Home BancShares, Inc.

Greetings, ladies and gentlemen. Welcome to the Home Bank Shares Incorporated Fourth Quarter 2022 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earning 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 one on a touchtone phone. If you decide you want to withdraw your question, please press star, then two 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 three 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 Townsville, Director of Investor Relations.

Thank you, good afternoon, and welcome to our fourth quarter conference call. Today's discussion will include prepared marks from our chairman, John Allison, Chris Poulton, president of CCFG, and Stephen Kitton, 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, Kevin Hester, chief lending officer, and John Marshall, president of Shore Premier Finance. 2022 was quite a year. Home Bank shares finished the year, though, with a strong fourth quarter, and to provide you with the details is our first speaker, Chairman John Allison.

Thank you, Donna. Welcome to our 2022 year-end and fourth quarter earnings release conference call. Properly managing last year was both arduous, stressful, and somewhat exhausting at best. Loan and deposit rates have not been this high since the late 70s and the early 80s. That's when Volcker took rates to the low 20s and finally killed the snake, better known as inflation. This is the second fastest that we've ever raised rates in the history of our country. Our belief is that we have high rates for longer. We've not even hit the 50-year average yet at 5.44 Fed funds. And the pivot crowd will be disappointed because Powell is aware of the early pivot that Volcker did in the 70s. Inflation was not over then, and it's not over now. We must hold the course, maybe not raise rates as much as in the past, but continue to raise, pause, observe, as it takes almost a year for the impact of what we do today to show up in the economy. We've seen some signs of inflation slowing, but without continued rate increases, this could be no more than a headache. The naysayers are saying there will be runs on banks. Bad loans will start raising their head. The recession is here. The biggest stock market crash is imminent. There is a financial hurricane leading in this direction. Banks are out of money, and higher interest rates are destroying the value by reducing the value of their securities due to ALCI. I have to agree that some of these risks are certainly out there, but most can be properly managed. A lot of deposits at much higher rates are finding their way to those that did not show patience and continued on the same path, plowing deposits into low-rate loans and security. It'll be a long road for those companies. They will not catch up for three to five years if that quick or until the low-rate loans and securities roll off the book. I've said this before and I'm going to say it again, there is no substitute for expense. The key is simply have interest income to outrun interest expense to result in an increase in net interest income. Even as conservative as home is and the position we're in, this is a very trying task during the court because those who spent their money were forced to buy money regardless of the cost as evidenced by their CD ads everywhere. There has not been a CD ad run at home. We let deposits leave the bank only when they hit the stupid point, otherwise we attempt to retain the deposits. In good times, these brain-dead banks had a race to the bottom on loan rates, and now they're having a race to the top on deposit rates. As tough as it is to maintain excess cash, we're still hanging in around 80% loan-to-deposit. Additional cash flows from securities, principal payments, and smaller payoffs are resulting in about $300 million per month in cash flow. February is expected to be about $550 because we have a $250 million treasury. Put that in where we can get another bite at the apple. We get that in early February. We have with 80% loan deposits, virtually no broker deposit, limited borrowing with billions of capacity, plus cash flow, the home is sitting in a great position. In spite of the damage done and more attempted by the West Texas group, It appears the intent was to destroy shareholder value. The strength of the entire franchise has stepped up and delivered three record quarters in a row since we closed that transaction. We're keeping a tally of the unprofessional damage done to our franchise, and we'll talk more about that in coming months. I found this pretty interesting. Bill Bonner, described as an underappreciated economic genius, explained that financial innovations always appear brave at first, but they soon are taken to excess and become a farce, and eventually the farce leads to a tragedy. All banks are not created equal. It's all cars, it's all land, people, management teams, football teams. We pride ourselves by trying to separate ourselves from the rest of the pack with top tier performance. Being named best bank in America by Forbes three out of the last five years is certainly a great achievement by a team. I don't know of any other bank in the country that has achieved that goal. We just witnessed the Georgia Bulldogs separate themselves from the pack in a very impressive fashion. No doubt about who is the national champion in the U.S. I don't know that home is the national bike champion, but we're certainly in the playoffs, and congratulations goes to our team. We're appreciative of the training multiple given to us by our supporters, as there are only a handful of banks trading over two times tangible books. while 66% of all publicly traded banks are trading at 125 or less. And that number came from last week, and we're taking them all down this way. The conservative management team at Holmes believes in maintaining a fortress balance sheet with excess capital and sufficient reserves. We do that in the event of a major downturn in the economy, all while continuing to report record profits and top-tier performances. We'll continue to carry these conservative balances, but regardless of the situation, home will be open in the morning, next week, and next month. There is no substitute for strength. You cannot get it when you need it. Therefore, we carry it at all times. Better safe than sorry. Don't worry about home. We're taking care of your bank. Let's go to the numbers. I'm pretty impressed with these numbers myself. Record fourth quarter income of $115.7 million or $0.57 a share. I'm sure that's a beat. Record 22 earnings as adjusted for the one-time second quarter adjustment on the merger expense of $107 million. $375.9 million or $1.93 EPS. Fourth quarter ROA, 1.98. A little disappointed I wanted two, but that's about as close to two as you can get. ROTCE, return on tax of common equity fourth quarter, amazing, 22.96%. Tangible Book grew from $9.82 to $10.17, even though we continued to buy back stock. AOCI, Brian Davis reported AOCI improved by $2 million. That's not much, but it's certainly moving in the right direction. ROE, 13.26. Revenue, record revenue, 272.3 for the fourth quarter. Fourth quarter margin, 4.21 up from 4.05. That's up 16 basis points. I think at the end of the first quarter, we said we'll continue to expand the margin in the second quarter, but not as much. It was a pretty good battle, and somebody better be managing their bank every day to grow that margin. Non-performing assets were 0.27, and non-performing loans were 0.42. Same or about the same or lower than last quarter. We did fourth quarter loan growth was $580 million, and I think Stephen's going to report on how that was over. I think overall portfolio was up 60 basis points in the fourth quarter. We added $5 million to reserve. It puts us at 475.99 times classified assets. I guess that's what it would be. Reserve is 475.99 to performing loans. I'm sorry, non-performing loans. That's a 2.01. The number is $289.7 million. Efficiency ratio, 42.44. We repurchased 840,000 shares for $20 million during the quarter. We didn't make any change in dividend. We'll be discussing that at the meeting on Friday. We received $15 million from our lawsuit against First Service in a lawsuit settlement. And next quarter, I'm going to introduce A very exciting and profitable portion of our company that has never been properly recognized or promoted. So stay tuned for that. I think you'll enjoy that. It's taken a lot of my attention recently. And strong capital levels, and I think Stephen's going to go over those in his presentation. These are some of the best numbers that we've ever produced, and probably the best that anyone's ever produced. We didn't win the National Bank Championship, but I guarantee you we're in the playoffs. And during all this time, we get downgraded with these numbers. I find that really totally unbelievable. But anyway, it is what it is. Donna, I think that pretty much wraps up what I've got to say. And if you want to take it from here.

