Home BancShares, Inc.

Excuse me, everyone. Please remain holding. The conference will begin shortly. Again, please remain holding. The conference will begin momentarily. Thank you. © transcript Emily Beynon

Greetings, ladies and gentlemen.

Welcome to the Home Bank Shares Incorporated third quarter 2022 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. Please note that if you would like to ask a question during the question and answer session, please press star, then 1 on a touchtone phone. If you decide you want to withdraw your question, please press star, then 2 to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 2022. At this time, all participants are in a listen-only mode, and this conference is being recorded. If you need operator assistance during the conference, please press star, then zero. It is now my pleasure to turn the call over to Donna Townsend, Director of Investor Relations.

Thank you. Good afternoon, and welcome to our third quarter conference call. Today's discussion will include prepared remarks from our Chairman, John Allison, Kevin Hester, Chief Lending Officer, Chris Poulton, President of CCFG, and Steven Tipton, Chief Operating Officer. The rest of our team is present and available for questions. Tracy French, President and CEO of Centennial Bank, Brian Davis, our Chief Financial Officer, and John Marshall, President of Shore Premier Finance. In a year that continues to produce wild market swings and economic uncertainty, the third quarter was no exception. However, with a fortress balance sheet conditions at home remain strong and with a positive outlook. And to provide more color on that, I will turn the call over to our chairman, John Allison.

Thanks, Donna. Welcome, everyone, to the third quarter earnings release and conference call. This headline for the quarter is similar to the statements we made last quarter about uncertainty. Actually, we're basically in the same place we were last quarter, except rates are higher and odds are they're going to go higher for longer. If you remember what I said last time about Volcker in the 70s, he took rates to 14% in the late 70s, but he didn't kill a snake before he pivoted. He pivoted under pressure because people said we've got to turn it around. As a result, he had to come back in the 80s and take rates to 21% to cut the head off a snake. I think that's exactly where we are today. Most everyone is hoping for a pivot, and it's absolutely the wrong time to do that. We have not killed a snake yet. Another 150 to 225 basis points and then hold and observe may get the job done. Rates are certainly much higher than most of us thought, but there is still room for them to run. Core CPI is certainly the highest in 40 years, and this administration is still trying to continue the inflationary spiral. I said last quarter they're either naive and confident or playing stupid, or maybe they're brilliant, which I doubt, but time will tell. I will say there is no substitute for experience. I heard Nancy Pelosi say that this morning and I might take that out of my vocabulary because I always heard her say there is no substitute for experience. There is no one in this administration with any business experience, period. You cannot take a bunch of PhDs that got their expertise out of some book. The world business is much different than that. I'll take a decision-making opinion from an experienced person much quicker than I'll take some inexperienced politician, and I don't care how many degrees they have. I'm still sticking to the possibility of a 6% Fed fund rate, as I said the last two quarters, because the puppet show is continuing on by Powell and his group. This is really not a time to panic, and I like the world's not coming to an end because of high rates. Remember the average Fed funds we talked about last time. For the last 50 years, it's been 5.44. We've got a long time with those high rates, and the world didn't crash. The sugar high that we've all been on, enjoying the crazy low rates, is nothing but an accommodation to allow Washington legislature to spin crazily year after year. As I said last quarter, the key for banks is to be premeditated and cautious with their moves, and playing a little defense is not all bad. When you see banks bidding up CD rates in the newspaper now, you immediately know that they put all their money to work and lower rate securities, and this will result in higher cost of funds and lower margins for them. We're getting looks at lots of stuff right now that we normally don't get to look at. I don't know if that's good or bad, but banks are tightening up. We just had someone fly in, just Tracy met with them, and one plane came in from Florida and one came in from California. And I said, why are you in Conway, Arkansas? And he said, because our five big banks won't do this deal. The good news, it wasn't a bad deal. We may be able to structure it and make a good deal out of it, but obviously there is some tightening going on outside with other banks. The good news is home was prepared for the right side of what has happened, as you see from these quarterly results. They're very good. We did this in spite of the damage that was done to us by the unprofessional actions of the West Texas former employees. Here's the good news. We've talked enough about the bad news. We hoped we'd be at $100 million run rate sometime in 23, but the good news is we had almost 110 for the third quarter. Actually, 108.7 profit. Our non-GAAP was 109.9. Nice start and a record. Adjusted nine months earnings are $268.4 million, or $1.40 a share, and that's also a record. Q3 revenue was $256.3 million, and that is a record. Pre-tax income of $142 million, and 55% of the net revenue, another record for the company. We ran a 181 ROA. NEM was, for the third quarter, was 405 versus the second quarter at 364. That's up 41 basis points. And here's how that's ticked. April was 335. May was 357. June was 371, July was 383, August was 398, and September was 408. So that's how it's clipped up so far, and hopefully it'll continue. ROTCE was not a record, but it was close at 20.93, and EPS was 53 cents, or adjusted non-GAAP was 54. After tax net profit was 42.37% of net revenue. That's what I call P5NR. Pre-tax, pre-provision, profit percentage of net revenue is 42.3 cents. I don't know many industries or companies can pull down 42% of the net revenue into profitable after-tax profit. Asset quality remains excellent. Non-performing assets were 0.27. Non-performing loans alone were 0.45. Charge-offs were 5.1 million as we charged off the final portion of a professional athlete loan. Already, we'd already allocated 100% for it, but we had not charged it off until this quarter. We had hope, but it didn't work out. We held off making any loan loss allocation because of the hurricane damage. We're evaluating our customer damage, and we'll make estimated allocations when we make a final determination. Expected reserve allocation is somewhere between $10 and $15 to $20 million, I would expect. Maybe, maybe not. Kevin will talk more about that. He's more up to speed than I am. Alliance for credit losses were 2.09 or $289 million. Combined efficiency, I'm pretty proud of this. Combined efficiency dropped from 4602 last quarter to 4297 this quarter. That's a nice, not a record Donna, but nice improvement. Continue maintaining strong capital ratios and Steven will talk more about those later. Tangible book value dropped a dime 992 to 982 during the quarter. We repurchased over a million shares of stock, and we had AOCI, but our TCE is still standing strong as we continue to maintain strong profitability, regardless of what they throw at us. Loans were down 94.6 million for the quarter, led by CCFG. I think they were down, Stephen, you said they were down about 500 million, but they had The net was about 342 million.

