HOMB - NYSE

Greetings, ladies and gentlemen. Welcome to the Home BancShares 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. [Operator Instructions] 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. [Operator Instructions] 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 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. And here at home, we hold ourselves to the high standards. 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, 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. And it is Sally Pope Davis, whose hands has guided Goldman Sachs Bank stock investment for many, many years. I’ve said this at the Stephens 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, a skill that the world will talk about banking. I asked her 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 times, 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 disappointed by Home BancShares’ 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 2.27% in June to 2.55% 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 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 or – unless you just want to maintain the status quo. Someone said recently," I hope that if I’m lucky, this will work out." Well, hope is not a strategy and luck is not a plan. We must plan for what we want to do to improve. Liquidity remains strong, and we successfully reduced the size of our asset-base by letting the high-price 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 that others may not be in as good a liquidity position as Home, because they’re paying 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 4.19% at September 30. However, the good news is, we grew margin in September, and Stephen will talk more about that in his remarks. Certainly, it 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 BancShares, which relates directly to safety and soundness of our customer deposits. Many customers are initially 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 sun set today. If their bank has a 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 supporting a powerful CET1 of 14%, that puts us in the top-tier – for you people who don’t know what CET three is, that’s capital. That puts us in the top tier of all banks in the U.S., regardless of size. Our powerful capital number is demonstrated by the #1 bank 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 Dimon 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’ll quote Mr. Dimon, "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 depositor’s hard earned money, our shareholders’ investment in Home, and to ensure our employees have continued employment. Your bank will not be one of the SVB, Signature or Republics 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 deposits. I think that’s pretty good. Some banks would love that. That is not an acceptable number at Home BancShares. 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. That 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 if 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. If you remember ‘08, ‘09 and ‘10, we were one of the biggest buyers of failed banks 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, Home BancShares is proud of continuing not only to hold loan, 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 transaction that we hold as held-to-maturity, the mark-to-market would be approximately another $31 million that 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 first year of $400 million for the year. As my football coach, used to say the hay is in the barn. Well, most of the hay is 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 former employees. Let’s go to few key numbers. Revenue was $245.4 million, down just a tick. ROA 1.78%, we like a 1.80% or better. NIM was 4.19%, and the return on tangible common equity was 17.62%. Asset quality is still remaining strong with non-performing assets at 0.42%. The last time we talked, we had an office building. We just heard about an office building that possibly was going – 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 OREO in the fourth quarter. I travelled 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 if any, I think we’re going to be in it at below $23 million – between $22 million and $23 million. So, the time will tell what 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 probably, 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 is going to talk about it. Looks like he has got a – 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, that 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 writing our loans in the high nine’s and the lower 10s. 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 in four or five years later. But it looked and smelling and acted like maybe a hit piece. We were a 100% correct because there was not a problem with our CRE portfolio. But maybe somebody is trying to make some money on the shores. We’ll keep you informed of that in the future. We always ask about what’s going on in the regulation side, and examiners all think the world is cured by capital and I guess if the CET1 was a 100%, that would be correct. You probably not want to expect this coming from me, but I’m inclined to be favorable to raising capital requirements. It appears to me the 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 will 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 base and less than 9% capital. If they can’t control themselves, somebody needs to control them. I also think they should be forced that they hit a certain level of profitability before they can expand their franchise. Now I think those ideas have possibilities of helping and would be meaningful rather than some of the math we do from time-to-time that really doesn’t mean anything. It appears they usually show up late and a dollar 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?

Thank you for those comments Johnny. Stephen Tipton will speak next with some details on our operations.