Okay, thank you for that. I know that all of our listeners always appreciate your insight, and congratulations on another great year. Our next update will come from New York from Chris Poulton with CCFG.

Thanks, Donna. And Johnny, I appreciate the shout out to UGA. Go Dawgs. Q4 capped off what turned out to be a solid year for CCFG. For the quarter, loan balances grew by just under $200 million at $197 million on just over $500 million in new origination. This growth was despite a robust $320 million in payoffs and paydowns for the quarter. Q4 is generally an active quarter as customers look to complete transactions ahead of the year end. You may recall that our portfolio declined by about $340 million in the third quarter. Much of the growth in the Q4 was simply planned backfill of the portfolio as we took advantage of the chance to redeploy our capital. Frequent listeners may have heard me say from time to time that getting repaid is not, in fact, the worst outcome for a loan. These repayments provide us an opportunity to redeploy capital on new, usually improved terms. For the full year, CCFG grew $356 million or about 18% on just over $1.5 billion in total originations. Looking ahead, volatility in markets generally creates opportunities for our lending strategies as traditional bank financing becomes either unattractive or unavailable. We enter 2023 with our usual sense of caution. Today, our leverage is generally a bit lower and structure a bit tighter. but we remain confident that we will continue to see a number of opportunities to modestly deploy capital in the coming quarters. Donna, back to you.

Thank you, Chris, and congratulations to your team on another great year. And now for our final report, it will come from Stephen Tipton.

Thanks, Donna. As Johnny mentioned, it has been quite a year. It's fun to get to report on such a strong and high-performing company, and we look forward to another great year in 2023. I'll start first with the net interest margin, which improved again in Q4 to 4.21%, up 16 basis points from Q3 and up 79 basis points from a year ago. The improvement comes as the earning asset mix improved on a slightly smaller balance sheet. We'll continue with our approach of maintaining healthy cash balances at the Fed and look for opportunities to deploy that liquidity where and when it makes sense. We continue to navigate through customer expectations for interest rates on the deposit side amidst such a competitive environment that has already been mentioned, and we'll do that on a case-by-case basis. If we do see additional rate increases and are able to hold the deposit rates at a reasonable level, the current ALCO model projections show about a 3.5% increase to NII in the next up 100 basis point scenario. Switching to deposits, Total deposits into the third quarter just shy of $18 billion. The decline in balances slowed from prior quarters, and we actually saw increases in North Arkansas and the Central Florida and Southern Florida markets. Non-interest bearing deposits accounted for 29% of the total at $5.2 billion, while CDs only comprised less than 6% of the total deposit base. We're focused on our core customer base in the markets we serve and looking to bring in new relationships as we deploy capital into the loan portfolio. Staying with liquidity for a moment, as Johnny mentioned, our loan to deposit ratio into the quarter at 80% and our primary liquidity ratio remains strong at over 19%. Switching to loans, origination volume was strong at $1.9 billion for the quarter. with over 1.3 billion coming from the community bank markets we serve. Yields on new production came in at 7.17% and increased each month throughout the quarter. We continue to focus on pulling these rate increases through the current pipeline and as loans mature. Payoffs moderated in Q4 with a total of $710 million, down from 1.2 billion in Q3. and help contribute to the average and end-period loan balance increases. Switching to capital and a few key ratios, as Johnny already mentioned, we had total risk-based capital of 16.54%, a leverage ratio of 10.86%, and a tangible common equity or TCE ratio at a strong 9.66% as of December the 31st. All of these are well in excess of our internal targets. Donna, with that, I'll turn it back over to you. Thank you, Steven. Good report.

Well, Johnny and Jesse, before we go to Q&A, do either of y'all have any additional comments?

