Home BancShares, Inc.

Ladies and gentlemen, welcome to the Home Bank Shares Incorporated fourth 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 Townsall, Director of Investor Relations.

Thank you. Good afternoon and welcome to our fourth 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. Our team is assembled today to review the fourth quarter results with you, and we will begin with some remarks from our chairman, John Allison.

Good afternoon, right?

Good afternoon.

Welcome, everyone, to the fourth quarter and year-end 2023 earnings release and conference call. I personally want to thank you guys for the many years of support that you've given this company. I believe Donna told me the other day how quick time passes. This is our 25th year, Donna, is that correct? 25th year. That's hard to believe that home bank shares have been around for that length of time. I finally remember 1999. It was our first year in business, and we were cash flow positive. And would have been profitable had we not started building reserves at that time. But you know our belief in reserves, and we've continued to build them over the years, and they've paid dividends for us. year two, the company was profitable and has been every year since the first year. We ended 2023 with total assets at $22.7 billion and earnings of almost $400 million. And actually we would have earned over $402 million without the surprise FDIC $13 million special assessment that we had to book for our part of the fair banks that occurred during 2023. because of poor management of some of those respective banks. I've heard for years Washington complaining about taxpayers bailing out banks that went broke. In 08, 09, and 10, it was TARP, Trouble Asset Relief Program, and the Fed was heavily criticized for that program. We borrowed $50 million from the Fed at a little over 5% interest. I think during that time we were getting like a point for it. I don't remember how much bribe we were getting on that money, but maybe a point, and we were paying 5%. Yeah, we weren't getting much on it. We weren't getting much. Anyway, I think the Fed did all right on that. I think they made money. We did that totally as an insurance policy and never spent a dime of the money. You remember what I said when someone asked me, what did you do with the money? I said, I took it home, put it under my pillow, and laid a 357 Magnum right beside it. I said, it seemed like it was yesterday when that happened. We kept the money for several years while becoming the largest buyer of failed banks in the US, or at least one of the largest buyers of failed banks in the US. We were building out our Florida franchise that has become a very profitable part of this corporation. What a great run that's been. I don't know about other banks paying their fair share, but we certainly did then, and we are now. We are having to pay $13 million because of the stupidity of other management teams. I don't like that, but it is the best way for banks to repay the Fed. After all, the Fed did front the money to save many, many, many banks. I think the failures would have been enormous. I felt the system was on the edge of collapse, and the Fed had stepped in with their new BTFP, Bank Term Lending Program. Under this program, the Fed allows banks to borrow 100% of the face value of any security regardless of the market value. So if they had a municipal that they paid $100 for and the market value was 50, I think if I'm correct, Brown, they can borrow 100, right?

That's correct.

So those that had the major AOCI problems, this kind of wiped that out for a lot of them. You know, probably that saved 80% of the banks in the U.S. Bank management teams plowed all that funny money, fiat currency, into long-term low-rate securities, while in a raising rate environment. It's almost funny if it wasn't so serious, and you can't make this stuff up. That's why I say most bankers are not very smart. The small percentage of banks that did not make that mistake have weathered the storm well. Home was prepared for failed bank days in 08, 09, 10, and 11, and reaped the dividends of the war chest of capital and huge reserves and strong management team. Likewise, this time, home was totally prepared for this bank crisis. We didn't know when it was coming, but we were just getting prepared. With more capital, larger reserves, more experienced management team, and a fortress balance sheet. But the monster was just too big, and many, many banks would have failed. If the Fed did not provide the easy access to cash again, the regulators moved to provide free money Once again, probably was the best thing the Fed could have done to save the weak banks. Home was hoping for another bite at the apple and again was one of the few in the country that properly prepared for whatever was coming. Our regulators have continually told us to keep our powder dry because they're going to need us to help clean up some of these messes. There are simply too many weak banks cluttering up the bank space with limited capital, crazy growth plans, coupled with very weak leadership. Kimmons Wilson, the founder of Holiday Inn, said, good judgment comes from experience, and experience comes from bad judgment. And I think there is no substitute for experience. These banks with 8% of less capital, 75 to 80% efficiency ratio, and loan and deposits of 105% threaten the entire safety of the whole bank space. The regulators are stretched to the hip. I think it's just too big a job to regulate that many different financial institutions. If my numbers are right, There are nearly 5,700 banks and another 5,400 credit unions. And with credit unions buying banks all over the country, by the way, as you know, credit unions pay no state income tax and no federal income tax. So every time you see a credit union buy a bank, the federal deficit goes up. That needs to be corrected. Let's talk about the results of the quarter and the year. They were pretty good. We'll take the blame for poor results that we can't control. But the Fed assessment was almost $10 million after tax, totally beyond our control. So I want to present with you today both ways, how we reported the earnings under GAAP, Brian, correct? And how they look had we not had the assessment. Different from the past, the Fed would just tell us to pay so much a quarter. We had to actually book the liability this time, right, Brian? That's correct. We booked the whole $13 million. We booked the whole $13 million, which ended up about $9.6 million after taxes, if I recall. It is our belief that a matching amount of, we're not going to get into the lawsuit deal today because that's in court. And I think that probably costs us some money for a quarter if we continue dealing with that over a period of time. But that decision of how much money that is will be determined by our court of law at some point in time. And it was 9,739,000 after tax was the assessment. So we reported earnings of 86.2 million. Without the Fed charge, we would have had 95 million, nine, almost 96 million. So for the year that put us at 392,929,000, or without that, we would have been at 402,698,000. So we hit, the EPS was 43 cents, and without the Fed there, it would have been a nickel, five cents a share, so it would have taken us to 48 cents, and that is a beat. Return on assets were 155 with the Fed cost and 173 without. Year to date, we ran a 181 without. Return on tangible common equity was 15.80 with the Fed assessment and 17.54 after. P5 NR was 48.22. It hadn't been that low in a while. That's with the assessment and 53.51 without. Good news is, Steve is going to talk more about it in a little bit, some margin. The margin was 417 versus 419, and a little of that we created ourselves. I like Brian with our borrowing, didn't we? About one basis point for the month. Actually, it was pretty much flat. Non-performing assets remained stable at .42, both in the third and the fourth quarter, and we continued to maintain our reserve of 2%. Tangible book value because of ALCI and earnings kicked up pretty good. from $10.90 in the third quarter to $11.63 in the fourth quarter. So CET1 continues to grow. We were at 14% last quarter, and this quarter we're at 14.4. We're making good money, and we continue to grow those capital ratios. Leverage was 12.4, and risk-back assets was 18.1. Revenue was a beat. Fourth quarter revenue was 245.6 million, so I thought that was pretty good. It's interesting watching that we're up pretty strong on interest income, but we're up almost likewise on interest expense. I like the spread. We're up 11 million plus on interest income, and we're up 11 million plus on interest expense. Hopefully, that's going to stop or slow down at some point in time in the future. Loans grew by $152 million in the fourth quarter. CCFG, they were down 61 million. 61.5 for the quarter, but legacy grew a total of 214.4 million, one of the best quarters we've had in a while. Deposits also grew by $270 million. Q4, we repurchased 815,000 shares at average price of $21 for 17.3 million. And for the full year of 23, we bought back 2,225,849 shares at an average price of $21.69 for a total buyback of $48.3 million. We have 16.7 million shares left available for repurchase. It was not a great quarter, but it was not a terrible quarter. I'm sure a lot of people got bigger problems than Holmes got. It just was a tough quarter, very frustrating and difficult quarter. We embarked on a As I told you last quarter, a cost-cutting measure. I don't know where we are there yet. I haven't seen any of it, but I think we'll see it. Should start seeing it. I mean, should show up first. It should be in this month, next month, and the month after that. So if we didn't get enough, we'll go back and get some more. But it's a tough environment. Outside of that, Donna, I don't really have anything. You can have it back and do what you want to with it.