Thanks, Donna. I’ll start with the net interest margin, as you referenced in Johnny’s comments. Reported NIM was down nine basis points to 4.19% in Q3, but included about $0.5 million of net event expense this quarter due to a couple of non-accruals that Kevin will mention in his remarks. Normalizing for those event items, the net interest margin would have declined six basis points on a linked- quarter basis. We continue to closely monitor asset repricing against the increase in cost on the funding side. On a month-to-month basis, we saw a little more pressure in August on the NIM and actually had a slight improvement in September with the core net interest margin at 4.19% During the quarter, total deposit costs increased 23 basis points to 1.87%, while the yield on loans, excluding event income, increased 18 basis-points to 6.99%. On a monthly basis, total deposit costs increased seven basis points in September to 1.96%, while the yield on loans, excluding event income, increased 11 basis points to 7.08%. We’re pleased to see the results in the loan yield as efforts from repricing maturities and discipline on new production begins to show in our results. Additional loan repricing opportunities continue this quarter, with over $200 million maturing at 5% or below, and we’ve got a little over $800 million between now and the end of next year at 5% or below. So there’s definitely opportunity there. Switching to liquidity and funding, we continue to manage the interest rate environment we’re in today, trying to strike a balance between the rate competition is offering and fostering our own relationships. In many of the markets we are in, 6% deposit rates are beginning to be the new normal. Total deposits declined $478 million in the quarter, with the decline occurring in July and August. The Texas and Florida regions saw the majority of the decline, while the Arkansas regions continue to be a little more stable like we saw in prior quarters. Noninterest-bearing balances accounted for about 2/3 of the decline in deposits in the quarter and stand at 26% of total deposit balances, down from 27% in Q2. Alternative funding sources remain extremely strong with broker deposits only comprising 2.4% of total liabilities. We allowed $65 million in brokered balances to roll-out in July, and continue to work on customer relationships that provide long-term value. The focus in loan committees and discussions amongst all of our regional presidents continues to be on deposit gathering, core customer growth and retention. On the asset side, as Johnny mentioned, loan origination volume slowed in Q3 with approximately $660 million in commitments compared to $1.34 billion last quarter. Yields on originations continue to improve with an average coupon of 8.98% in Q3. Correspondingly, payoff volume declined in Q3 to a total of $578 million in payoffs, and the yield on new loans was in excess of 150 basis points higher than the outgoing rate on those payoffs. Closing with previously mentioned strength of the company, all capital ratios improved in the quarter, notably with the TCE ratio of 10.76% and a total risk-based capital ratio of 17.6%. And with that, Donna, I’ll turn it back over to you.

Thank you, Stephen. And now, Kevin Hester will share information from the lending side.

Thanks, Donna, and good afternoon, everyone. Many times through the years, I’ve characterized our approach to lending as conservative. We always preach to our lenders that we want asset quality, profitability and growth in that order. In 2017, when most banks were loosening credit standards, we were tightening. I believe that all of this was to put us in a position for a time like today. We knew that the free money days would come to an end and that interest rates would increase. However, there was no way to anticipate the giveaway money days of COVID that would create massive inflation. No one anticipated the level of interest rate increases that would be required to reverse the inflation caused by these poor fiscal and social governmental decisions. It is unreasonable to expect debt service increases of over 100% wouldn’t test even the most conservative of underwriting processes. We will see that this is the case, especially if the interest-rate scenario is truly higher for longer. During the last couple of months, we’ve been evaluating three credits. The first is the office building in California that Johnny has talked about. It’s a Class A property in a desirable location. We will move this property into OREO during the fourth quarter at a balance of just below $23 million, which is about 70% of the new appraised value. Cash flow is not breakeven at present, but we’re optimistic that there is a path to disposition at little or no loss. The second is the Miami property of about $7 million that is primed for redevelopment. The appraisal indicates that the land value exceeds our loan balance, and it is also in a desirable area. While we will move this into OREO in the fourth quarter as well, are currently evaluating an offer that is above our carrying balance, so we don’t expect any meaningful loss from here. The last one is a marina that Johnny mentioned on a lake near the Texas Oklahoma border that is in the $9 million range. Recent financial information indicates that the project is viable and it appears that our issue could be coming from something outside our relationship. We are continuing to evaluate this situation and we’ll adjust our approach as we gain more information. With these three loans on nonaccrual, NPAs did increase 14 basis points to 0.42% this quarter. However, past dues only increased three basis points on a linked-quarter basis, indicating a reduction in activity outside these three loans. Even with this NPA increase, the allowance for credit losses still provides a stellar 314% coverage of non-performing loans. I do believe that our preparation and discipline will pay off in the long run and will result in fewer asset quality issues with less severity than would otherwise be the case. Combine this with the best-in-class loan-loss reserve and very high capital ratios, and I believe that we’re in a great position as the remainder of this interest- rate cycle plays out. 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?