Yeah, I was thinking with Johnny, he used all those adjectives when he started his prepared remarks. I came up with the word entertaining. It's certainly been an entertaining year, but, well, the best ever. You know, it's never been dull with you, Johnny, in the 21 years I've been around, so entertaining is probably the better word. A compliment to all of our markets and regions and the areas for the past year. Certainly, we've seen the rapid increase in interest rates. It's been something to work with. But all of our markets have done an outstanding job managing their balance sheet, which overall makes our balance sheet looks good. When you look at numbers for the bank, return on assets are in the 2% range. The return on average tangible common equity is in the 20s. You've got efficiency ratio that's the low 40s we actually hit below that this past month which is nice and you've got net interest margin around four and a quarter that's uh pretty pretty strong telling about the type of folks we have working out there in our our community you know one thing you talked about inflation that i think our company does really well at and we talk to our market leaders on a regular basis just talking to the customers so we we know they're still A lot of things of concern out there. Some people have cut back on doing certain things. Some loans that we talked about doing nine months ago, customers called and said they want to put it on hold for a little while, which is just good business. And I think that's the nice thing about our balance sheet that we have in the bank is knowing our customers are making good business decisions and showing up in the numbers. But all the performance numbers are good, Mr. Allison, and I hate to say this in front of you, but I think we've got room that we can improve on all of them.

Well, why would you hate to say that? I mean, I've always been easy. I've never kept raising the bar. Anyway, it's a great quarter. Thanks, everyone, for your support out there. I can't say enough about the quarter. I don't know anybody. I'd look for somebody. I'd just find somebody that we might win the national championship. I should see somebody beat us in this market. for the quarter, and I'm not sure they'll do that.

Well, I'll get the pom-poms ready just in case.

Get the pom-poms. Maybe we'll get Slurpees again. You think maybe we can get some Slurpees? What was the horn you had?

We had some kazoos.

Kazoos, yeah. We'll get us some kazoos. Anyway, I think it's a great quarter. Look forward to the questions, and I'll give it back to you.

Okay. We'll turn it back to the operator for Q&A.

Absolutely. 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 telephone keypad. If for any reason at all you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star 1. As a quick reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Matt Olmey with Stevens. You may proceed.

Hey, thanks, guys. How are you?

We're good. We're happy.

Good. Good stuff. Well, good report. I want to ask about the loan growth. Strong trends in the fourth quarter. We got the report from Chris, pretty active in his group, but the community bank also had a strong quarter of growth. Any color there? And as you think about 2023, what are the expectations for growth there? Thanks.

Hey, Matt, this is Kevin. You heard Stephen talk about lower payoff numbers, so that factored in some, but certainly he mentioned the production across the footprint. You can hear how much of that came out of the footprint. It was a strong quarter for really a lot of our regions. That's kind of a function of us continuing to do what we do. We're pretty conservative across the board. We stick with that, and sometimes it works in our favor. These times where you've got competitors that are Some out of money and some just choosing to sit on the sidelines in certain asset classes. We keep doing what we're doing conservatively, and we're getting to go to the dance some now. So we'll just continue to do what we do. And as Johnny says, sometimes it works in our favor, sometimes it doesn't. And this quarter, it certainly did. And we've got folks doing a lot of stuff right now, looking at a lot of things. So we like where we're at.

A lot of banks are out of money. I mean, they're loaned up. It gives us a shot, I think, at some of these deals. I mean, you think about somebody loaned up 100-plus percent, and they're barred out. It's going to take a while to unwind that before they get back into the competition. Yeah.

Yeah, okay. I appreciate that. And then... on on on the credit front looks like you report a positive loan loss provision expense for the first time in a while anything specific that that drove that and then i guess kind of stepping stepping back any specific asset classes you're you're washing closely or any loan categories uh you're more focused on in 2023 hey matt this kevin again so uh you know we're certainly from an asset class standpoint we're going to watch

A few. You got retail that certainly has stresses and as you see how this economic cycle continues, if we do truly go into kind of a consumer recession, then that's something we're going to watch. Office obviously is on everybody's mind and we don't have a ton of office, but we'll look at what we got and continue to watch it like we do anything else. Hotel seems to be doing well. and certainly in the markets we're in. We will watch the asset classes based on what we're hearing out there in our markets and in the national as a whole. Just from our perspective, in the fourth quarter, we had a group of about six ALS properties in Florida that totaled about $100 million that struggled to reach stabilization. The equity came from an institutional investor. These loans have always been current, continue to be current, and supported by this investment group, but given the long stabilization runway that they've been on and more challenges ahead, we decided in the fourth quarter to move those loans to substandard. We've been watching them for a while, not anything particularly different today than yesterday, but just given the length of time watching them, we decided to move them, so I think you'll You'll see that as the quarter numbers come out. Again, we'll watch the market and watch our asset classes that we're heavier in and look at particular loans as their annual reports come in. We'll act accordingly.

