Home BancShares, Inc.

Greetings, ladies and gentlemen. Welcome to the Home Bank Shares Incorporated second quarter 2023 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. Please note that if you would like to ask a question during the question and answer session, please press star, then one, on a touch-tone 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 2023. 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 Townsell, Director of Investor Relations.

Thank you. Good afternoon, and welcome to our second quarter conference call. With me for today's discussion is our Chairman, John Allison, Tracy French, President and CEO of Centennial Bank, Stephen Tipton, Chief Operating Officer, Kevin Hester, Chief Lending Officer, Brian Davis, our Chief Financial Officer, Chris Poulton, President of CCFG, and John Marshall, President of Shore Premier Finance. Well, Home Bank Shares actually continues to stand tall in this shaky banking environment with a strong second quarter results. And our first speaker, Chairman John Allison, will illustrate those details for us with some prepared remarks.

Thank you, Donna, and welcome everyone for attending the second quarter of 23 earnings release and conference call. I hope you find it interesting and informative and maybe a little comical. Some people set themselves up for an easy target and sometimes others can't pass it. Well, here we are in July 23 and just wrapped up a very interesting and unusual, to say the least. We have seen the worst financial crisis since the Great Depression in 2005 to 2010, a 1917 pandemic like we have never seen, while inflation, not seen since the late 70s and the early 80s, as a result of both the past and present administrations spending money without any restraint. all while Jerome Powell was trying to do his best to control inflation with his out-of-control spending. I call that swimming upstream with handcuffs. So we've got bad moments. That's a new term I just heard. So how's it working? Suicide rate has jumped. Homelessness has exploded. The highest number of bankruptcies in 12 years. We're starting to replace the U.S. dollar with a digital one. Not sure what that means. Bank failures, we've had several bank failures this year. I bet we'll have many more, but we could. Interest rates are at the highest level. Crimes running rampant in cities. The war in Ukraine continues on. And Putin's own hired army seemed to turn on him. The economy is slowing. The deficit is exploding. The administration is trying to get us to believe that the economy is strong, while 31% of the Americans have tapped a loan from their retirement fund, 401k or IRA. Record level of credit card debt, technology continues to kill thousands of Americans, thousands crossing the border almost unabated, inflation continues to march forward. However, it is improving. The last time I checked, Janet Yellen was still busy buying nonstop to her Chinese counterpart. China appears to be a threat to the U.S. because the U.S. looks weak. China is trying to bully us a little bit around the world. China is sending weather balloons, they call them weather balloons, over the U.S. Russian aircraft playing cat and mouse with U.S. aircraft and ships. And Hunter Biden has finally agreed to take his punishment from the U.S. attorney. I think they have stopped him from having snow cones on Tuesdays and Thursdays. So that's his punishment. And they did prohibit him from paying any more income taxes, by the way. No state, federal, city, or county. I think that's just because they want us to pay our fair share. We can't figure out who left the cocaine in the White House. But other than that, things are really, really good. So what can possibly go wrong? The second quarter was a stressful 91 days with several bank failures in the prior quarter and maybe more to come. This was the scariest 91 days of my banking career. As I said last quarter, liquidity was not important until it ends. And this was my first experience up close what a liquidity crisis can do and how quick it can end the life of a bank. I was very nervous but also proud to be one of the very few banks that have the balance sheet with the liquidity to pay out all uninsured deposits. Keeping home's balance sheet strong with the ability to pay out all insured deposits has cost us some income, but the peace of mind that we've positioned home into one of America's strongest and safest financial institutions more overrides the short-term earning issues. Not only can we pay out, but we can pay out if we've borrowed all the money and left the balance outstanding for the full quarter. At today's interest rates, we would still be in the top 25 to 30% of profitability for the top 200 best publicly traded company banks in the U.S., and that includes all the money centers. However, in spite of the craziness, the second quarter was a pretty good one anyway. Really, the only weakness in the second quarter we allowed was interest expense to outrun interest income by about $6.9 million from last quarter. Interest income was a company record, but so was interest expense. That was very disappointing to me, but we're addressing that issue. We have about $760 million to reprice between now and the end of the year at a little over 5%. and we possibly could see a 300 basis point increase in those yields. If so, that adds about $5.7 million to the quarterly interest income. Not all we need, but close. We also have about the same dollar number of scheduled payoffs, and we'll evaluate the rate and customer and hopefully retain some of those customers at higher rate. We'll continue to originate new business as long as we feel safe and secure. We are not aggressive on the loan side. and that philosophy will continue forward. It is certainly not time to be taking any risk. Our goal was to make about $400 million for the year, and we're on target to do that with a $208 million first half of the year. I think our investors and shareholders would be happy with those numbers. Having the best year in our corporate history right in the middle of a banking crisis, coupled with a very unprofessional treatment and possible illegal behavior we experienced in West Texas, I think all our people should be proud. Our performance speaks for itself. My wife said protect the chuck wagon, and that's exactly what we're doing. This is a time to move slow and careful, don't take any risk, and for sure do not buy someone else's problems by refinancing their bad loans and trying to get them off their books. This is a time when problem loans float to the top, and many bankers are trying desperately to get them off the balance sheet. We're seeing some of them, but our New York office says they're seeing a lot more of them. But interestingly, nobody is really taking the bait. If these 5.5% and 6% newspaper ads continue to be run by these bankers that have already run their balance sheet in the ground because of the mistakes they've already made, I suspect the cost of deposits will continue to move up. For them, that means screw the margin. They cannot borrow any more money from the Fed. They've borrowed all they