Tracy, you got anything? Got a comment.

Johnny, I don’t think there’s anything that you didn’t cover or Stephen. Kevin covered for the Banks. But, all I know is our group of outstanding bankers will stay focused and we will do what’s the best thing for the shareholders. Brian. Any comments?

No, I’m good. I think you said it all.

Thank you, Donna. I think we’re ready for Q&A.

[Operator Instructions] Our first question comes from the line of Stephen Scouten with Piper Sandler.

Good afternoon, everyone. Appreciate the time. I guess you guys already have one of the better efficiency ratios in the industry, but it sounds like maybe there could be a closer look at really every aspect of the business. Would you expect any sort of larger scale efficiency plan? Are we going to – is Donna going to get named, the efficiency ratios are once again? What are we looking at there on the expense front?

Stephen, this is Tracy. I mean, I think for the past several years, we’ve had some growth that’s gone on. As Johnny mentioned, we even had some recent activity that could have made our company grow a little bit more if that opportunities would come across. With the economic times today, it’s certainly past time to reevaluate a lot of areas of the bank that we’re going to – we have started that and we will address that as soon as we possibly can. So always room for improvement.

And I didn’t get – Stephen, I didn’t get – you thought I got in the fetal position at the end of last quarter and curled up. I didn’t do that. I want you to know that. I want you to know...

I’m not going to tell them all that you didn’t do that.

Isn’t that what you thought, Stephen.

I was just worried, you thought banking wasn’t any fun anymore. I was worried you’re just tired of it.

I don’t know if I’ve ever had as much fun.

I’ll leave that one there. How about loan growth? I know you said it felt like maybe there wasn’t a lot of demand out there, but in the same vein, it feels like a lot of your competitors are pulling back a good bit on the growth front. Do you feel like there might be opportunities out there for you guys to be more aggressive in spots, to kind of pick your battles, if you will, some areas where you could add loan growth, CCFG or otherwise?

Stephen, this is Kevin. The fourth quarter looks pretty decent from that perspective. We see our pipeline out that far and know what we’re going to close. And so, fourth quarter is going to be pretty good. Past that, I mean it’s all about opportunities and where the market goes and we’ll take what we can get. We’re not projecting big loan growth. That’s not the time of the market we’re in, but this quarter does look pretty good.

You’re getting some high rates now on these loans and particularly on some of the projects people are looking at, we’re getting some higher rates and that’s meaningful. We watched the last three quarters that not keep up with interest expense. And we – as I said, we’re fighting that battle to stop the bleeding and we may be getting close to doing that. I watched the seven – our lenders have done really a good job on the $750million, at least from June to December getting pricing on that, up 400 basis points to 500 basis points on those. So, I really don’t think we’re going to kind of be flat here for a while, if the Fed – probably a good time to be flat. We’re repricing people at 4.5% going to 9.5%. That’s a shock. That hadn’t hit the market yet. That has not hit and we got, I don’t know, what’s – repricing next year is about $1 billion? Stephen, do you have numbers?

Yes, below 5%. We’ve got between $800 and $1 billion that’s coming due, that’s fixed rate that will have an opportunity to improve significantly.

