Home BancShares, Inc.

Greetings, ladies and gentlemen. Welcome to the HomeBank Shares Incorporated third quarter 2023 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. 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 Townsend, Director of Investor Relations.

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

Thank you. Welcome to the third quarter of 23, earnings release and conference call. We'll discuss the results of the quarter. We'll talk about the year and what's going on in the bank space, and then we'll open it up for Q&A. First, I'd like to pay respect to a mentor, a trusted professional investor, a respected friend, and trusted ally, a person we all look to for guidance and advice, and we have total respect for her, and she was above reproach. That is Sally Pope Davis, whose hand has guided Goldman Sachs bank stock investing for many, many years. I said this at the Stevens Conference several weeks ago, that having Sally in your stock as a long-term investor was like having the good housekeeping seal of approval on your stock. All of us at home will miss her leadership, her guidance, her professionalism, and her straight talk because you always knew where Sally stood because she had a way of letting you know. Not only us, but the entire industry will miss her too. We wish her happiness in her retirement years and sincerely hope that life brings her many years of fulfillment. I have one other comment. It will not be the same without you, Sally. It will bring an emptiness that cannot be filled by anyone anymore. Let's go with the world and talk about banking. I asked last quarter what possibly can go wrong. I agree with Jamie Damon. I read his information that he put out and that In addition to being in a tough economic time, we're facing very perilous war with Ukraine war and now the war with Israel. And that one has the potential, maybe, of getting out of control. Hopefully not. The quarter was a little disappointing by Home Bank Share's high standards because we always expect to be the best in the nation. But we continue to be an industry leader as we compare to other financial institutions. The two main culprits were operating expenses and interest expenses that caused a slight decrease in net income. Operating expenses are creeping up as evidenced with almost 46% efficiency ratio and interest expense is creeping up likewise as evidenced by the cost of interest-bearing deposits from 227 in June to 255 at the end of the quarter. The good news is interest margin actually improved in the month of September. as we've been working diligently to stop the bleeding, and we're just starting to address the expense side issues. The lenders are doing their part by increasing revenue through repricing and higher origination rates of new loans. I'm optimistic they will overcome the increase in interest expense in the fourth quarter. The expense of non-income producing area of the bank will have to be addressed, and each department scrutinized. It's really pretty simple. If profits are going down, you either increase revenue or reduce expenses. There is no other way to increase profitability unless you just want to maintain the status quo. Someone said briefly, I hope if I'm lucky this will work out. Well, hope's not a strategy and luck's not a plan. We must plan for what we want to do to improve. Equity remains strong and we've successfully reduced the size of our asset base by letting the high-priced money go to those willing to pay almost anything for it. However, on the expense side, we still have the same number of people as we did when we had a much larger asset base. Watching the newspaper ads, it appears others may not be in as good a liquidity position as home because they'll pay almost any rate just to get the money. Maybe profitability is not important to them. The margin fell nine basis points during the quarter to 419 at September 30th. However, the good news is we grew margin in September, and Stephen will talk more about that in his remarks. It certainly appears that maybe the increases have slowed down. However, it could be a head fight. Stay tuned. Our TV and newspaper ads continue to promote the strength of home bank shares, which relates directly to safety and soundness of our customer deposits. Many customers are innocently chasing rates on deposit without any consideration as to what happens if the big bad wolf shows up at the door. Many banks will be closed before the sunset today. If their bank is 100% loan-to-deposit and less than 9% capital, it could happen today, tomorrow, or at any time. Home has an 86% loan-to-deposit and is sporting a powerful CET1 of 14%. That puts us in the top tier. For you people who don't know what CET1 is, that's capital. That puts us in the top tier of all bikes in the U.S., regardless of size. Our powerful capital number is demonstrated by the number one bike in America, JPMorgan Chase, has a CET1 capital ratio of 14.3%, just slightly above home. We're very proud of our Fortress balance sheet, and we will continue to build on our strength. Jamie Diamond said he is steering his company to be ready for whatever comes his way, and your company, Home, is doing exactly the same thing. I quote Mr. Diamond, this may be the most dangerous time the world has seen in decades. We are in total agreement and are continuing to take the safe path and protect our depositors, hard-earned money, our shareholders' investment in Home, and to ensure our employees have continued employment. Your bank will not be one of the SDB signatures or publics that did not have the ability to pay out uninsured depositors. Homes can pay out all uninsured depositors and still have money left. I don't know how many banks can say that today, but I'm damn sure proud of our ability to do that and personally commit that we will remain in that strong position on a go-forward basis. In addition to that, home would run a 1.20 return on assets after borrowing all the money that we needed to pay off the uninsured depositors. I think that's pretty good. Some banks would love that. That is not an acceptable number at home banks here. Adding to the financial strength of home is peer-leading amounts of reserve for bad loans. Almost $300 million of 2% of outstanding loans ranks us as one of the best in the country. A 2% reserve level has provided security for our company even during the great financial crisis of 2005 through 