Yeah, balances were down 340. I think they had about 500 in payoffs.

Well, Chris will tell you there's nothing wrong with the payoff, and I agree with him. In the legacy footprint, though, we grew $273 million for the quarter, and we had 26.4 million in PPP loans paid off. I had expected loans to be flat or up for the quarter, but We didn't get there. We got a new loan system we put in. It's kind of complicated. I'm not sure if we like it or don't like it yet. But it appears the company provides no help, and we have to get third parties to help us. So I think that was new to us, and kind of we stumbled with that a little bit. And then the hurricane, the impact on loan closing. As of this day, we're up over $100 million that would have closed, we think, had the hurricane not hit. Anyway, we're fairly close. We're not too upset about that. We repurchased $24.3 million in home bank shares. That was $1,032,732. That's a lot of stock. We bought back a million, I think, last quarter, Brian. Is that about right? A million this quarter? That's correct. Our holding company has about $55 million in bank stock and bank securities investments yielded about six and a half. And that shows a loss of $2.6 million because we have to mark that to market. These securities were purchased for the dividend yield at the holding company And they produce about $3.6 million a year in dividends. So we'll continue to hold these securities. They'll go up and down, as you know, bank stocks do. Really, the only extraordinary items, unless somebody got something for the quarter, was we spent $2 million in costs due to the unprofessional departure of some West Texas employees. That's number one. Number two, we had, as I said, fair market loss on the securities. of 2.6 million dollars and number three if i read correctly brian we had a 1.1 million recovery on historic losses that were written off on prior acquisition and that was from a prior acquisition you're correct so going forward loan demand is staying strong investment yields are very attractive so we'll continue to pick our spots on high yielding investments and on the m a side the only thing we've really done I met with the CEO of about a billion dollar bank for lunch and drinks earlier this month. We had preliminary discussions about possibly doing something together, but guess how much he wanted? Two times book. That's always the story, and that didn't work. However, I liked him, and I think he likes us, so who knows where that'll go. And that's about it for me. Tracy, you got any comments that you want to make for the quarter or Are you happy or are you unhappy or how do you feel?

We've got to be happy. I mean, when you look at the performance numbers of the bank, they certainly are better than they've been in a long time. So it's good to see that 2% ROA out there on the bank side. I know we'll get that number pretty quick on that aspect. You mentioned the hurricane. All our locations turned out to be safe and sound, back open already. So staff's done above and beyond getting that operation going. Kevin will give you a report on some of the lending aspects of that and We certainly are watching the interest rates. Kind of like baseball season, we don't know if we're getting a curveball thrown at us or a knuckleball or we may get hit by the pitch. I don't know. But our deal here, Johnny, is just hit doubles. We're just going to hit doubles and keep going around the bases and doing the right thing and taking what's thrown at us. And I do also want to say, you know, the Texas operation has turned the corner tremendously. The changes that have been made have just turned out to be great people. And the leadership there is not a good job of bringing in the right folks and the support of Arkansas is made that doing well right now. So ready for the next quarter.

That's good. Well, thank you. It's been a kind of been a challenging quarter. It's been busy and rates up and down, not down, up, up, up. And it is. For our shareholders, it is one busy place. I'm telling you, it's very, I don't know if we're accomplishing anything, but we're certainly busy. Everybody's got their hands full with everything they're doing. So Donna, with that, I'll let you have it, girl.

Okay, sounds like a quarter with some more fantastic numbers. So congratulations to all there. As you know, the quarter did end with the unfortunate landfall of Hurricane Ian, and I'm sure many of you are curious about the lending portfolio in those markets. So Kevin Hester is here to provide you an update.

Thanks Donna and good afternoon everyone, I know everyone's anxious to hear about how hurricane Ian impacted the bank Southwest Florida footprint. Ian was an incredible storm that had a tremendous impact on a large number of people in Florida, including several of our own employees. Our hearts and prayers go out to all those affected by this storm. We have about $1.6 billion in loans in the 20 plus counties in the designated disaster area. We had an established disaster deferral program that we were ready to implement, and our Florida lenders are very experienced in this process. I'm very pleased to report that we have only about $9 million in deferrals executed at this time. Based on lender reports who have been reaching out to those borrowers, we see this balance growing possibly to $45 million in total, which is much lower than the deferral balances resulting from Irma in 2017 or Michael in 2018. Asset quality continues to be very strong with non-performing loans and non-performing assets down six basis points and two basis points respectively on a quarter-over-quarter basis. Both numbers remain near all-time lows for the company. Early-stage past dues improved seven basis points to 0.50% as we completed our first full quarter after the happy conversion. Loan opportunities continue to be plentiful, as Johnny mentioned, as we continue to be diligent in evaluating both credit and interest rate risk. It is our experience for both CCFG and our community bank footprint that volatility often reveals more opportunities as the overall market becomes disrupted. We will continue to evaluate those opportunities as we move deeper into this Fed tightening cycle. Donna, I'll turn it back over to you.

Thank you, Kevin.

I just want to make one comment. The way it runs our Pine Island branch, She was cut off from the mainland, and she was taking her deposits and money back and forth by boat. Pretty remarkable. They've got the temporary bridge in now, and that's pretty good stuff, right? We've got a branch manager that goes that far.

That's amazing. And the early reports that you have, Kevin, from customers are reassuring, too. So hopefully they're all going to make it through better than we would imagine. So next, we will turn to Chris Poulton for an update with CCFG.