Okay. Thank you, Johnny. Next we will hear from Steven Tipton with some operational details.

Thanks Donna. I'll start with the net interest margin as Johnny referenced in his comment. The reported NEM was down two basis points to 4.17% in Q4, but as mentioned we carried some additional cash on the balance sheet late in the quarter, which improved NII but negatively impacted the NEM by one basis point for the quarter. We continue to closely monitor asset repricing against the increase in cost on the funding side. When adjusting for the excess cash in December, the monthly net interest margin would have calculated at 4.17%, nearly matching the quarterly's average. During the quarter, total deposit costs increased 22 basis points to 2.09%, while the yield on loans excluding event income increased 20 basis points to 7.19%. On a monthly basis, total deposit costs increased six basis points in December to end the year at 2.16%, while the yield on loans, excluding event income, increased four basis points to 7.25%. Switching to liquidity and funding, it was great to see an increase in deposits in Q4, particularly as the rate backdrop continues to be extremely competitive. Total deposits increased $269 million in the quarter, with the majority coming from the Texas and Arkansas regions. The deposit mix movement was similar to prior quarters as interest-bearing balances increased and CDs continued to be in focus for the consumer. We still remain just under 10% of total deposit balances in that CD category. Non-interest-bearing balances account for 24.3% of total deposits, down to 26% in Q3. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.3% of total liabilities. And a loan deposit ratio was in line with prior quarter standing at 85.9% at year end. The focus in loan committees and discussions amongst all of our presidents continues to be on deposit gathering, core customer growth and retention. On the asset side, As Johnny mentioned, in-period loan balances increased $153 million, with the Texas region increasing $160 million and Florida increasing $31 million, offset by a decline in the balances with CCFG. On loan originations, the volume picked up in Q4 with approximately $1.17 billion in commitments. CCFG finished the year strong with nearly half of their full-year production coming in Q4. The community bank groups accounted for two-thirds of the loan production in Q4, with the Texas regions closing nearly $400 million in volume. Overall yield on originations continues to improve, with an average coupon of 9.18% in Q4. Closing with the previously mentioned strength of our company, all capital ratios improved in the quarter, notably with a tangible common equity ratio of 11.05%. a leverage ratio of 12.4%, and a total risk-based capital ratio of 17.8%. With that, Donna, I'll turn it back over to you.

Thank you, Stephen. And now Kevin Hester will provide us with a lending update.

Thanks, Donna, and good afternoon, everyone. I'm happy to be able to tie a bow in the very challenging year of 2023 and begin to look forward to a new year. Even with the unprecedented challenges that we faced as an industry in 2023, We at home are in a very good position to take advantage of whatever this year brings. Our asset quality remains solid with low past dues and non-performing loans combined with a very strong capital position, which includes a 2% loan loss reserve. I'll provide details on that in a moment. First, I would like to give you an update on the three credits that we discussed in detail last quarter. We have agreed in principle on the sale of the Oklahoma marina note at par and hope to have it closed very soon. We are finalizing the note sale documents at this time and would anticipate payoff to occur shortly afterwards. We also have a signed offer with a short due diligence period on the Miami property at a number that would result in a full payoff of the Oreo balance with a small recovery. This buyer is familiar with the property and the area, so we think it is a good buyer for this asset. Regarding the third asset, which is the office property in California, I will pass it to Chris Poulton for an update.