We've talked about these credits over the years. The current plan is agreed, but they still bother me a little. I think we're on the road, you know, when we had, uh, we had the pandemic hit and they said, Oh, home's going to get killed on hotels. Well, we did a fireside chat and showed everybody we underwrote them properly. We underwrote these properly too. So I don't anticipate a loss in these Bush comes to shove, but it is something we talked about and, uh, Kevin thought it was time to downgrade them. So we did downgrade them outside of that. We have about 100 million of them. The only ones that had a problem was about 60 million of them, so $60 million. If there was a loss, it would be small, I would say. You might lose 10 million, maybe, maybe not. Anyway, we always like a 2% reserve. You asked about the loan amount. Good days, bad days. recession, high rates, low rates, inflation, whatever comes or goes, 2% reserve has worked. And that's been a rule for us for many years. We like 2% reserve. We don't want to use our reserve like a piggy bank and pull stuff out, put money in, pull it out, put it in. We have a 2% reserve. We like that. We feel comfortable with that. We went through 8, 9, and 10, the worst financial crisis I've ever seen in my business career. with a 2% reserve, and it paid off for us. So we'll continue to maintain strong reserves in the event that something were to pop out there anyway. We actually fell down below 2%, so we put the money in there. We got a gift from Service First, gave us a little gift during the quarter, so we just kind of thought we'd put that money in reserves.

Yep, okay. Well, I appreciate the disclosure on some of those downgrades. And just to clarify, Kevin, what types of credits were those? I was a little unclear on what those were.

Assisted living facilities.

It's primarily member care. One thing we've learned is the member care struggle. People, I'd be glad to get a pill you can take for member care, but people struggle with member care. And sad as it is, the patients don't live very long.

A lot of turnover and really expensive. The staffing has been really a challenge after COVID. They had a lot of headwinds.

I'm sure that asset class will straighten itself out at some point in time because the baby boomers are rolling. They're getting 65 and older. Lots of baby boomers rolling into that. I think that's what was anticipated in this field. That's what would happen. It has been a struggle on the cash flow side and And particularly, people went and got their loved ones when the pandemic hit. They went and got their loved ones and took them out and brought them home. And a lot of that happened and filling them back up. One of those long-term care centers or assisted living centers was hit by a hurricane. So we got the insurance. Hopefully, we can sell that one to the insurance companies. That would be one of the ones that were in question.

Okay. Okay. Well, thanks for the help, and I appreciate you taking my question.

You bet. Thank you, Matt.

Thank you. Our next question comes from John Armstrong with RBC. You may proceed.

Hey, good afternoon, everyone. Hi, John. Do you guys hear me all right? Hey, Steven, question for you. You threw out a number, 7.17. Was that the new loan yield production?

Yes, that's correct. Good afternoon. That would be the coupon on total production for Q4. Only a portion of that would have funded by year end or during the quarter, but that was what you wrote.

And December yield was what?

Yeah, I think I mentioned it increased kind of throughout the quarter just as market conditions have changed. And I think we wrote it about 740 or so in December. So it's got a nice trend towards it and kind of lining up with what you think from the Fed.

Got it. Okay. And what kind of reaction are you getting from clients at those rates? It seems like there's plenty of demand, but just kind of curious on sentiment.

This is Kevin. I think people have recognized that that's where the market is and their deal either has to work at those rates or they can't do their deal.

We've had a couple of big builders came in and some of his projects didn't work at those rates and he just pulled them off the table until he gets... And inflation, building costs were up, interest rates were up, but it just didn't work. So to his credit, he pulled those projects off the table. We'll see him again, I think, because he owns the land. He won't go forward with the project. Good business. Actually, our customers are thinking through this process well, looking at it, analyzing it, deciding if they need to do it now or do it later. Some need to do it now. Some need to do it as evidenced by the strong home growth from the Corps.

Cap rates are still good, so if they're billing to sell, this is just an increase in their interim costs. more than it is a cost of the project. Most will factor that in and take a little less profit and get it built and get it sold and move on.

Our home builders, they just visited with our home builders out of Florida, big home builders. They have softness in and around Houston, but their Florida and Alabama are continuing to run really strong. Tracy got that there from what they said.

Yeah, October was good, November was a little dip, December strong, but they've adjusted some of their ways they market it over time, but margins are still a little bit less than what they were, but they're still really good.

By the way, we talked about asset quality a while ago, and everybody's been watching Shore Premier and been talking about Shore Premier. If you don't mind, I'm going to get John Marshall to talk about short premiere of his performance and his past dues. If you could quickly tell us about stealing your show. When we were talking about asset quality, I thought we ought to let John present, and I forgot. John, do you want to talk about what you're seeing out there?

Yeah, Mr. Allison, thank you. I appreciate the question. I'm seeing some forecasts in the market of elevated delinquency and defaults, but I also believe, Mr. Allison, what we're going to do, we're going to observe that in the smaller boat and trailer retail segment. You all will recall that our marine book is underwritten to a prime credit quality standard. Our average application, Mr. Allison, is $820,000, and our average loan size is $670,000. Our borrowers have verified the liquidity of 66 months. Imagine that. So completely indifferent to their income, the W-2, they've got five years of average liquidity to cover their obligations. That's all of their obligations, not just their boat loan. If you consider delinquency as a harbinger of default, at 21 basis points, our delinquency is consistent in the fourth quarter with where we've seen it all year. And again, we feel like that's a very low number. So, Mr. Allison, I don't know if that answers the question, but That's kind of what we're seeing.

Thank you for that. I didn't mean to steal your thunder, John, but I wanted to get that out. Matt asked about asset quality, and you probably would have asked about it anyway. You've got the floor, John.