Our lenders have really done a really pretty good job. I have to – they’ve done a pretty good – they’ve really done a good job of getting that. And they understand what it takes and they’re getting it done. So we’re catching up. We’re just catching up with the – I almost said that I thought we troughed on the cost of interest expense, but that may not be right. But we’re damn sure getting closer to it. So we’re trying. We look at that report every day. We’re trying to get there.

Got it. And with those repricings at $800 million to $1 billion, I mean, are there many concessions that you feel like you’ll have to give as those loans reprice? I mean it just feels like it’d be tough for that many loans to go from, let’s say, under 5% to 9% or what have you. Do you think there’s a portion of that, that you’ll have to do at, call it 7% or somewhere in the middle to keep them working right?

I mean, there could be a few, Stephen. We haven’t seen – we’ve repriced quite a bit of stuff this last two quarters, and we really haven’t seen very much of that. So I don’t anticipate a lot of it. There could be one every now and then that just looked that way. But I don’t expect it to be widespread. If you remember, we’re pretty low leveraged even back in that time frame. So, it’ll test our underwriting, but I don’t think it’ll break it very often.

I think Kevin hit it on the head there. Hey, we didn’t create the interest rate increase, it happened. Right. It’s a way of life. But most of the customers that we talk to, they’re good business people. So they understand what’s going to happen or what’s happened. So, Kevin and the team has got their lenders working those a little bit ahead of game than normal, just to make sure we’re in the right spot. So we actually feel fairly good about it. I think I’ve only seen one, one ask. I think I’ve only seen one ask. It may have been another ask, but I’ve only seen one, which I think is outstanding. Kevin has made a good point. We’re low leverage. They may let some stuff go, but they’re probably not going to let that low leverage stuff go. They’re probably going to keep it. They’re probably going to keep it. I mean, if you got high leverage on stuff, they’re probably going to go away or could come back. When you think about the office building...

Yes, that’s definitely a testament to the underwriting that – yes.

Yes. You just said, that is a testament. That was originally a $50 million appraisal. It’s now a $34 million or $35 million appraisal. So we’re in at 70. Had we been in there 80 on the front end, we’d be in at 110 or 120 now. So we’re very pleased with what’s going on in that space. Chris, do you want to talk about that a little bit on that one office building?

I don’t think you’ve got any other office building, Steve.

No, not really. This was our one. We had cash flow and we lent on it, and that serves me right. We don’t usually like cash flow. But, yes, no, happy to talk about the asset. We got involved in that asset in 2016 when we financed the NPL purchase and our borrower converted the NPL to an REO. It was 50% leased then. They took it to 100% leased and had about a 70-something million-dollar value against that and it’s on a ground lease. The ground lease was resetting in 2020. We gave them some time to get through the ground lease reset and we got through that. There was a pay down obligation associated with that which they met. And then we kind of got into the pandemic and one of the tenants in 2022 left, which put us back to 50% occupied. And kind of after that, our borrower lost a little interest in the property and really kind of started to focus on trying to fill it up with what we would consider to be slightly above market rents. And so, we kind of got to the point over the last maybe six months or a year with that borrower that they needed to show some better effort on improving the value of the property. And we had an opportunity to probably sort of modify and extend, etc., but we really got to the point we felt like the property value was either deteriorating or not improving, and we didn’t think that our current borrower was going to be the right party to do that. We don’t take it lightly when we take things back. But at the same time, you can’t be afraid to do so, especially at our leverage. Some of the loan was, I think, at about $27 million or so. So we negotiated a return of the property that came with some obligations from our borrower. We brought it down under $23 million now, so between $22 million, $23 million, and we’ll work it there from there, as is values. We just got an appraisal of $32 million, which is down 55% from its peak, but it’s down 55%. We’re still at 70%. We feel like there’s some opportunity there. We were fortunate also that our existing office space in L.A, the lease was maturing at the end of this year. So we’re moving out of our property. We’re moving into this property. We’ll be there on site and start to work towards stabilizing this property. We have a good relationship with the owner. That was not the case, our borrower did not have a good relationship with them. And so I think everybody is working towards now the same goal, which is, let’s improve the value of the property, and we’ll use it until we lease the rest of it up. But we like the location. We think it’s a good property, and I think you can’t be afraid to step in and do these things every once in a while.