So the subject property is a 95,000-square-foot office building subject to a ground lease located at 1733 Ocean Avenue in Santa Monica, California. During the quarter, we completed a deed and move foreclosure in October. During the fourth quarter, we expensed just over $300,000 in transaction costs to bring the property into REO. As part of that transaction, We received just over $5 million from our borrower, and this was used to reduce our basis in the property to just under $23 million. The current as-is appraised value is just over $32 million, putting our carrying value at approximately 70% LTV. The building is currently 50% occupied, operates just above break-even. where the lease income is at or just above our building's expenses, which includes ground lease tax, insurance, and other operating costs. We're planning to occupy space in the building. We started moving our West Coast office into the building this week. Our prior lease in LA expires this month. Our immediate focus on the building is in three areas. First, stabilizing the rental income through extensions and new leases. Second, there's some cleanup remaining on the existing ground lease, and then third, we're preparing to market the property for sale. Bad news is that this is an office building. The good news is that it's very well located. We've been paid down by 50% against our original loan. We have an immediate use for a portion of the space, and the current building income is sufficient to operate at a break-even today. With that, I'll turn it back to you, Kevin.

Thanks, Chris. Going back to the asset quality numbers, Non-performing assets remain unchanged on a linked quarter basis at 42 basis points. Early-stage past dues at 12-31-23 were 61 basis points, which is down 23 basis points on a linked quarter basis and flat when compared to a year ago. Net charge-offs for the year of 2023 were nine basis points of average total loans. As a further note, we have completed a detailed review of all 2024 maturing loans over $3 million with an interest rate below 7%, and have noted very few loans for which an increase to current interest rates would create any significant default concerns. This is due to a combination of strong borrower guarantor support, low overall leverage, and the majority of our lending taking place in growing southern U.S. geographies. We will continue to monitor this subset of loans, but are encouraged at what we see at this time. In conclusion, I'd like to thank our lending staffs across the footprint for doing the hard things, asking to be paid for the risks that we take, and pushing for the equity and structure needed to make sure that the borrower's interests are aligned with ours. It's not easy work, but it's the difference between an average performing bank and a best-in-class financial institution. Donna, that's all I have, and I'll turn it back to you.

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

Chris, you got any comments today?

Well, first of all, Congratulations on the 25 years. I couldn't have swore it's longer than that because I thought I'd work for you for 40. Yeah, 40. I thought I'd work for you for 40. But congratulations on that, John and Mr. Allison, and a hell of a story you've created. Good reports. It's nice to see 23 close the books on it. It was an interesting year. Last quarter seemed to show the turn in the loans and deposits, and as you've indicated, our non-interest income, non-interest expense. I think there's certainly room for improvement there and we'll continue to do that. But just also compliment the entire management team of the bank all across this company of all the things that they've done to get us through this year. Look forward to 2024, I think. Johnny?

You know, the margin, being able to maintain that margin to me, Stephen, is pretty important right now. And Looks like you think we're – they asked Don and I this on the road when we're usually out in Alaska, so I'm sure next time. Do you think you can maintain that margin? And I told them I thought we could. We certainly intended to try to.

So what do you think? Yeah, I think certainly on a monthly basis over the last quarter or two. I mean, we've operated in a pretty tight range. We still have – We have the maturing loans that we previously talked about that will continue to come through over the course of 24, and if we continue to be able to reprice those upwards, I think the prospects of that are good. That's certainly what we're working for.

So, Kevin, are you seeing the pipeline remain fairly strong through here, or are you seeing it get short, the pipeline easing up a little bit, or?

I think it depends on the geography, but we certainly have some folks that have some good opportunities in some good areas. So it looks like first quarter's holding in there, and I feel pretty good about 24.

Brian, have you completed your budget for 24?

Well, yeah. We're going to have it presented for the board meeting this week.

And how much did you raise? Did you lower or raise? What did you do?

Well... It's down a little bit.

Better than expectations. Yeah. We've challenged it to be better than what expectations are out there.

I asked Donna and I, they said, we got y'all forecasted to be down next year. And I said, they said, what do you think about that? I said, I don't think about that. That's not how I think. I don't think that we're going to be down. I think we've got a shot. There may be some opportunities out there. You saw where Home Street sold today or yesterday. We see some activity out there, maybe some opportunities for us out there at some point in time that we can pick up, but we haven't really addressed much M&A in the last couple months. We got on the deal out in Texas at one point in time, and that kind of went away for us, and we really hadn't, I can't think, we hadn't looked at anything lately, had we? Kind of had our head down running our own business and trying to get the year in, so. Anyway, I think, Donna, I'm going to turn it back to you, and I guess I'm ready. If everybody's ready for Q&A, we'll go with Q&A.

I think we're ready for questions.

We will now begin the question and answer session. Once again, if you would like to ask a question, it is star 1 on your touchtone keypad. To remove your question, it is star 2. We do ask if you are using a speakerphone to please pick up your handset before asking your question. Our first question comes from the line of Brett Rabaton with Hovde Group. Your line is now open.

Hey, good afternoon, everyone, and congrats, Johnny, on 25 years. It's been a run, right?

Thank you. Yeah, that's great. I didn't realize it had been 25.