I appreciate that. That's helpful. You alluded to the margin drifting up, but maybe not as much as the quarter this past quarter. It seems like you've got some pretty good repricing coming, pretty good momentum in loan yields. How do you feel about the margin trajectory, and how are you guys fighting some of the deposit pricing requests and pressures? Is it just taking the loan-to-deposit ratio up, or is there something else going on?

Well, we're taking loan-to-deposit up a little bit, but I think the trough on the deposit, I think we hit that. Interesting, we manage this company, as you know, every day. And October was a screaming home run. It was just, we knocked as a grand slam home run for October. November, rates took off, as you saw. And it was a day, it was hand-to-hand combat in November. We actually went backwards in November from October. And then here comes December. and we're booking some loans and we're getting them on the books, and they're starting to run nip and tuck with the increase in revenue, the increase in interest expense. Until the 15th or 18th of the month, we were actually running backwards, and it turned. The whole thing turned at that point in time. We got enough new loans on the books to outrun the interest expense. and it ended up being a great December. So it is hand-to-hand combat, and we're taking them one at a time, but we've dealt with most of it, and I'll hush and let Stephen comment on what he... Yeah, you said it, John.

I think it all hinges on what we do have to do on the deposit side. We did, as Johnny mentioned, we were a little more aggressive in October and November last year, on you know on the heels of the 75 basis point rate increases had to pass some of that along to you know to deal with the customer demands but um you know feel like what we did in december and then depending on what we see here in a week or two uh the first of february from the fed uh we maybe be a little more conservative there it's not that we don't we see it every day we see it we see it plus or minus or we

We'll compare December 8th with November 8th. How are we doing there? And with October 8th, how are we doing there? How does that compare? Are we winning or are we losing? It was a battle, really. It was a battle. I think that most of the rate increases are done at this point in time. So I'm optimistic that we have a shot. We have a shot at increasing margin in the first quarter. if we can continue to write where we're writing, and if I'm right, most deposit expenses are behind us.

Okay. Okay, that's helpful. I appreciate it. Thanks. Thank you.

Thank you. Our next question comes from Stephen Scalton with Piper Sandler. You may proceed.

Hey, good afternoon, everyone. Appreciate it. First of all, great quarter. I think it kind of played out as you guys said it would, getting some of that liquidity to work. I'm kind of curious, John, to dig into the comment you made in your prepared remarks. I think it was around $300 million a month of cash flows and repayments and other things. I'm wondering how much of that specifically is coming off your bond book in terms of cash flows. Just kind of trying to think about how much loan growth you could fund if, you know, without any incremental new deposit growth?

Oh, there's about $30 million, $35 million coming off the bond book. And we really haven't redeployed that because rates have kind of backed up here a little bit, as you've noticed. So we've just settled on that money. We're better off growing Fed funds on that extra cash. That's what Brian's been doing with that.

Because we're getting 4.4 at Fed.

Yeah.

And you're getting on new investments about five.

Yeah. So as rates, as we think rates are going to go back up, they're not going to lock in somewhere, but we've picked our spots, and rates kind of backed up on the scale. You've seen the 10-year and what's happened there. So is it over? No, it's not over. Are they going to continue to raise? Certainly they're going to continue to raise. It may not raise at the level that they've been raising, but they're going to continue to raise.

Yeah, so the $35 million, that's per month in terms of cash flows, and I was more thinking cash. Maybe not deployed back into securities, but could you deploy that into funding the loan growth?

Absolutely. Put it where we want to put it. Yeah, absolutely we can. When you think about it, it's coming off at $150. If you can put it in at $747 or $740, if you can put it in, that's a pretty good spread. So we're still sitting on cash. We've still got cash. and we're generating cash, and we've got a CD, not a CD, a treasury coming out in February that's $250 million that we'll put to work. So we're pretty happy where we are. We don't need to borrow anything right now. We've got plenty of room. We don't have a broken deposit. We're not borrowing that at all. We need to get borrowing up if we can.

Got it. Makes sense. And then you referenced in the headline of the report the – despite continued West Texas headwinds, but it's hard to see any headwinds in the results. I guess, can you expound on that a little bit of what's coming out of there? Is growth just not what you would want out of those markets yet, and it's just been other areas that kind of kept us from seeing it?

They went after, that bunch went after a bunch of our customers, took a bunch of our deposits, and did what they could do to damage the company, I guess. That's what it certainly appears like. Had we not had that, we would have had a much better quarter. We're keeping up with how much that is. I think it's important to know, keep a running tally of how much they got from us or stole from us or took unprofessionally from us. As you know, we don't When someone tries to injure the company, as happened with Service First, we stayed after them for years until we got our money. I'm not saying we're going to do that here either, but I don't like people trying to hurt our shareholders.

That's what I'm talking about. Okay, got it. Last thing for me is really just, like you mentioned, you guys have continued to repurchase shares. and are one of the few bank stocks trading above two times tangible any longer. So at 230 a tangible, does M&A become more interesting than repurchasing your own shares at some point, or is that math just not attractive to you at this point in time?

No, it does become attractive. I mean, I'm appreciative of our support that people have given us to trade at that level and be one of the few that trade there. But it is... We're interested in M&A. The problem is that a private bank doesn't recognize that their price goes down like the rest of the banks do. The rest of the banks used to be at 170, 175 times tangible book, and now they're at 125 or less. 66% of them are. Regardless of what they do, theirs is going up the same way. It's going to be exactly the same. Whether a private bank recognizes or not, they go up and down like we do as a public company. My thoughts are that we'll be acquired here next week. We have two weeks away, and we're going to visit with some people out there if there's some opportunities there. How do you do an M&A deal today, though, Stephen? I mean, you guys are pretty damn good. You're about as good as there is out there doing deals, or one of the best at doing deals. How do you do one? What are you going to mark that loan book at today? You know, with these rates where they are.