can borrow, and they've spent all their liquidity and are forced to have cash to satisfy the regulators, regardless of cost or margin. If they're forced to sell the securities, the loss could hit them so hard they could get a run on the bank, a.k.a. Silicon Valley Bank. That's exactly what happened, and it happened quickly. A few days later, the bank is closed, over forever. They thought they were totally bulletproof. I spent 23 years building this company, and the thought that it could be gone in the blink of an eye is absolutely frightening. Those bankers who have allowed their balance sheets to go over 105% loan to deposit and weak capital of 8% or less have a good chance of the same thing. If the big bad wolf shows up at the door and starts huffing and puffing, goodbye forever. That's not going to happen at home. Strength and safety has been our priority for the last 23 years, and that will never change as long as I'm here and this management team is in charge. Let's go to the results. Pretty good results, 105.3 million in earnings for the quarter. It's 52 cents. I think right in line, I got a little extra penny in there somewhere. I think that Alice were at 51. Revenue, 257.5. That was right on target. Efficiency at 44. That interest margin remains strong, however, it dropped nine basis points during the quarter. We tried hard to keep that up and we're working on that now. On the asset quality side, reserves remain strong at 2.01. Non-performing loans and non-performing assets both improved for the quarter. Loans from 0.51 to 0.43 and non-performing assets from 0.33 to 0.28, good numbers. Announcement on our member care. Our $30 million member care loans that we've talked about for a couple of years have been sold, refinanced, with multiple buyers bidding on the properties. This is a perfect example of conservative underwriting practices that your company follows. These loans were underwritten properly on the front end and provide an avenue for banks to get out if and when problems come up. Great job by all. Asset quality has remained good. The only thing worth mentioning is I found out today, or late yesterday afternoon, we have one office building that's half full in the $25 to $30 million range. We will keep you informed on that. It's early, but we do not anticipate a loss. The tenants that moved out spent over $10 million on tenant improvements, and I haven't looked at the offers. I don't know if Kevin has, but I understand it's a nice product. Other than that, I don't see anything that bothers us. I will say it's a good feeling to have almost $300 million in loan loss reserve in these uncertain times. I certainly sleep better with those kind of reserves, and our employees, investors, shareholders, customers, and postures should too. Return on tangible common equity was 19.39%, nice numbers, and here's the capital ratio. It's top tier capital ratio. CET1 at 13.63%, leverage at 11.92%, Total risk-based capital at 17.28. Tangible common equity and tangible assets at 10.65%, and tangible book value is $10.87, and book value is $18.04. During the quarter, we repurchased 560,849 shares for approximately $11.8 million, and year-to-date, We bought back 1.15 million shares for 25.3 million. Average loan yield was up 20 basis points to 6.84 from the first quarter of 664. Yeah, the first quarter of 664, excuse me. Interest grant deposits increased from 190 to 227. That's a pretty good jump, a jump more than our 20 basis points. I'm expecting the second half of the year to be much tougher than the first half. The good news is home can handle whatever comes our way. We didn't get into this great position by luck. We controlled and directed the entire operation of the company on the most conservative path we could follow. Called the shots along the way. Some were controversial and tough to seize, but they had to be made. But they have certainly paid off for home. Home continues to be recognized in the top tier of all banks in the U.S. and even 15th in the world. That's a great place to sit. It will be interesting to see the rankings after all bank reports during the quarter. I would imagine that home will remain in the top echelon group of all banks, as it has been for most of its entire business life. Being ranked by Forbes' best bank in America three out of the last six years was not luck. Running a business in normal time, if we know what normal is anymore, is fairly easy because we all pull from our past experiences we have had. But in the last 18 years, it's been new surprise after new surprise experience. I've witnessed many Home Bank Shares employees working from daylight to dark, getting very little rest in their offices. Sometimes some of them even slept in their offices. And I describe that feat in one word as remarkable. I'll never forget how blessed we are to have such a remarkable team that does whatever it takes to win. The entire group that Participate in this process. Thank you so much for what you did, not only commonly but throughout the entire footprint. The efforts you made changed the course of lots of things. I want to thank the investment community for their amazing support. Being in the bank space has not been the most popular asset class to have owned in the last 15 or 20 years. So many of us have committed our lives to the space, and so have many of you. But you can always sell and change your asset classes much easier than those of us that are huge owner-operators of our bank assets. Home is my largest asset and the largest asset of the members of my executive committee and the largest asset of many of our regional presidents. So there's a powerful commitment to the success of this company. I don't think there's a management team in the country that is more aligned with their shareholders in the entire bank space than home. We will protect this company with whatever it takes. We take an attack on home in any way as an attack on all of our individual families' futures because all of us, an attack on home can change the value that we have committed our lives to for nearly a quarter of a century. This is not a job. This is a future. I hope all of you are proud of our performance over the year. There is only a handful of banks that sell it two times tangible book or more. Most of them sell in the one time or lower. As we've seen, the multiples decrease over the years. We do not apologize for our multiple. As a matter of fact, we're very proud. If I've heard it once, I've heard it a thousand times. I'd love to own your stock, but you are a little pricey. Really? Now, why do you think that is? We're blessed with the best and smartest institutional investors in the entire bank space, and we've met nearly all of them over the years. plus strong insider ownership with about 7% of the bank, and the Allison family stake is around $200 million. Well, we're here in the space, committed to our shareholders, and we'll continue to try to make you proud by remaining in that small group of elite, top-performing banks in the country year after year. You have my personal commitment. Thank you for listening. Donna, I'll come back to you.