One and two. Wanted to first go to talk about the margin a little more. You talked about being able to maintain it. Can you talk maybe about the dynamic with NII and the margin? And, you know, it would seem like you might manage the balance sheet, you know, fairly flat or have an opportunity to, and while you're growing loans, which could mean the margin is better later this year. And so just wanted to get an outlook for the margin.

know if the fed does cut rates how you feel about that could the margin trend up later this year hey brett this is stephen uh good afternoon you know i think our view today is while we continue in this rate environment that that we're in you know that we're able to kind of tread where we are like we said we've traded in a pretty tight range here uh over the last couple of quarters um we do have the opportunity from a loan repricing standpoint. I think we talked last year, we had a billion over the next five quarters. I show we have about 780 million that is under 6% that will mature this year and give us the opportunity to reprice. We've got a little over a billion that's at or below kind of our spot rate at the end of December, which was seven and a quarter on the loan book. We still have some upward pressure on the deposit side. That seems to maybe have slowed a little bit. We had a lesser increase in December than we'd seen on a monthly basis in the back half of the year. I think our view is that the ability to reprice loans can offset what we continue to have to do on the deposit side in this rate environment that we're in. I think our view is if we do see some cuts, uh you know at some point in 24 that that gives us the opportunity to um you know to pare back on the deposit side what we've done we've got 11 billion in interest bearing checking and you know a really short cd book i look in here our our total cd book is about a billion six and i think 80 80 plus percent of that uh matures in 2024 so even as some of these come through we may be able to to fine tune some of that if we see some rate cuts actually materialize?

We watch it every day and we look at it every day. We look at what the revenue is generated for that day and basically what the margin is for that day. We live it 24-7 around here. I actually don't think there's not as much room I don't think interest expense is going to go up as much as interest revenue is going to go up. As you heard from Steven, we've got some repricing opportunities coming out, about a billion bucks worth. I think we'll continue to do that. We'll monitor it on a daily basis, as we have been doing. As you can see, we basically won a little bit in the fourth quarter. The third quarter, we were getting beat. The interest expense was outrunning the revenue. and was disappointing, and we made some adjustments there. So in my last call, I said only two ways to increase profitability, and that's to cut expenses or increase revenue. And we did both, but you haven't seen the cost cut effects of the company yet, to my knowledge. I appreciate the compliments about good expense control, but it's not where we wanted it to be. We just got a little fat over the years, and it happens. It's just natural to do that. And we went back in and we went to work on it. And if we didn't get enough, we'll go back and get some more. So we're committed to the cost-save side at this point in time, and we're committed to the revenue side. So we'll continue to monitor on a daily basis. But deposit costs, I don't know if they've troughed, but they've certainly gotten... gotten to a point. We're still seeing these 5% and 6% CD ads run by these banks that are out of money, completely out of money. A person would certainly want to be careful about putting money in one of those banks running those kind of ads because what that essentially says is we borrowed all the money we can borrow because you can borrow from the Fed a lot less than that, and we're just to hell with profitability. We're going to try to save. We've got to save the company somehow. You'll see us, I suspect, I would have really thought that our margin would have been up. We did a little borrowing and we borrowed about $500 million from the BTFP program.

We borrowed an extra $500 million.

Borrowed an extra $500 and we're getting a spread on it of about 45 basis points.

It's actually up to 64 basis points today.

64 basis points. So anyway, I don't know how I feel about doing that. We borrowed it and then put the money there with the Fed. I don't know how I feel about that, but that wasn't what the intention of the program was for. The intention of the program was to save these banks that are broke, and they did at work, and it saved them. Well, we were in that deal. I thought we ought to get something out of this deal, so we're getting a little spread on that. So that lowered our margin for the month by a basis point. For the quarter. For the quarter by a basis point, or we would have been within one basis point of that. And the third quarter had a little juice in it, that the fourth quarter didn't, so actually margin was flat, and I'm pretty proud of that during the quarter, so we'll continue to monitor that. I know it's a long-winded answer, but there's a lot entailed in this company to managing the margin.

If we have the $500 million for the whole quarter, that itself will be profitable to the bank, but it'll be diluted to the margin about 10 basis points.

Yeah, if we keep it all next quarter, it'll be diluted to the margin by 10, but it'll

an increased probability about about a million for the quarter so that's right that's helpful i was going to ask about that it looked like that was what that increase in borrowing was um in fact just on my other question my follow-up question was just around loan growth and it sounds like the pipeline suggests you can continue to have some growth last year you kind of managed to flattish growth if we were penciling in mid single digit for the year would that seem fair to you guys or would a different number be more appropriate.

Hey Brett, this is Kevin. I think we gained some traction last quarter in production. I feel good that that's still continuing in at least some of our markets. I think the question is going to be really payoffs and that's even more as we get into the middle of the year. I think Probably low single digits is something that I could get on a little bit more than mid, but a lot of that will depend on, I think, payoffs.

We're seeing payoffs slow somewhat in different markets because they can't get it financed. We're blessed with the fact that we didn't make the mistakes that 95% of banks did, and we have money to loan. So we're in a position to loan money As a result of that, that's where you saw the loan growth come in in the quarter was because the fact we had money to loan and not many banks in the country had money to loan. They found us, came to us, and we made some good relationship loans that will be with us for a long time. That's really helpful.

Thanks for calling.

There's lots of loan business out there because there's not many people on it. I mean, we could roll into a recession pretty quick here because these banks that are 105, 108% loan deposit can't loan any money. They just shut down.

Great. Thanks so much, guys.

Thank you.

Thank you. The next question comes from the line of John Arfstrom with RBC. Your line is now open.

Thanks. Good afternoon.

Good afternoon. Thanks for the congrats over 25 years, John.

Yeah. Yeah, I've only covered you for 16 years, so I still have training wheels on.

He said he's just catching up. He's been with us 16 years. Thanks for your support.

Yeah, you got it. Can you talk a little bit more about the expense expectations? You keep hinting at it a little bit that it didn't show up in the first quarter or it didn't show up in the fourth quarter. What can we expect? I know Brian Davis, you touched on a little bit as well, but what's coming?

John, there was some reduction with staff done in the fourth quarter, and most of that happened in November and December. So some of that will show up starting now. But every market, and I've talked to every region and every manager that's support office type stuff, and it's just making sure we're fine tuning everything. So there's still room to improve. We always want to do that and always have been able to do that. So I think there'll be more. But the first quarter, she'd kick in a little bit.