Yeah, no, the math has gotten hard. Yeah.

It would be extremely difficult to do it well. I mean, you've got to mark the loan book, and ALCI has already booked the securities, basically. Can we do a deal, Brian? Maybe. I'm afraid the seller can't take the marks, Stephen.

Yeah, yeah, yeah. Now that makes sense. Obviously, the market's appetite has still been relatively tepid towards deals, but I think you guys showed with a happy deal, if you do the right deal at the right price and the right structure, it still can be perceived well. I appreciate all that, Culler. Congrats on position in the company well yet again.

Thank you. We appreciate it. We work hard at doing what's in the best interest of our shareholders. As it turned out, Happy ended up being deluded to us because of ALCI, but I think we overcame that pretty quick. The rest of the franchise jumped up to help us. I'm very proud of the year. I think we had a great year in spite of all this. It is very stressful managing your business. with all this going on with the distraction in West Texas along with all these interest rate changes. But we got through it and had a great year.

Thank you. The next question comes from Brett Rabaton with Hoptic Group. Please proceed.

Hey, good afternoon, everyone. Thanks for taking the question. And congrats on the championship as well. I wanted to... Wanted to talk about deposits for a second. And just, you know, I think everyone's trying to figure out, you know, how much more they might see operating accounts from a DDA perspective decline and how much more liquidity could drain out from the low-cost core deposits. And just wanted to see if you had any crystal ball thoughts on that for your bank. And, you know, you've obviously not had to really push too hard on deposit betas versus many peers, but wanted to see if that was something that you might be

looking to amp up if loan growth is going to be there for you from an opportunity perspective hey brett it's stephen uh i guess as you said that's a crystal ball thought if we if we knew we wouldn't be sitting here uh you know like johnny mentioned i mean you know if we found a trough yet i mean i think certainly in q3 excuse me q4 the the decline slowed from you know from from the prior two If I go back and look, I think pre-pandemic ran 22%, 23% non-interest bearing to total. I don't think that's necessarily where we go back to, but I think some of that's still to be determined, I guess, as some of the money that's been in the system over the last year or two moves around. We talk around the table here. It's taken a little while, I guess, to kind of spin back up the conversations at Loan Committee and other places around raising deposits again and having that be a part of the discussion when you've got a new opportunity at Loan Committee and those kinds of things. I think before we push hard on beta and rates and CD specials and those kinds of things like you see, I think we stick with the relationship banking approach and ask for business.

Okay.

I'm just going to say, Brett, the only thing, remember when the pandemic hit, deposits really boomed, right? We stayed disciplined and we didn't lock in a lot of loan opportunities back then at 3% for 7 and 10 years. We always knew that the deposits would go away to some degree. Thought it would take a little bit longer than it did this past six months. But, you know, we watched a lot of our customers would give us a call, you know, give us a call if we wanted to match a high rate. We certainly get that opportunity. So it's not that we've lost a customer, but instead of a normal deposit rate in the bank, you know, they could take it out and do an investment and do more money. And then we also have some customers that used to borrow the money that used their own money. So that time will turn back with that deposit money will come back in. Johnny has mentioned about the West Texas. I think we've got a really good call-in opportunity coming down the pipe on regaining some of that that we generally lose whenever you do an acquisition. So as Johnny mentioned, we meet every day and discuss it every day and watch where it's at. So I don't have a crystal ball either. I'm just real pleased with the way our team has managed that challenge over the last four or five months, which has been interesting.

Okay. That's really helpful. One, just to go back to the loan pipeline and the loan growth, Johnny, last quarter you said some folks were flying in to see you. They weren't able to get credit from their bigger banks. wanted to see how much of the growth or the pipeline was tied to stuff like that. Maybe market share opportunities and if that might continue to be something that helps your loan growth going forward or maybe you're going to pull back as well relative to the environment.

Hey, this is Kevin. There was certainly some of that and that particular deal hasn't actually materialized yet. There are other things that We're similar to that. Opportunities, like we said, that other folks are on the sidelines for one reason or another and we continue to do what we do. We've got money to loan because of the way we've managed through this last couple of years and we will continue to do that. I think that's the reason we held off like we did is to be able to take advantage of the situation. Johnny said three years ago rates were going up and That's the way we managed it, and now we're in a position to be able to take this money and put it in good earning assets at a good rate.

We moved on that credit quick enough that that customer didn't do that big transaction. He will do lots of transactions. We built a relationship. He said, called, wished Merry Christmas and a Happy New Year. and they're class people, and he said, I'm impressed with your team and how quick you moved. It was a complicated credit, and it went to Chris Poulton. I mean, he actually left here and went to see Chris in New York, and Chris spent two or three days with him and ironed out the problems. And then week done, I met him in Boston, and Chris in Boston. And he said, I'm going to do this. As a matter of fact, the KBW conference is coming up in Florida, and we're going to go down a day early or stay over a day late to go have dinner with him and meet his more of his people. That's going to turn out to be, even though we didn't close that transaction, he didn't build it then, that's going to turn out to be a good long-term relationship. Your point's well taken. We picked up some of that business during this time that we'll build some relationships with. As Tracy did in 8, 9, 10, and 11 with a lot of Florida borrowers, there are still long-term customers with us. I mean, we charge a little more, but they know that, but they know the money's good and they can get it done. They don't have to worry about whether the loan will get funded or not or get funded properly. So we're a half-point or three-quarters of a point higher in lots of instances, but that doesn't seem to bother the projects. Good question, though. I appreciate the question.