Thank you, Donna, and good afternoon. Since the beginning of the year, we've been talking about a number of payoffs expected in our CRE portfolio. Johnny mentioned this earlier in his comments. The headline number for CCFG this quarter is the payoff number. During Q3, we were able to realize about $500 million of these payoffs with four loans representing the bulk of this number. As a result, our portfolio reduced by $341 million to $2.1 billion. These were expected, however, and year-to-date, the portfolio has positive growth of about $150 million. So many of you have heard me say this before. As a reminder, payoffs are not only a natural part of our portfolio lifecycle, but we view these events as a sign of a healthy portfolio. A majority of these payoffs were refinances to the permanent market at significantly higher dollars versus our outstanding loan amounts. This quarter, CCFG originated just over $300 million in new loan commitments, bringing our 2022 totaled well over a billion dollars. As we approach year end, we're working towards closing out our existing loan pipeline. And at the same time, we're seeing an increase in demand starting to build for 2023 origination opportunities, should we so choose. Donna, I'll hand it back to you.

Thank you, Chris. And now for our final report, we'll turn to Stephen Tipton.

Thanks, Donna. It's a pleasure to get to report on our company today. As Johnny mentioned, our company's patience and persistence over the past couple of years continues to pay off today. The net interest margin improved again in Q3 to 4.05%. Our intentional approach to maintaining cash balances at the Fed, variable rate loans, and variable rate securities all help contribute to that increase. While we are cautious around customer expectations for interest rates on the deposit side, We could see additional improvement if rates continue to rise. Our current ALCO model projections show a 4.5% increase to net interest income in the next 100 basis points scenario. We continue to keep a daily watch on deposit balances and customer activity in this dynamic rate environment and our new markets in Texas. We'll continue to refine the deposit base and navigate what has been a rapidly rising interest rate environment. Total deposits ended the third quarter at $18.5 billion. Nearly half of the billion-dollar decline came from our Florida markets, while the other half was mixed between Texas and Arkansas, respectively. We've analyzed the changes we saw and a number of large customers opting to take advantage of Treasury rates front-running bank deposit rates and the Fed, as well as real estate investment projects and other opportunities. Chris, we may call on you to spin up the deposit machine in New York at some point if we need to. Crack it up, Chris. With over $5.5 billion in non-interest-bearing deposits, what comprises 30% of the total today, we continue to like our core deposit positions in the markets we serve, pleased to see account opening activity remain steady over each of the past three months. Staying with liquidity for a moment, Our loan-to-deposit ratio ended the quarter at 74.6%. Our primary liquidity ratio stands now at 23.74%, which is more than double our historical pre-pandemic levels. Switching to loans, production was strong at 1.54 billion for the quarter, with 1.2 billion coming from the community bank markets in Texas, Arkansas, Alabama, and Florida. Yields on new production have continued to increase each month throughout the quarter, now seeing sevens and even a few eights in committee recently. The unfunded commitment pipeline increased by nearly $200 million in Q3 and now stands at $4.4 billion. Kevin can provide additional color on what he's seeing in the pipeline during Q&A, but the activity in our committees the past three months has been strong. Negating a portion of the production in the third quarter, payoff volume increased to a little over 1.2 billion. As Chris mentioned, his payoff volume was elevated around 500 million, while the community bank footprints were at more normal levels. We still see this as a sign of overall health in our markets and with the projects that are coming online. Finally, switching to capital and a few key ratios, we had total risk-based capital of 16.75%, leverage ratio of 10.39%, And as Johnny mentioned, a strong TCE ratio or tangible common equity total assets at 9.24% as of September 30th, all well in excess of our internal targets. It's times like these where our balance sheet sure feels like a good place to be. Donna, with that, I'll turn it back over to you.

Thank you, Steven. Johnny and Tracy, before we go to Q&A, do you guys have any additional comments?

I'm good. I'm good. This is a great quarter. The best quarter ever in the company's history. I don't know how you say that. We keep saying that lately. We've hit a bunch of these deals, but Texas has worked out pretty well for us in spite of what we got hit with out there in West Texas, but it's been we've overcome that. It cost us some money, but we're fighting that battle. Other than that, I couldn't ask for much better. Things are going very well for us, so That's it, Donna. We will go. Are you ready to go Q&A?

I am. Operator, we'll turn it back over to you.

We will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your touchtone phone. If for any reason at all you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first comes from Matt Olney with Stevens Bank. Please proceed.

Hey, guys. Good afternoon. How are you?

We're good, Matt. You have a quarter like that, you've got to feel pretty good, haven't you?

Absolutely. Well, thanks for your commentary, always colorful. Johnny, you ever think that maybe Nancy Pelosi's been listening to your home bank conference calls and stealing some of your quotes?

She and her husband are, buddy. We're drinking, buddy. No, we're not. I don't know if she wouldn't get too much of a kick out of it, I'm afraid.

Well, I want to hit on some questions and thoughts on the third quarter results, but first I... I came across a press release that HomeBank had a few minutes ago, and it sounds like there was a lawsuit settlement with Service First and some formal employees of yours. And if I'm reading this right, it looks like you'll be receiving $15 million in the settlement. Any more context you can give us on this deal? It's been a few years since we've talked about this. I can't recall all the puts and takes around it. Thanks.

Well, it's been a, it's been a long affair. I wish service first, the best, it was the right way to do something the wrong way to do it. And as evidence, we thought they did it the wrong way. They thought they did it the right way, but it's such a fine line, really is a fine line. And we're just glad to have it behind us. Kevin has been with it the whole way. Kevin, you got a comment on it?

Well, you said it, it's been a long, long road. We're almost seven years. It's good to get it behind us. We're pleased with the outcome. And that's probably all we should say about it.

Anyway, it's done over and we'll get our money in a few days and we got it resolved.

Okay. And as far as the results and the outlook here, loan growth, you gave some good commentary on that. You mentioned some challenges near term, the higher pay down you saw, the new loan system and the hurricane, obviously. Curious about the updated thoughts about loan growth from here. You think some of those headwinds will continue or do you think some of those things will kind of ease up to produce some loan growth here? Thanks.

We're actually up. We just didn't get them all closed. We're actually up $162 million as of today. That's pretty good. We just didn't get them closed. And as I said, we got a new loan system and it's a little more complicated. It's creating some problems. I'm not going to call the name of the loan company, but it has created some problems throughout the system, and I guess the jury's still out on it. We're trying to stay with it the best we can, but it is different and more complicated. But as of right now, we're up 162 million, Brian said, as of today. That's correct. So we had the loan. We could have had the loan demand. The hurricane slowed it down and the loan system slowed it down. But I'm proud to say we're up $162 million today. I hope that holds and continues on.