I told Tracy, I said, can you get the costs down? And he said, yeah, I'm going to get them down. I said, well, you can get them down because I've got Donald Townsend warming up on the sidelines. She was an efficiency guru. If you can't get it down, I'm sending her in the game.

He didn't think as very funny as I did. Right, right. I hear you. You know, John, in Texas, you know, there were some things that were drug out, and Scott Lewis and the team out there picked the ball up and learned extremely well. So that will, I think you'll certainly see some of that effect in the first quarter, and some of that will actually close a branch or four. And so that will happen in the first quarter, so you may not see some of that until the second quarter. But he's fine-tuning everything. All the managers out there picking the ball up and doing their jobs.

We didn't get the savings out of Happy that we expected. We just didn't get them. And now this management team is working on getting those expense cuts. We'll see that. We'll feel that, I think, in the second quarter. So first quarter, some in the first quarter. But some of these branches were closed, and they'll be at second quarter events.

John, you got expenses going up.

I mean, our group insurance went up a couple of million dollars. You just got everything going up. Everything's going up.

So to say that you're going to reduce expenses

in 24, if you can hold expenses in 24 with all of these things that are beyond our control would be great.

Okay, fair enough. I just wanted to ask a question on credit. It kind of dominated the call last quarter and you were pretty quiet on it this time around, but anything new on credit, any newer emerging concerns we should be aware of And then, you know, for Chris, just anything on the potential timeline for resolving the California office property.

Hey, John, it's Kevin. I'll take the first one. Nothing of any significance at this point. You know, we're working through those three we talked about. And as I said, we've looked at what's maturing that's at low rates and don't really see any significant issues there past dues are you know they're flat from last year below where they were a quarter ago so uh I think that's why you you saw that there was less less emphasis on it this quarter and it was you know more of a more of a focus last quarter yeah fair enough take that now yeah hey John um you know I would say we're going to be pretty patient

on this one. You know, it's an office building and it's a tough market for office. I could liquidate it, but I don't think that's the best result for our shareholders here. You know, it's breakeven. I can use it, have a need for it. And I think if we put a little elbow grease into this and stabilize it, we drive a higher value for it. So, you know, my point of view is that I think we can enhance the value of this. I think that this was not well managed by the previous borrower once they realized they weren't going to be able to recoup their money, and it took us a little time to get control of it. Now that we have it, I think we should do some work on it. We're doing some work on leasing, et cetera. Let's get that done and put it in a good position for a buyer. We're not the right long-term owner of it, but I think we might be the right short-term owner. Yeah. Okay.

All right. Thanks for the help.

I appreciate it. John, I've been quiet because we've sold two of the three of them. So, you know, hopefully they close, the transaction close, and we didn't lose any money on them. So we underwrote them right on the first place. Thank goodness the teams, Kevin's right, our team's really done a good job. They did a good job underwriting. You know, in times like this, a lot of people do 80-20 lending. You put 20% in and they loan you 80, and that kind of becomes a rule. But in times like this, you've got no equity because the values of some of those properties have deteriorated, and there's no value in them. So the good, tough underwriting at home is maintained over the years. It's certainly paying off for us. And there may be some hiccups in the field. Some people may have some hiccups, but I don't think there's going to be substantial hiccups. It's not an old 506 we made, or 7, when we made that tour through the Florida Keys. It's not one of those deals. So it... It feels different now because most of the stuff we've got, we're at a loan to value of 65%, 70%. So instead of having no money or little money in a deal, we've got 25%, 30%, 40% in deals. So I think we'll have some, but not a lot. So that's the reason I was quiet because I'm pretty happy, in fact, that we had three pieces of property that concerned me, and we've sold two of the three.

Yep, yep, it's good progress. Okay, thanks a lot. Thank you.

Thank you. Our next question comes from the line of Brady Gailey with KBW. Your line is now open.

Hey, thanks. Good afternoon, guys. Hi, Brady. I wanted to start with your sensitivity to interest rates. The forward curve suggests a decent amount of rate cuts this year. If that plays out, will there be much of an impact to your net interest margin, I feel like you guys tend to be somewhat rate neutral, but what's the impact to the margin if we do see rate cuts?

Hey Brady, this is Steven. We're looking at our ALCO model assumptions now. To your point, I think we've been plus or minus 5% on both sides, up or down in the past. As I said, to Brett, you know, kind of at the outset of the call. I mean, I think our view today is that in a down rate environment, if we see short term rates come down this year, we'll be able to, you know, kind of attack the interest bearing checking side of things and see a little margin improvement. I think our budget, if I remember right, has four rate cuts potentially in it next year and shows some margin improvement throughout the year. So in terms, I don't know what the model shows today. I think as we work through our assumptions, that's our belief in terms of being able to improve in a down rate scenario.

Brady, if we have six rate cuts this year, we're going to be in lots of trouble. I hope that's not correct because I hope it's not politically motivated behind it. But if we have six rate cuts, it's a sign that we're in trouble. The country's in trouble, not home. The country's in trouble. That's pretty scary to think that we could have six rate cuts. I understand they're pricing those six rate cuts in. I'm still a hire for longer guy. I just believe that. We may see 25 or 50 basis points wouldn't hurt us, but if we got four major rate or six rate cuts, we got big problems. It reminds me of the late 70s when Volcker pivoted because of pressure, and we had to come back at 21% rates in the early 80s to kill a snake. So, you know, I think it's going to be, hopefully, we don't end up in a recession.

Yeah, I agree with that. KBW only has, I think, two cuts in our economic baseline. So, yeah, I agree with you. My last question is just on bank M&A. John, I know you've been very active in that over the years. Do you see bank, like traditional bank M&A, unassisted bank M&A, do you see that de-thawing at all any time near term?