2012. We had sufficient capital and reserves, and we came through that with hardly a bump. We're all expecting additional impact to the economy as the Fed continues to hold rates higher for longer while attempting the difficult process of making a safe landing. Maintaining strong reserves is another spoke in the wheel to ensure home will be a survivor through the next crisis, as we have been through all the others. Not only a survivor, but to come out the other side stronger than what we went in. We're constantly watching for opportunities. You remember, in 1910, we were one of the biggest buyers of failed bikes in the country, and we're looking for opportunities, and we're seeing some. Another spoke in the wheel of strength is protecting the growing tangible common equity better known as TCE. While many institutions have not protected their TCE, allowing several to even go negative, Homebound Shares is proud of continuing not only to hold on, but to grow ours during the fastest escalation of interest rates since the 80s. Over the past 12 months, we have paid out 143.3 million in dividends, we've repurchased 2,250,900 shares of stock for $51 million, and have taken an additional mark to available for sale, or referred to as AFS, of $43 million, while still growing tangible common equity by 11%. We grew it from $9.82 a share to $10.90. So that's a shout-out to all of our people for an outstanding job in managing this company through an extremely dangerous economy. If you want to throw in the kitchen sink theory and take all the additional losses of happy bank bond book transactions that we hold as held to maturity, the mark-to-market would be approximately another $31 million, but still equates, if we take that, it still equates to tangible common equity growth of 10.4% over the last 12 months. If it's true that bank stocks trade on a multiple tangible book, one would expect home stock to be up about 10% because TCE is up. We're actually trading down about that same percentage. I think it's indicative of the fear that exists in this asset class. Earnings ability is certainly another spoke in the wheel, and we're continuing our march towards our stated goal at the birth year of $400 million for the year. As my football coach used to say, The haze in the barn. Well, most of the haze in the barn. For the big three quarters, we've earned $306.8 million through the first three quarters. We earned $98.5 million for the third quarter of the year, or $0.49 a share. But if you add the last four quarters together, home has produced a record earnings of $415 million, or $2.05 a share. While fighting all the distractions we have encountered, both on the economic and man-made disruptions from some disgruntled foreign employees. Let's go to a few key numbers. Revenue was 245.4, down just a tick. ROA, 178. We like a 180 or better. NEM was 4.19, and return on tangible common equity was 17.62%. Asset quality is still remaining strong with non-performing assets at .42. Last time we talked, we had an office building. We just heard about an office building that possibly we were going to get back. It looks like it's going to be a fourth quarter item, and we're going to get it back in Oriel the fourth quarter. I traveled to see the asset. I walked the office building, and I left quite happy with the location and condition of the property. Prime location, great parking garage, elevators, well kept. I don't expect much loss. I think we're going to be in it at, below 23, between 22 and 23 million. So time will tell whether it's worth, but I'm not expecting much loss. We had a new one that popped up, a marina in Dallas. This is new, probably too early to tell. I don't expect a loss here. If we underwrote it properly, which I'm sure we probably did, as hot as marinas and the marine business has been, I can't imagine a loss there. There's one other one we've been carrying on the books for some time. And Kevin's going to talk about it. Looks like he's got to maybe have a solution to that one. Loan demand has been about half of what it has been. We may be in the beginnings of a loan recession. Yields on loans were up to 6.98 from 6.48, up 14 basis points last quarter. Loans were up slightly for the quarter, primarily CCFG. Chris and his crew came on. We're expecting loan growth in the fourth quarter. So far, I don't normally predict that because I usually make a mistake, but we are predicting some loan growth in the fourth quarter, and we're now riding our loans in the high nines and the lower tens. M&A activity, we've been involved in several deals, but most of them just don't work at this time. Last quarter there was some press about some comments that I made. Some press came out, I don't know where it came from, about some comments I made during 2018 about not seeing a problem. I did say I didn't see a problem with CRE back then. Not sure what the purpose of taking an old quote and printing it four or five years later, but it looked and smelled and acted like maybe a hit piece. We're 100% correct because there was not a problem with our CRE portfolio, but maybe Somebody's trying to make some money on the shorts. We'll keep you informed of that in the future. We always ask about what's going on on the regulation side. And examiners all think the world is cured by capital. And I guess if the CET1 was 100%, that would be correct. You're probably not going to expect this coming from me, but I'm inclined to be favorable to raising capital requirements. It appears to me that most bank failures are a result of bad loans. So if there was some limit on loan-to-deposit ratios or loan-to-capital, they would not be able to stretch themselves into these kind of problems. I would not be opposed to some kind of restraint because the world is full of 108% loan-to-deposit banks with less than 9% capital. If they can't control themselves, somebody needs to control them. I also think they should be forced to hit a certain level of profitability before they can expand their franchise. Now, I think those ideals had possibilities of helping and would be meaningful rather than some of the mess we do from time to time that really doesn't mean anything. It appears they usually show up late and the dollar's short. It's the old story. Some people make things happen, some people watch things happen, and other people say, what happened? Am I supposed to say back to you, Donna, or back to you, Mike?