And anything specific from Chris Poulton? I know Chris called out some higher paydowns that were likely to happen in the third quarter, and we saw that. Just anything from Chris on the loan growth outlook from here?

You can take that, Chris. Okay, thanks. Hey, Matt. No, I think we continue to see good demand. I think we're still up for the year, right? I think the last two quarters, we kind of said, look, we front run some of these paydowns. I probably would have normally expected to have one of those in the first quarter, one of the second quarter, maybe two in the third quarter type of things. We are seeing secondary market and takeout markets are a little choppy. I think what ultimately happened on on these four in particular is at least on three of these, I think they were waiting around hoping the market got better for them on takeout and they finally decided to pull the trigger. It's why they all happened at once. I think they probably made the right choice. You know, two of those in particular, they were taking large cash outs in their refi and that may have been, this past quarter may have been the last time they could do that. We're seeing conditions tighten, especially on takeout financing with cash out, et cetera. So, I mean, we always, We like to have paydowns. I've mentioned that a lot. These were projects that we helped people achieve, and they got through, and they were able to put some cash in their pocket and reduce their rates, and I think that's good. Having done that, they'll come back and borrow from us again.

Yep.

Okay.

It scares you a little bit. We're seeing people come flying in here more so than we've seen in a while, people we don't know. which ties to what Chris is saying, where they've been getting their money, they can't get it, or they're not loaning in that asset class. Anyway, it's interesting watching it, and I think in my comment today I said, they flew in one plane from California and one from Florida, I guess it was, and I said, why are you here? Why are you in Conway, Arkansas? And they said, we can't get it from our normal sources, so Anyway, it's interesting watching this, and this is a good time for Chris because he does very well in volatile times, and I guess this is volatile time for us. So whether we'll do any of those or not, it is interesting. But you can feel the change in the air when it hit because all these people want to fly in or send a plane to pick you up or whatever. And I'm thinking, wow, what's going on? Something changed, and I guess that's it. So interesting times, Matt.

Yep, it sounds like it, definitely. Well, I guess switching gears over to the – on the fee side, fees were especially strong this quarter. I know those can be volatile, a little bit chunky sometimes. Anything to call out in the third quarter fees or any kind of outlook you can provide?

On other service charges and fees, we're up about $1.4 million and $1.3 million of that is all related to – Chris, CCFG. So if he wants to provide a little color on that, he probably can.

Yeah, sorry. Sorry, on which piece?

Your fees for the quarter were up about $1.3 million.

Oh, yeah. That's always tied. Yeah, sorry about that. Yeah, I understand the question. Sorry. Yeah, that's always tied to, when we get paydowns, we also collect fees. And so big pay down quarter is always a big fee quarter. Yep.

Okay. Good and bad. That's right. Okay, guys, that's all for me. Congrats on the quarter.

All right. Thanks, Matt. Appreciate it.

Thank you. Our next question comes from Steven Stoughton with Piper Sandler. Please proceed.

Hey, good afternoon, everyone. Good afternoon, Steven. I guess. I was kind of curious what your plans are and thoughts around continued liquidity deployment and kind of what you saw on new yields in the quarter, both in loans and securities, what you're able to obtain.

Well, we saw some, we're seeing sevens and eights on the loan side. We're seeing some sevens, six and sevens on the strutty side. We're just kind of picking our spots when we see an opportunity. As our gentleman who runs that area for us said, there was kind of an out-of-balance deal the other day, and sometimes that happened, and there was some opportunities to pick up some 738 AAA securities, and they did. So we're just kind of picking our spots. Brian's got a comment on that, or Stephen, either one of y'all got a comment on that?

No, you hit on the loans. I don't have the securities yield handy, but I know, like you said, that Brian Greathouse has found some good opportunities here over the last couple months.

He has the authority to go buy, and if he sees an opportunity to go buy it, and that's what he did a while back when he found that security at seven plus, so he picked that up. So he's on top of his game, and we're going to sit for a little bit here on the deployment side. I think we've got another 75 basis points and another 75. I think we've got another 150 basis points before the end of the year. So we're just taking it on the Fed's fun side and ask Brian Greathouse if he finds an opportunity to go ahead and exercise that opportunity. I think that's the best way to play it right now. I'm not sure where this is going. They're trying to get – everybody starts talking about pivot, pivot, pivot. But as I said in the commentary, I don't think it's time to pivot. I think we hold tight to where we are right now. I mean, we operated like this forever. Young people think this is awful, but it's not awful. It's just a change. We just have to adjust to where we are at 4%. We're not to 544. We're not to the 50-year average yet. Anyway, I think we're going to be fine. Overall, it's going to be... an adjustment period, but those that have done, do good asset quality, have done proper loans, and those who have not spent all their money, those who spent their money are going to have a tough time, but those that have liquidity, the ability to deploy liquidity and pick their spots, I think they're going to do very well as evidenced by the increase in margin you saw at home. Does that answer your question, Stephen? Yeah.

Yeah. Absolutely. Absolutely. Also, kind of conversely, how should we think about the balance sheet move forward? I know there was maybe about a billion-dollar reduction in deposits this quarter. Do you think we'll see the balance sheet shrink a little bit as you let higher-cost deposits run off, or was that an aberration at all, or how should we think about kind of deposits and the size of the balance sheet?