De-thawing?

Yeah, like becoming more active?

Yeah, you know, we talk about it around here. It's just the expectations of the sellers and the cost of the deals and the marks. We saw where Home Street got bought. That's probably a pretty good trade. There may be some trades like that out there that make some sense that are really banks that need to be in stronger hands. But outside of that, I'm afraid M&A, you know me, I like to do M&A trades, and we've done a lot of them. I'm just afraid we can't get them done. I'm just afraid they won't work. Nobody's been involved in M&A around here lately because we've been trying to wrap the year up and do what we're doing. We won our $400 million and Brian Davis told me we won't have to book our exposure to the Fed deal, but that's okay. We would have done it without it. I don't know if I've answered your question or not, but I That's about as good as I can do.

Okay, great. Thanks for the color, guys.

Thanks, Bruce.

Thank you. The next question comes from the line of Matt Olney with Stevens. Your line is now open.

Hey, thanks. Good afternoon, everybody. Good afternoon, Matt. Hey, Johnny, you mentioned the market expectations for a home bank was for net income to be down in 24 versus 23. It sounds like you don't agree with this. So I'm just curious if you want to give you a chance to talk about your targets for 24. What's the Johnny model for home banking in 24?

Well, it's certainly not a down. It's not a down scenario. I've never budgeted a down scenario in my life. I think it's going to the board for approval. I'm going to vote against it. When you think about taking advantage of this opportunity when all these banks are broke in the country and can't loan any money, it ought to be a great time for us. Revenue was strong. We had growth in revenue. With high interest times, we had growth in revenue, growth in deposit, loans, margins hanging in really good asset qualities, wonderful, and we got lots and lots of capital, and one of the few banks in the country that can pay out all uninsured depositors. So, you know, I like where we're sitting. I like where Home Bank shares are sitting. We have built, this isn't by accident, we built it this way. So, it is one of the strongest banks in America. We'll get our fair share, we'll get our fair share, but I'm north of $400 million T. Without a settlement on the West Texas deal it bothered us i'm north of 420. T. that's where I want to be. T. that's a Johnny number.

T. North okay. T. Okay, well, I appreciate that and wouldn't be surprised to you guys ultimately get there this year. T. What about on the the lung growth front, I think you guys mentioned a while back, you were looking at doing a. an energy loan. Didn't know if you got that deal done and funded or that's still on the drawing board.

We did it. It's done. It's on the books. It's on the books and going well. It's on the books and going well. We got an opportunity on another energy loan. We're not afraid of energy loans. I think you've seen the guy on TV trying to run his electric cars down the road. Something tells me oil and gas is going to be here for a long time because I think Hertz is selling like 25,000 electric cars or something, taking a beating on them, getting rid of them. I believe oil and gas is going to be here for a while. So we're not afraid of oil and gas. We would do more oil and gas.

Yep. Okay. And then just lastly, I think Kevin mentioned in his prepared remarks that you did, I think it was a deep dive in some of the CRE properties that will be reset higher, the loan pricing. I think you mentioned that in some prepared remarks, but I missed this. Was this any specific segment or any region or just kind of a more broad deep dive? Thanks.

Hey, Matt. This is Kevin. So it was all loans that are maturing in 24 over $3 million and had an interest rate less than I think it was 7%. Just really across the board, just trying to get ahead of anything that's going to have a pretty big rate shock and make sure that we understand what that looks like and that there's not any issues. If there's going to be an issue, we want to know it now rather than in the third quarter when it matures. In that review, there was just a handful of things and none of any of any great size that, you know, that look like it could be even a challenge to the project. And the good news is almost everything we saw had, you know, either a really, really strong gear towards a lot of liquidity or, you know, a lot of very, very low leverage, those sorts of things. So, again, Johnny's talking about the underwriting that we've that we feel like that we've done well over the past several years. I think that's where this comes into play is when you're looking at a several hundred basis point increase in rates and still everything looking like it's going to work out.

I didn't know he was doing that and he didn't. I think it's Greg. He called me. He just said, hey, I just went through everything. Three million less, it matures in the next 12 months. That is 7% or less. And he said, Johnny, I didn't find hardly anything, which gave me real comfort. So I appreciate them doing that. I appreciate him doing that. It makes me feel good. It should make you feel good, Matt, representing us to investors.

Yep. No, that's definitely good news. Glad you guys are doing something like that. All right, guys. Thanks for your help. Congrats on the year.

Thank you.

Appreciate it.

Thank you. The next question comes from the line of Steven Skelton with Piper Sandler. Your line is now open.

Hey, good afternoon, everyone. I'm a little scared to know what a good year looks like if this is supposed to be a bad year, Johnny. Would you put 1.8 ROA, 17% ROTCE? I got scared when I read the first line of the press release, and then I looked at the numbers. Seems like a good result.

Donna just did the quarter, last quarter, and I think we ranked in the top three or four or five of every category, ROA, ROA. Tracy said, we're getting this kind of performance. I said, we don't pay attention to other people's performance. It's what we're going to do. We're going to do better than anybody. We want to be better than everyone. We're getting good performance. The numbers look good. But I appreciate that comment. You'll make him and Steven and Tracy and Brian all want to just take a nap or go on vacation.

Steven, I've gone from gray hair to no hair.

Yeah. That's right. We don't have that. So the area I'm most interested in is really the strong loan growth you guys had. I mean... So far this quarter, we haven't seen much in the way of loan growth from a lot of peers and a lot of the industry as a whole. So 4.3%, I mean, it may not feel like a lot, but on a relative basis, it looks like a ton. And so I'm just wondering if you think that's sustainable, maybe going back to Brett's question earlier on, and then if there's any kind of geographic dispersion or any segments or kind of any additional color, Kevin, you might be able to lend of where that's coming from and how you're getting it.