Yeah, thanks for all the color.

Thank you. Our next question comes from Brian Martin with Janie Montgomery Scott. You may proceed.

Hey, good afternoon. Thanks for taking the question. Just, Janie, you wanted to circle back, or I'm not sure who, just on expenses. I know you talked a little bit about in last quarter and some things that were going on, but just kind of the run rate on expenses and just how you're thinking about that going forward here, just any changes or how we should think about that prospectively.

Well, we had a forensic team, and we spent millions of dollars with this forensic team on what happened to us in Texas. So you're seeing a lot of that. You saw some of that last quarter. You saw a bunch of it in this quarter. So that will probably continue on the legal side for a while going forward. But most of the forensic is, I'd say, pretty much done with you, Tracy?

I don't know if that ever gets done. Yeah, it doesn't ever get done.

Okay, so anyway, that's where a lot of those expenses came from. The increased expenses. You can see where it's, I don't know, two or three million dollars this quarter, I think. Five. Five? Yeah. Five, excuse me. So, that'll come down at some point in time. We'll be collecting a lot of money.

Brian, this is Tracy. I think... With the cost of everything that we're seeing out there in just the real world, you're going to have to expect there to be some cost involved. Now, we also, I said earlier in the call that I think we've got room for improvement in some of that, too. So we'll constantly go there. I think Brian's working his numbers and budget for next year, and it's going to be a little bit of an increase, but not anything significant.

Well, Michael Rose had to do a GoFundMe deal for us several years ago. And I may have to get Michael to do another one now because we had, I don't drink Bailey's, I drink Carolyn's. And I went down to buy me a bottle of Carolyn's the other day that I normally pay $22 or 23 for and it was $36.50. And I said, are you sure you have the price right? And she said, yeah. She said, it's correct. She said, drink it and enjoy it, but drink it slow.

Gotcha.

And, you know, I guess just maybe one other one just on the loan growth this quarter. Can you guys just talk a little bit about now, you know, with the expansion into Texas, maybe just how things played out? Can you give some kind of wrap of the year as far as how Texas contributed, you know, the growth that you started to see there or just some momentum or just how you expect that to continue relative to kind of the other parts of the footprint or just any – Any commentary on how trends are there, given some of the issues that have occurred there?

Well, we were treated a little rough in Lubbock, as you remember, and some of our accounts left. We were forced to do some low-rate loans in those markets, and we did. I think I told everybody we'd use the strength of homes balance sheet to counteract whatever anybody was trying to do to us. I kind of take that stuff personally. You probably didn't know that, but I kind of take it personally, and I don't give up. Anyway, I think we've leveled out from that. I think Steven Scouten said, someone asked him about it. He said, home will be fine. They're grinders, and that's true. We don't quit. We don't stop. We don't give up. We work hard. We've got the power hose balance sheet if we need to use it, and The people that left went to some little bank over there somewhere and they can't fund much. I don't know if they're out of money. I just hear that. They're out of money and they can't fund anything. They're pulled up. They're loaned up. I don't know if any of that's correct or not, but if it is, it probably is. It gives us some opportunity to go back and pick up some of it. We're going back to some of those customers that were taken from us. We're going back to try to bring them back home. Some we're getting, some we're not. It was unfortunate, very unprofessional and unfortunate. It was not done properly. Not that I can't go somewhere else to work. Work anywhere you want to work. It's just how you go about it.

Right. Are you starting to see the momentum in Texas kind of gradually pick up here? I guess that's kind of where I was getting at, just as you kind of look to 23 and just kind of your outlook on kind of the loan growth in general for the company.

Yeah, well, the past quarter did really good, and Robert runs... Robert Lewis runs Central Florida and he never slowed down. He never missed a lick, never missed a step, just kept rolling. So while we were trying to deal with West Texas Lubbock and was there another place where Willard is?

Plenty.

While we were dealing with that stuff, I mean, The Dallas-Fort Worth area never slowed down. They just kept moving. They kept growing. They did excellent. And a lot of those customers that were in Lubbock were Dallas customers that they'd been assigned. As one loan officer went out to Lubbock, he took them with him, and so they just brought them back home. All those big customers, they saved all those big customers. Or nearly all of them.

Gotcha. Gotcha. Okay. Okay. Perfect. And maybe just one last one for Stephen. Just going back to the margin for a minute, Stephen, I guess it's just, is your thought, it sounds as though the margin is, you know, at least puts in place as you look forward based on, you know, if you see a couple more rate hikes here that it's probably flat up a little bit the near term and then, you know, maybe you see some decline thereafter or is that just in general because look over the next couple quarters how you're, what you're expecting there given some of the liquidity levels and putting that back to work?