Once Chris cranks up that big deposit machine in New York, he'll probably be flooded with deposits. We're trying to keep our deposit. I mean, we lost $50,000 on a deal here today. I think somebody put it in a quarter or some kind of deal. So, I mean, these banks that are out of money are really stretching out there right now. You know, it's good. Our margin was over four. I'm tickled over that. That was our goal of ours to get back over four, and we got to 405 or 408 for the quarter. I think we'll continue to improve there on the margin side, hopefully. We don't get eaten up on the deposit cost. But it's a battle out there right now. But so far, so good. We've still got good liquidity. And that's one reason I'm going to sit back a little bit and just play the Fed funds market for a little bit and let Brian Greyhouse pick his spots. I think that makes sense. I know we're going to get another 150 basis points between now and the end of the year, or at least I expect that to happen. So that's a pretty good kick. You know, if the Fed goes 150 basis points, it may not be over, but they can stop for a little bit. We don't need to pivot immediately, but they can stop for a little bit and catch their breath and watch and observe and see what impact that has. Let me say this to you. We had a big customer, one of our largest construction customers that friend of Tracy's from way back came in. And interestingly enough, he wanted to talk about his projects for the next 12 to 24 months. And half his projects were retail and did not work. They would not work. The numbers did not work. So he said, we're going to scrap those or put them in the drawer because those projects don't work. He said that the costs were so much higher on the retail space that he said the retail customer that rents that can't pay that kind of rent. So he backed up. He thinks things might settle down and get better in the future, and he'll come back to those projects. But you like to see guys out getting... estimated costs on projects 12 to 24 months in the future and see if they work. He's a good customer. He's been a good customer for many years and a large customer. That's the first sign I really saw of that happening to a guy like him. I see some people coming in with some deals that don't make a lot of sense right now, but they're trying to squeeze all kinds of they're just gonna have to put equity in the deals right now. I mean, there's just opportunity out there, but they're gonna have to put lots of cash equity in these deals to get financing, as Chris will tell you, as I'm saying. So I think that's the future, is that you're gonna be able to pick your spots, you'll be able to pick your loans, and pick your securities rates. So, but you just, you're gonna be able to make some money for a period of time here, I believe.

Yeah, makes sense. Okay, and then just lastly, what are you seeing, or what are you, How are the M&A conversations going that you may or may not be having? I know you mentioned maybe a larger transaction this quarter that you had some conversations on. I guess, what do you think, you know, in this rate environment and the related marks is the likelihood of you doing a deal in the next six months, 12 months, something like that? And would you rather do a larger deal or a smaller deal if they were, you know, both on the table?

Oh, I really like the larger deal. I'm just not ready to pull the trigger on a deal that size. I mean, I like the people. They're good people. I like them a lot. I just don't think I'm ready to do that at this point. I think, Will, you'll see us active on the M&A side. He found the right partner in the right market. I mean, I talked to this billion dollar money guy. I like the guy a lot. I think he knows his business. I think he runs a good management team, but They all have to get off of that two times tangible book. It is the same thing. It didn't do anything for us. I liked his management. He would have been a nice individual to bring in on the management side. Might still do it. I think we like each other. We'll see where that goes. We just pulled off one recently that we were invited to bid on. The reason we pulled off was because of the culture, the anticipated culture of the bank as compared to our culture, and we didn't think that our culture would mix well with that culture, and we decided not to go forward with that transaction. Other than that, my friends at Stevens got me some stuff they want to show me, and I'm sure Scott Clark's got some stuff he wants to show me, so everybody's got a deal to look at.

Absolutely.

I think we'll do a deal in the next six months. I think we'll do a deal in the next six months.

Got it. Got it. Well, you're doing something right over there. No one's sending any planes to come pick me up, or no one from California is flying to see me. Sounds like you're in a good spot.

Well, I was just going to mention to you, I was going to send a plane over during duck season to pick you up. But you've come hunting with me. Sounds great.

There you go.

Okay.

Thanks, David. Thank you, guys. Appreciate it.

Thank you. Our next question comes from Brett Robertson with Hobbit Group. Your line is open.

Hey, guys. Good afternoon. Good afternoon. How are you, Brett? Wanted. I'm doing good. Thanks. Wanted to first ask Johnny, you know, you've been 100% right on rates and, you know, in past year, you've been talking about the Fed's going to have to do more and you've been aggressive with that. And that's, that's proven to be true. I'm curious if you think about the outlook from here, if maybe you think now's the time to batten down the hatches, so to speak, and maybe tighten the, more than folks have on on credit standards and was also just curious if you think about you know 23 one of the hard things is if rates are 200 basis points higher you know what does that do to demand so just curious on your on your thoughts on each well i think it's uh i think you can see the 200 basis points

You know, the story I tell about Volcker in the 70s, and he didn't fix it. He almost fixed it. He slowed it down enough, but the pressure came from everybody to pivot. And Powell's going to get that same pressure. It's just a matter of whether he pivots too soon or not. I don't think it's time to pivot. You know, when you think about this, again, I go back to this. The average was 544 for the last 50 years. It's not the end of the world. We can continue to exist here. We just have to adjust. Now, add to that inflation and material costs on all of these multifamilies or office or whatever you're building, that adds a lot to the factor, too. Multifamily still works. I'm not sure retail works anymore, but multifamily still works if you watch your P's and Q's and get in the right area. The scary part, as you're seeing, as Chris Poulton will tell you, he never uses forecasted higher rents above the market. If the market's a buck and a half and you say, we're going to get two, that's a stretch because of the cost you're using that. You have to be careful. It may work. You may get two. but you're much better off pricing it at $150 if that's the market and see if that works rather than think you're going to get two. I think we're going to see business okay. I think there'll be some projects slow down. I mean, like I told about our construction guy at Orlando, half his projects don't work. So if they don't work, you know, it... He's smart enough. He's a smart enough guy to get out front. Kevin, you got any comment on the loan side?

Well, I would just comment. You asked about tightening, underwriting. And we've been historically pretty conservative anyway. And we err on the side of more cash in deals. And rates go up. That's just going to mean that more cash gets into deals. So we see ourselves as that this is a good time. Volatility certainly works in Chris's business. It works for us in the community bank footprint too. So we're excited with the opportunities we're looking at and we'll underwrite them appropriately for the rate environment we're in. Johnny does, but we all believe that we're not close to the end of this rate cycle yet. There's more, it's probably higher for longer. makes more sense to me. So we understand that, and that's how we'll underwrite it.

That's great, Collar. And then, Johnny, you did mention one lung category that you grew this quarter, multifamily, is still working. I assume that's one lung category you'd still like to add to. What lung categories look good to you at this point, and which ones are a little bit more scary to you as construction and land development? Is that something maybe you might de-emphasize going forward to some extent?