Hey, this is Kevin. So geographically, certainly you got Texas and Florida who are poised to provide that because you got so many people still moving to those two geographies, and particularly the southern Florida part. So that's always helpful. Do I think it can continue? It certainly can. Do I think it's, Johnny mentioned it earlier, I think you've got a lot of banks who have pulled back and either by choice or because they don't have any liquidity and ability to loan. So that bodes well. We're still going to, we're still having to fight the rate issue because some deals just don't work at these rates where you have to have so much equity that it is a challenge to get people to put that much in. So that's still a challenge, but there's From a competitive standpoint, we have a little bit of a break here, it feels like, and the ability to do that. To the degree that we can still get what we want to get from a yield standpoint and get the leverage points we want, there are opportunities. That's what we're working into.

Steven, if I could add, a lot of it is the referrals that we're getting. I use an example. Johnny has a great customer that he got introduced to someone when he was down here visiting with his customer. And that's turned into several opportunities for us. In Texas, we've made some relationships that getting customers calling, referring us to help them on opportunities. And we're seeing that in Arkansas, too. Some of the banks that have changed or done something different, you know, in our northeast Arkansas, they're getting opportunities to look at. Will we do them all? We don't know. But we're just, it's coming back to just good old-fashioned

referrals that we're getting from other keeping our hands shaking that saying hello that's exactly right it's kind of referral to referral to referral and it's you just had a guy come in and aces straights and pluses his banks in trouble as 95 of them are his banks in trouble and uh you know sometimes you wonder if you're doing the right thing and you just keep building your company When you see a crisis like we've seen, you know you're doing the right thing. People are coming across the country to come see you, to do transactions with you, because you have a good reputation, because you've got the money. The guy looked at me and said, what's the cost? I said, it's 10% plus a point. He said, I figured that's what you were going to say. That's what it was. That's what the price of the deal was, 10% plus a point. We have that opportunity right now. Hopefully, we'll be able to continue to. We're not gonna do everything at 10% plus. We have the opportunity to do some of those transactions, I think, and at some reasonable rate in the future. One of our big customers company-wide was in Florida at his resort. Had me come down and meet this guy, and I opened with Kevin and his referral deal, and it was a great credit, great guy, $50 million credit. We did it. Just one led to another and another. He said, the guy said, I'm having a problem getting this done. He said, you need to talk to my banker. So anyway, because we got the availability of money, because we got the strength to do it, that's why you're seeing the loan growth.

Yeah. Yeah. That's great. And you mentioned that 10% plus a point. I mean, what sort of yields on average? I don't know if you, if you have that number, but average new young yields in the quarter, what's kind of what you're seeing and how much pushback is there from, from customers on, on those yields, whether it's renewals or new customers.

Hey, Steven, Steven, the, the, the new, uh, the coupon on, on new originations in Q4 was nine 18. I believe. As Johnny mentioned, there's a mix of some tens and some primes, but largely we've been able to improve on that I think every quarter this year. Kevin may have some color in terms of just pushing back.

Obviously there's pushback. That's part of why I made the comment in the earlier remarks. Our guys fight that every day, every loan, every situation. and try to get all they can out of it. So it's one of the things that we do and just part of working here at home. I mean, you've got to do that, and it's very important. And there's obviously pushback.

Yeah.

Makes sense.

All right, guys, I appreciate the time. Congrats on a great year. Thank you. Appreciate it. Thank you very much.

Thank you. Our next question comes from the line of Michael Rose with Raymond James. Your line is now open.

Please ensure you are unmuted.

We lose Michael.

He must be too excited.

I've heard let's just move on if there's another question and we'll come back to Michael. See if he's back on there.

Certainly. Our next question will come from the line of Brian Martin with Jannie. Your line is now open.

Hey, good afternoon, guys. Congrats, Johnny, on 25 great years.

Thank you very much. Appreciate it.

Hey, just a couple for me. Just on the fee income side, it looks like the last two quarters have been a little bit lower and I think Tracy maybe mentioned that there's somebody mentioned earlier, I think there's some opportunity for upside, just kind of wondering where there's some opportunity there or kind of the current levels, a, you know, kind of a rate of run rate to think about as you go into next year, just kind of where, where the puts and takes could be there.

Yeah, we, we do, we think there's, there's certainly opportunity improvement, you know, the mortgage business operations been interesting with the interest rate increases over the year. That's fine-tuning, making sure we've got the right people in the right place, and Keith Little-Runsett does a really good job of handling that. So we think that can probably pick back up and smooth out a little better. We've also, trying to figure out, we've analyzed all our accounts and done a lot of things to see there's not a whole lot of room that we can improve on some of the account fee type stuff today. uh i thought there would be on that but we're again as we're just taking a look at every non-interest income non-interest expense category and uh identifying what could could be out there but uh just just the way that the year was in some of our service industries i think that you know hopefully that opportunity comes back if not you know our we've been very very fortunate with the trust business uh kevin or His team has done a really, really big job of joining in with our Texas opportunity, and we have the Gold Star Trust out there. It's been a nice pickup, and I think that has the opportunity to continue to go and grow with the staff that we've got together there. So that's always been a little player in our field in the past, but it's a line item today.

Okay. The equity investments have been fantastic.

I'm pretty pleased with watching Gold Star Trust and how they progress. That's a pretty sweet little organization. I gave it no value when we did the transaction because I didn't understand it, but they do a really good job. I'm pretty pleased with that. We may have him on one of these conference calls sometime and tell you what all he does. I think it'd be good to have him join and explain to the world what he does sometimes.