Yeah, I mean, I think mentioned just on the deposit side, I think our beta ran mid-50s or so in Q4 where it was, you know, high 20s in Q3. And so if we kind of get back to a little more normal levels on what we have to do on the deposit side, you know, our forecasts show we could have a little slight increase too, but I think we'd be pleased with holding the line where we're at now. I mean, I try to get arm's length away from Johnny. I would definitely be pleased with where we're running right now.

Right. Okay. Perfect. That's all I had. Thanks for taking the questions, and great end to the year, guys. Thanks. Thanks. Thanks, Brian.

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

hey thanks good afternoon guys most of my questions have been asked and answered but just one last one so you talk about the reserve coming down to about two percent now i think you know if you look back a year a year and a half ago your reserve was almost two and a half percent but you know it sounds like you're comfortable with the two percent levels do you think that that two percent level will be maintained here it seems like if you're going to be able to grow loans and you guys have great asset quality yeah you can see the reserve drift below that two percent i think consensus has a drift in below two percent but you're signaling it's a two percent kind of from here on out yeah i'd like that i think that's reasonable we i think that's reasonable you know when when we when we everybody in the country might due to the pandemic major big reserve moves

We made our big reserve move. Who knew, right? Who knew what was going to happen in the pandemic? It was pretty shocking times. We're going to maintain that reserves up in here. I don't know. I actually thought we might take 20 or 40 million and put in reserve. You see all the big banks thinking, saying, we've got a recession, we've got a recession, we've got a recession. There's going to be a stock market crash. All the naysayers are out there saying all the negative, negative, negative things, and kind of makes you a little nervous, and you wonder if you're doing the right thing, is 2% enough, or do we need to put more in there? We'll kind of follow it through the next quarter or two and see what we need to do.

Okay. All right, great. Thanks for the color. Thank you.

Thank you. And our next question comes from Michael Rose with William & James. Your line is open.

You guys pulled me in with the slurpy comment. I feel like now I have to sort of whistle big fund, given the kind of year we're having.

Hey, I'd like to whistle big fund. We'd all be in for that.

I know you do, so that's why I brought it up. A little bit more costly, but I think we can get a group together for you, Johnny. Exactly.

Exactly. Well, I just had one question that was kind of more conceptual in nature. You know, I think we're hearing a lot about, you know, pullback in commercial real estate and construction, you know, kind of especially it seems like a lot of banks are really pulling back in some of those areas, just giving caution. But you guys are in a really good fundamental position from a capital and liquidity reserve standpoint, everything that's been kind of brought up today. I mean, do you see that as an opportunity for you guys to kind of gain some market share here? It sounds like at least in Chris's group, you know, when times are tough like this, this is an opportunity to grow. But just in the broader, you know, context of your business, I mean, is this the time to actually maybe actually gain some market share and get a little bit more aggressive on the loan side? Or is it just, you know, you would continue to be cautious and kind of stick to your underwriting, you know, guidelines that have voted so well for you? Thanks.

I think whenever you have these situations, it is an opportunity. All the things that we've done through the bank during challenged times, it's turned out to be a great opportunity for us. As Johnny, I think, said earlier about one of our customers, they've elected to not do things. We probably would still have participated some with them. They're going to put a lot of skin in the game. Speaking to all of our markets and regions, as Chris said earlier on his part, to redeploy some of this capital that we're doing. So we're looking at them. We get to see just as many as we always have. Kevin, don't you?

Yeah, I would answer, to specifically answer your question, I don't think we have to give one up to get the other in this environment. I think we can continue to be. Yep. conservative and in some cases even more conservative than we have been and still gain some of these market share clients that Johnny was talking about just a minute ago. I think that's going to happen because of where we're at.

I guess we had money and they thought we were easy. We're not easy as you know, but we saw what Tracy did in 8, 9, and 10 and Kevin and our bunch built lots of relationships. We're going to pull some big customers through this run.

Very helpful. And maybe, Johnny, you should start a Pappy Fund for Chris since he's a Georgia fan, and that's what apparently the Bulldog champions drink. Thank you, guys.

Chris, you want to comment on that? Michael, he went to SMU. He's a bandwagon guy.

Stephen said he graduated from SMU. I didn't even know he went to SMU. Chris, you tell everyone you go to school.

I did. I had to marry into a decent football school, so my wife's very happy that I got to say go Dawgs on the earnings call.

Oh, okay. He married into it. That's the key, Michael. He married into it.

There we go. Thanks, guys.

Thank you.

Thank you. There are no further questions at this time. I will pass it back over to the management team for any closing remarks.

I just want to say thank you to everyone, all the supporters at home, It's trying times out there. I have to compliment our management team and our people in the field. It's hard work that they put together to put together this great quarter. I don't know if you could, I don't know, I haven't seen anybody turn out these kind of numbers. Probably somebody will turn out as good numbers or better, but I haven't seen anybody turn out these kind of numbers yet. We're proud of our numbers. We're proud of what we did. In spite of all the problems and the difficulties we had, getting there. We got it done and we're set in a great position for 23 and our lenders are ready to roll. Actually, our Dallas lenders wrapped up their year early on in working on 23. Overall, it's a great quarter, great year. I'm happy. I think we can run the runway hose where it is and we can get 100 plus million a quarter to do run a 2% ROI and come in running at $440 million or so next year, I think that'd be a great, I think it'd be good for all of us. Anyway, thank you, and we'll talk to you in 90 days.

This concludes the Home Bank Shares Incorporated 4th Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your line.