Well, you know, hotel, get all the hotel loans you want right now. I mean, you can get more than we have available cash to do. It's just picking the right hotel loans. We're not afraid of hotel loans. I mean, we like the space. You just got to get the proper capital stack in there to make yourself feel comfortable because we're not sure – But if we do hit a recession, how much it slows the economy down? So you're just better off getting extra equity in a deal at this point in time. If we've done anything, we kind of ask our people to get a little additional equity in a trade. So, you know, I don't want to do any office. As I told you, my guy from Burlindo said office doesn't work, or excuse me, retail doesn't work. I'm not sure about office. I guess it's more with the family.

Multifamily and industrial. Industrial's been really hot. We've been kind of out of the play because it has been so hot now that people are getting a little skittish in some areas. Some of those opportunities are coming to us. Again, the volatility brings us into things that sometimes when things are really great, we're priced out of. Both in Chris's business and for us in the community bank footprint as well.

You know, interestingly, some of our biggest customers we have picked up in times like this. When other people are not lending and we're continuing to lend into the markets. And I can name a handful of customers that we picked up in really difficult times like this. So I'm looking for the opportunities there to pick up some of these really good customers and build long-term relationships with them. Because I think this is a good time to do that. Because a lot of people don't have any money, they're loaned out, and they're having to borrow money, having to borrow fed funds, and I think it's a good opportunity for us.

We're already seeing it this week in our loan committees. We had one yesterday that Davey had.

Yeah, big credit. That's right. Our Jonesboro operation, Davey Carter brought a really great credit in yesterday with a great customer that we never would have gotten a look at except for some disruption out there in the marketplace. So long time family, very wealthy organization. So this brings, even though it gets a little tough once in a while, but you know how conservative we are. We unwrap properly, we do the right thing and keep ourselves reserved properly in case there's a problem. And we'll try to continue to do that in the future.

That's great, Keller. I'm kind of surprised the stock's not doing that well today. It feels like the market wants to punish the banks that have already burned through their liquidity. So it's a little bit unusual, but congrats on the quarter anyway.

Well, thanks. I don't know why we're down. If they got us down a dollar and a quarter, I don't know why we're down. We don't deserve to be down. There's no reason for home banks or stock to be down. So 4.99%, that's On the best earnings and liquidity, we're in great shape. Lots of reserves. I don't know if anybody's got as strong a balance sheet as we do, but it is what it is. I just don't like banks today.

It seems that way. Congrats again. Thanks, Johnny. Thanks. Appreciate you.

Thank you. Our next question comes from Brady Gailey with KBW. Please proceed.

Hey, thanks. Good afternoon, guys. Hey, Brady. So the margin was up. I'm doing fine. The margin was up pretty nicely in the quarter, a 40 basis point move in the quarter. I think there's some other banks out there that are talking about NIM expansion not being that great going forward, just as maybe deposit betas catch up. So how do you think about a big move in the margin this quarter, but how do you think about the margin going forward, do you think there's still some notable upside or does the increase start to decelerate in the quarters to come?

Well, I look at it every day and right now I'm a little backwards for the month of about $300,000. I don't like that. So we're going to correct that around here if we can. So I think there's going to be a little more pressure on the margin than there has been, but however,

model i'll let stephen talk the model what the model shows yeah i think mentioned in enough in the next up 100 basis point scenario we show nii up about four and a half percent um yeah i think we've talked in the past that's you know assumes i think 40 or so percent deposit beta on checking and savings and then 100 on on cd so i think all of this ties back to we've got asset yields moving in the right direction i think we've done all the right things there and you know we continue to if i see right we picked up a little bigger percentage of variable rate loans and some of the production this past quarter from texas so um we're doing all the right things there i think it's just a function of of being able to control um you know deposit costs on the way up while retaining you know everything that we want to retain and that's been front of mind with uh our top of mind uh with with all of our presidents you know, every day and every week over the last two or three months. It's really trying to kind of act like a 100% loan to deposit ratio bank today just to keep the deposits that we've got and we'll cultivate. You were talking at loan committee yesterday. In some respects, it's been a couple years since we've really focused on the lending side to obtain, you know, deposits from these customers. And so we're refocusing some of those efforts and these loan committees and making sure that we get the deposit opportunities and relationships when we do the loans as well.

If you're asking if we're going to be up 41 basis points this quarter, I don't think so, but I'd like to be up 20.

My next question was on the expense space. You all did a good job of holding quarterly expenses pretty flat. We're actually down a little bit. So how do you, you know, a lot of banks are seeing a lot of inflation pressure and expenses going higher. Is home any different than that? You know, do you expect to see some more meaningful expense increases or, you know, maybe not with how efficiency minded you guys are?

Yeah. Interestingly enough, Tracy called me up to his office yesterday about a million to increase for the next 12 months, about a hundred thousand dollars a month. We were discussing it yesterday, uh, Outside of that, we're going to have some increases. I saw where somebody said they were looking at 12 or 13% increase. We don't see that. We're not seeing those kind of numbers. We haven't really refined Texas yet on the efficiency side. It has not been refined. There's lots more room to to get out of Texas over a period of time, particularly on the facility side. We have lots of big facilities that we'll be working on. I mean, as I told you, we've got a 240,000 square foot corporate office out there, but there's lots of little things that need to be done that we haven't even started doing on the Texas side yet that we operate the way we operate on the Arkansas side. Wouldn't you say, Tracy?

Yeah, I think that's fair. I think there's going to be opportunities when you look at anything. Today, the size we are, just company-wide too, but Texas, we've been focused on the acquisition and focusing on the merger and taking care of the customers at this stage of the game, so a lot of good opportunities we'll be able to check into.

Okay, got it. Thanks, guys. Thank you.

Thank you. The next question comes from Brian Martin with Jay Montgomery Scott. Your line is open.

Hey, guys. How are you doing?

We're doing really good, except there's stocks down. There's no way for this stock to be there. That's right. When you report these kind of earnings, it's about as good as we can do, right?