Yeah, maybe just the, um, the equity investments have been down a little bit. Um, so that's another area, I guess I would presume that's more, more, more, more volatile, um, as far as when that lumpy, when that would come in.

Yeah. I mean, you know, we, to be honest with you for this particular quarter, the, uh, equity investment income is down about 2.2 million. And when I say that we've booked about 858,000 and income for Q three. But unfortunately, we had a couple of those equity investments that had a decline in their capital balance. And so we took a loss of 1.3M, which is sitting in this reduction in our other income line item on the statement. So that's about a 2.2M dollars from Q3 to Q4. Yeah. We anticipate that to be improved in Q1. Yeah.

Okay. And then just on the expenses, I think maybe you said it, Johnny, but just the, not like we should expect a reduction per se on an absolute basis in expenses as you look from 4Q to 1Q, given some of the initiatives you've got, but maybe better to think about it for now that it's, you know, holding the full year to full year at a stable level is a better way to think about it until you go further along.

Yeah, you know, we, This inflation is not over and it's continuing. We're seeing the expense go up. I don't think our expenses have gone up $25 million, but if we can cut $25 million out, we should get some benefit from that. If inflation lowers its head, then I think we'll get some benefits of that. If not, we'll have to go back to it again. We've got to do what we've got to do. We've got a responsibility to the shareholders of this corporation to be profitable. They're the ones that own us. We work for them. We're going to do what we need to do there. Whatever it takes, we'll do. Hopefully right now, we'll see what comes out at the end of the quarter and what the expense reduction is and compare that to the You won't see it all because, like I said, insurance, all these different expenses are up for the year. But we'll get a little of it.

Okay. And first quarter is typically impacted seasonally a little bit higher anyhow. So it seems as though it's probably the second, third, and fourth quarter would actually be a little bit lower than 1Q given the timing of these savings and some seasonality in 1Q anyhow. That's correct. Okay. And then maybe just Maybe just last was on the timing of the borrowing program. Maybe I missed what you said earlier as far as the timing and the impact to dollars of net interest income and margin. But it was what, a basis point in the quarter? I mean, I guess timing-wise, when was the borrowing implemented? And just kind of run back through what the timing and impact of it was for 4Q.

We didn't start until about mid-month of December. We start about, so what you're saying is about 15 days of the borrowing program, about 15, 16 days. We didn't start. We talked about it three or four times.

We didn't need it. We didn't have to have that. It's just the opportunity came with the spread.

We missed, had the Fed not put their borrowing program in, you would have had multitudes of failed banks. And as you know, we were the largest buyer in the country last time, and we would have been this time even bigger buyers because of the strength of our ballot sheet and the equity in this corporation. So we missed that opportunity because the Fed came in with free money again, which was probably the right thing to do. That was probably the right thing to do. And then they come back against us, profitable banks, and we pay our fair share. So I think that was... I think it was the right thing to do over the period of time. We'll see, though.

Okay. And the total borrowings on that program that you're getting the spread on, you said spread 64 basis points. How much were the borrowings?

$500 million.

We've got $500 million that we took out in December kind of as a special borrowing, but we already had $200 million outstanding when we did it. We were kind of paying our money back and re-barring it trying to keep about $150 million in the checkbook. Today we're at $711 million. It's the whole $700 million and it's 64 basis points.

The impact is about $10,000 a day. I don't know if I feel good about us doing it or bad about us doing it, but we would If we didn't have this opportunity to do that now, we would have certainly, if they hadn't brought the program on, you might see 150 banks out of business today. Probably would see 150 banks out of business today. If they got runs on them, they'd be out of business. I'm telling you, the big bad wolf show up, a bunch of the banks around the space would be out of business. I thought we ought to get something out of it. our group on executive committee meeting said let's borrow some money and i thought okay so we're barred at first at 37 and 42 and 50 and in now 64 64 so it's a nice little income piece for us it does hurt the margin so when you see our margins we leave it in the entire quarter next quarter Brian said it'll be about 10 basis points, but it'll be more money. So you'll understand you can adjust the margin for 10 basis points in the next quarter.

I guess the real question is do you want an extra million dollars to have a 10 basis point solution to your margin? I mean, it's real money.

Right. And do you guys right now expect to keep it? Is that the plan or is that kind of up for debate or the timing on that?

I guess it really depends on what happens with the Fed funds rate. Right. You know, if they drop the Fed funds rate and, you know, all of a sudden we have, you know, 14 basis points spread on the margin, then it probably doesn't look very attractive because we had some opportunities to do that earlier in the quarter and just passed on it. Gotcha.

Okay. And just remind me, I mean, your outlook or just expectations, I mean, do you expect, you know, with this benefit to be able to grow the dollars of NII, you know, year over year? Is that? kind of baked into the outlook here as far as with the sensitivity on the margin and the growth outlook?

Yeah, I think that's certainly the goal. We talked about thoughts on loan increase and the outlook there, and if we're able to, even in this environment, if we're able to hold the margin in where it's at, if we can see a little balance sheet growth, I think NII follows.

Okay.

that's uh that's all i had guys thanks for taking the questions hey thank you appreciate your support let's see if michael rose got back operator thank you there are no additional questions in the queue at this time so i would now like to turn the call back over to mr allison for closing remarks thank you for your time and patience with us it's been a

trying year last year was extremely stressful like the most stressful year of my banking career when you see banks going broke in 24 hours and all the electronic transfers were deposits running out high rates and it it was it was actually very stressful for all of us and But home came through it. You can see how well we came through. You know, you heard Steven Scouten say, well, you said it wasn't a very good year. It was a great year. Well, it was, we set it up for that to happen, and it's happened that way. So I appreciate your support, and hopefully we'll have a good 24, and maybe we'll buy something worth the money for it to add to what we already have. Thank you very much for your time and your support.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.