and the team has got their lenders working those a little bit ahead of game than normal, just to make sure we’re in the right spot. So we actually feel fairly good about it. I think I’ve only seen one, one ask. I think I’ve only seen one ask. It may have been another ask, but I’ve only seen one, which I think is outstanding. Kevin has made a good point. We’re low leverage. They may let some stuff go, but they’re probably not going to let that low leverage stuff go.

They’re probably going to keep it. They’re probably going to keep it. I mean, if you got high leverage on stuff, they’re probably going to go away or could come back. When you think about the office building…

Kevin Hester: Yes, that’s definitely a testament to the underwriting that – yes.

Stephen Tipton: Yes. You just said, that is a testament. That was originally a $50 million appraisal. It’s now a $34 million or $35 million appraisal. So we’re in at 70. Had we been in there 80 on the front end, we’d be in at 110 or 120 now. So we’re very pleased with what’s going on in that space. Chris, do you want to talk about that a little bit on that one office building?

John Allison: I don’t think you’ve got any other office building, Steve.

Christopher Poulton: No, not really. This was our one. We had cash flow and we lent on it, and that serves me right. We don’t usually like cash flow. But, yes, no, happy to talk about the asset. We got involved in that asset in 2016 when we financed the NPL purchase and our borrower converted the NPL to an REO. It was 50% leased then. They took it to 100% leased and had about a 70-something million-dollar value against that and it’s on a ground lease. The ground lease was resetting in 2020. We gave them some time to get through the ground lease reset and we got through that. There was a pay down obligation associated with that which they met. And then we kind of got into the pandemic and one of the tenants in 2022 left, which put us back to 50% occupied.