The whims of the market. So, well, you guys are staying patient. We'll see where the stock turns, so. um maybe just a couple follow-ups just on the expenses i mean should we think about the expenses you know given the opportunities you have in texas that you know what you kind of outlined there that you know the net expense number should trend lower in the next couple quarters from the current level we're at if you're what around 114 million today this quarter should we see them you know trend down is that your expectation or is that that kind of wrong, you know, I know it may take some time as you kind of work through the Texas part, but is that the outlook or just how quickly would you expect to realize some of those benefits you kind of outlined?

Well, we got a little investigative work going on in Texas. We spent a couple million dollars and we'll probably spend a little more over a period of time as we look into some situations that have arisen that we have found. That could have pulled it down this quarter a couple of million dollars, but we don't want to talk much about that right now, except the fact that we're working on some stuff out there. Other than that, we just need to fine-tune it. Texas people don't waste money, but there's a lot of savings, little things that we did many over the years here that Donna and her team created, and our branch managers came with more and more and more. We just haven't instituted any of that in the really in the floor I mean in the Texas market as of right now so we just we got enough we had enough going on didn't we Tracy plenty going on yeah plenty going on it's been it's been a busy busy place in Conway Arkansas and I know it's with our with all over the country everywhere everybody's working hard so okay so probably not trending down right you know immediately the couple million you talked about that wasn't something non-recurring that

just comes out to you, do you step down? Is it just more just going to take some time to kind of work through what you're doing there?

Yeah, that will be recurring for a little bit here as we continue to do our investigations.

Gotcha. Okay. And then maybe just one on the back to the margin for a minute, your comments about getting half of the pickup you saw this quarter, Johnny, in the fourth quarter, but just maybe one more for Steve and just If the Fed does begin to pause or pivot as you get later in this year, if you get your two increases at your end, how does the margin behave once you get to that end? Think about the margin maybe peaking in the first or second quarter next year, and then maybe it stabilizes or drops. Is that how you guys are thinking about it? Keeping in mind, I guess the liquidity is obviously a wild card depending on how you deploy that, but is that you know, how we should kind of be thinking about it today?

Oh, hey, Brian, Steven. I don't know, quite frankly, if we're out, you know, that far in front of it. I mean, I think we're focused, you know, keenly today on stabilizing the deposit base. You know, out in the future, we certainly, as payoffs continue to turn through, those can be, you know, reinvested at some of these higher loan rates that we're doing, same on the investments. side as cash flows come in. But yeah, I think it's our expectation belief today that we're going to see some continued rate increases and are focused on positioning the balance sheet to take advantage of that. Gotcha.

Okay. All right, and then maybe just two last questions was just more housekeeping. I think, Brian, you mentioned there was some higher fees from Chris in the quarter. Was there anything in the other line item on the fee income side? I think the other fees were up another couple million bucks. Was that just kind of a core maybe from the happy deal, or was there anything unusual there? It didn't sound like it if you didn't call it out, so I just wanted to confirm that.

Well, it's up $1.8 million, and we did have an item related to a fair value adjustment on our equity investments of $3.3 million. And if you remember last quarter, we had some pretty large recoveries from acquisitions that had been previously charged off. And so we're kind of down $1.3 million on that for this quarter. So that's pretty much the change that you're looking at there.

Okay, that's what I figured. I just wanted to confirm that. And then the last one was just on maybe for Chris, was just the payoffs you saw this quarter. Typically, fourth quarter is, you know, a heavier payoff quarter. Given what we saw this quarter, Chris, is it, you know, I guess your expectation, you still see more payoffs coming in 4Q? I know you talked about originations being, you know, solid for 23 or at least the outlook there. But just the payoffs in 4Q, are you still expecting more to occur or kind of an elevated level in 4Q?

I don't think we're going to see an elevated level, at least what we're looking at now. We'll probably see our – we'll probably head back to a normal run rate. There are a couple – I mean, there's a couple things that are out there that are a little more bridgey that they're kind of binary, right? I mean, they'll pay us off at the end of the year or they'll extend off another year type of thing. So I won't know that until December. I'm up right now. I expect our balance to stay up through November. And then, you know, we have a December surprise every once in a while and something pay down. Right now, I'm forecasting sort of flat to up overall, which would put us at a kind of a normalized, you know, payoffs. We don't have a lot of these large loans left either. You know, we do most of our stuff, 50 million and less. And we have a few larger ones every once in a while that pop. But, you know, it's not our bread and butter business either. So. Yeah, it's hard to say. Fourth quarter, you know, historically sometimes is quite high for us, but I think we have a pretty good handle on it this time. Something will surprise me, I'm sure. But in general, no, I mean, I think this was – these were the loans we were looking – that we were expecting to pay off. And quite frankly, at some point, if they hadn't paid off, I'd have gotten a little worried.

Yeah, okay. No, that's helpful. And last one was just – Johnny, you talked about – or I guess maybe Kevin, you talked about the hurricane reserve or provision. The timing of that, I guess, is your expectation at the fourth quarter event. And then just outside of that, just kind of how we think about the reserve going forward, given given credit and then just how good credit is today, along with just kind of the counterbalance of this kind of macro environment.

I may have been overestimated what kind of reserve we have to have. Based on what I'm hearing, it may be better than I anticipated.

Yeah, I mean, in my comments, we said we feel like 40 to 50 million is, you know, the most that we could see on deferment. That's only like a fourth of what Irma was and less than Michael, and Michael was, you know, up in the panhandle. So, I mean, at this point, I don't see it as a big event for us, but, you know, obviously it's still early, too, so we'll We'll continue to track that and be able to report it as we go.

Okay. And then just outside of the hurricane, just how to think about the reserve as we go forward. I think where you're sitting at today, a little bit over 2%. Is that kind of a line in the sand where you'd like to stay? Is that your outlook today?

Well, yeah. I mean, think about it. you've had the worst financial crisis, you've had the pandemic, you've had a hurricane. I mean, it would have looked like a up and down, up and down, up and down if you played with it. And, you know, 2% reserve has worked. It's always worked for us. I don't know if the season works or not, but we're running parallel systems right now. And we're keeping up with that. But, you know, what I do know, because the 2% reserves worked, and in this volatile time, I think we certainly need to maintain. Anybody that's running 1% or less, they certainly don't have enough reserves. I don't care how good their asset quality is. It's not enough, because we don't know what's going to hit us next, right? We never know. Something's going to hit us. We just don't know what it is. Yeah.

Okay. Perfect. Thank you guys for taking the questions in the next quarter.

Thank you. Appreciate it.

Thank you. Our final question comes from John Arstrom with RBC Capital Markets. Please proceed.

Close enough. Good afternoon, everyone.

Hi, John.

Hey, can you just, I know this call's gone a little long, but can you give us a quick update on Shore Premier? And I don't know if it's a hurricane-related update, but just, you know, how did the business do this quarter and, you know, how are you thinking about that?

Well, I will. I'll turn it over. John's on the phone and you can hear from the horse's mouth. So we'll let John tell you what he's seeing for the quarter. John, you want to take it?

Yeah, this horse is ready to speak. So, John, thank you for the question. As far as the hurricane, my folks tell me that so far we've only had one yacht that was totally destroyed. And the risk to us is that we got 100% payoff of that loan. We haven't had anybody file for any of the deferrals, the deferment program that Kevin Hester was talking about. And as I was talking to Mr. Allison earlier this week, third quarter was a good quarter for us. We had nearly $100 million that we pushed out the door. Mr. Allison, I think the number was actually $90 million, so I'm stretching that just a bit. We had about $55 million in repays and prepays, so $35 million net growth. which is good for us. But as I was telling Mr. Allison, importantly, the component to that was $12 million on the retail side of our business. But the pendulum seems to be gradually coming back to us on the commercial side of the business. So of that net $35 million in growth, the bulk of it, $23 million of that was commercial inventories. So we're happy to see that. But the outlook is positive. We're starting to see um some slowing of applications but as you would expect in this current environment of limited supply um we're seeing the average application is going up uh because the inventory values are going up and so i think they've they've risen year over year by about a hundred thousand dollars uh but uh asset quality is holding strong and um so our outlook is is positive but as we're entering this uh the vote show season We're expecting there perhaps to be a seasonal rebound in that application volume. But so far, the business has not been negatively impacted by the macroeconomic headwinds. Okay.

All right. That's good to know. Thanks, John. Just last one for you, Johnny. You talked on several calls prior to rates going up about some of the fixed-rate commercial real estate loans that were being made in some of your markets. Have you seen any of those banks struggle or have problems or come to talk to you about acquiring them? How do you think those banks are doing? Thanks.

Well, they've got to be sick that they put so much money in low-rate real estate loans and securities. I mean, you'll see them. Look at them. What's the local newspaper for Sunday's ads? That's what I'm seeing is they've just run out of money. They spent all their money, put it, as I've called that, over the years. I couldn't believe it. And HAPI did the same thing, too. The HAPI group did the same thing. They took extra cash and put it in the securities while we were not doing that, but we didn't own them at that time. A lot of people have done that. I haven't heard the squealing yet, but I'm confident we'll hear the squealing. I think from an M&A perspective, it really makes it tough to do a deal with someone. If they're ALCI, you look at their bond book and they're upside down on the bond book, like everybody is, but it significantly impacts the value of the company. Then you look at their loan book and they've got a bunch of twos and threes on their loan book. in this market, and by the time you get through marking that to market, I don't know how to really do an M&A deal right now. You've got the fees that are attached to it and the cost of doing one. It's just tough to do. They're just really, really tough to do. Thank goodness we didn't do that. I'd rather be lucky and smart. We just got lucky and didn't do it and held our line. I'm not looking for a pat on the back, but I think we made the right call.

Yep. Seems that way. So, okay. Thanks. I appreciate all the help.

Thank you. Appreciate it.

Thank you. There are no further questions at this time, so I will now pass it back to John Allison.

Thank you. I'm going to go to Tracy French for any closing remarks that Tracy might have.

I think the group did a good job of Governor, all the questions, they didn't hear much on the Texas deal, so I thought I'd give you a little short summary of that process. We talked about some of the challenges that are out there, but I don't know if Michael Williamson's listening on the phone, but I'm going to just say they're doing pretty good. If he is and his team that may be listening, but they're really doing outstanding from what we've seen so far. You talked about the loan growth. I mean, we're seeing the activities there come through for us where the first two or three months that they were with us, we were working on the merger and conversion challenges and everybody was dealing with customers and so forth. So that part turned out extremely well. And internally we do, we rank them and allow them in our board meeting to report to the board just like Donnie does here today. And I think for the first month, Monday, Texas will go first on the meeting. And that's thanks to Robert and his Metro team that have picked up the ball and run extremely well. Overall, for the banks, Johnny, I mean, when I look at all the states, it's the first time Arkansas, Florida, Texas, and New York operation has all been above the 2% range in a long time. So I think we have a lot of good momentum. And so I think we have a lot of good momentum, and I think Scott, Michael, and Robert put together their teams out there that survived, and we've got some really bright bankers that's going to probably be taking my job someday that works there today. So very pleased with it outside all the chaos that you've mentioned out there and kudos to the rest of the Florida operation, which we know what they've done down in Florida and North Florida and Arkansas. Said pretty good. If the world doesn't throw us too big curveballs, it hits us in the back.

Thank you for that. Anybody else got any comments? Well, I think it was a great quarter. I'm very pleased with the quarter. I couldn't have asked for much more from this group. We teed it up last quarter telling you how good last quarter would have been had we not had the one-time $107 million expense last quarter. But we didn't have it this quarter, and the proof's in the pudding. So we're pretty pleased. I'd like to get it. I have another number in mind. As we hit one goal, I change to another goal and create another goal and go higher. I sent out a deal a couple weeks ago and I said, here's how... How do we get to this number? Here's how I think we can get to this number. They said, do you ever quit pushing? I said, no, not yet.

Anyway, we just keep... You told me I had to the other year to get there. Amazing how that changed after 63 days, Bunny.

Anyway, I thank you all for attending today. We appreciate the support. Donald, I think we're done.

Crazy some things just never change. This concludes the Home Bank Shares Incorporated third quarter 2022 earnings call.

Thank you for your participation. You may now disconnect your line.