Appreciate the color guys. And glad to see you’re still out there fighting Johnny. Keep it up.

Our next question comes from the line of Matt Olney with Stephens

I want to ask about the event income that was highlighted. I think you mentioned it was negative in the third quarter, had been positive for a while. Just any color on kind of the drivers. I think you mentioned the non-accrual reversal. Just also remind me, in a normal quarter when that is positive, just remind me what that represents and what kind of outlook we should expect here?

Matt, this is Stephen Tipton. It was about $1 million in non-accrual interest from the two credits that Kevin talked about during the quarter. So, I think it was $0.5 million or so net negative. So it would have been $1.5 million. It bounces between $0.5 million and several million a quarter, just depending on the pace at which loans pay off and we may accelerate origination fee income. So, a little hard to target going forward, but I don’t recall it being a negative number any time in our history here. So, would not expect that going forward and that was the – it was just from those two credits.

So it sounds like, Stephen, that can be a result of – in a normal quarter, it can be a result of our origination or a pay down, not either one – I’m sorry, not one or the other, but both, is that right?

Yes, that’s fair.

Okay. And then I guess Stephen, sticking with you on the non-interest-bearing deposits, still some outflow in the third quarter. It looks like the end of period balance is still a little below the average balance in the third quarter. Just any color on what you’re seeing there throughout the quarter? And any thoughts on kind of where we go from here?

Yes. I mean I think it’s just a general combination of customers seeking higher yields and we’ve seen some here lately that our competition is offering a rate of interest on demand deposits, which has not historically been a thing or it hasn’t in a long time. And so, you’re having to combat some of that. But as Tracy and I look every day, every month, I mean I think a lot of it is just general customer spend, too. When we look at current balance versus average balance over the last 12 months or so, I mean broadly you’re seeing a lot of those balances are off 20%, 25%. And I think a lot of that is just general business customer spend there. So, it may have a little trend downward from here, but we’re managing the interest rate aspect of it best we can every day.

Okay, appreciate that. And…

And Johnny, on the...

Go ahead.

I was going to say, Johnny hit on the asset side of things. I mean I think that’s – we’ve said for a long time, in this cycle that we’re in, interest rates have gone up. We negotiate with customers one off. We’re going to have to continue to pay that. I think the main thing is just to try to offset that on new originations, which we are and what we’re able to pull through on renewals.

And it sounds like you found some maybe – I’m sorry, go ahead.

Go ahead. Matt.

Well, I was just going to ask about just margin stability overall. I think you mentioned in September you found some margin stability. Curious kind of what kind of confidence you have that we’ll see some more stability in the fourth quarter or could that be more like early next year?

Tracy is laughing at the end of the table. Some optimism, I think, just from September being up a couple of ticks from August and kind of being in line with where it was for the quarter. But I think we’ll take that on a weekly, monthly basis as we work through the deposit side.

We had a customer – got a customer who walked in, in one of our banks and put – a customer that I don’t get along with, and he didn’t get along with me, and we don’t like each other. But he walked in and put $2 million in our bank and he said, "I know it’s safe." I’m glad, it’s safe. So, I don’t know if our ads are working or not, but we’re working that side of it pretty hard. You don’t see any – I mean, our ads are all strength ads. We’re going to be here. If the big bad wolf shows up Home, will be open in the morning.

Our next question comes from the line of Brady Gailey with KBW.

Wanted to start on M&A. I know, Johnny, you mentioned that you’re having a couple of recent conversations. And you also mentioned there’s some banks out there with negative tangible common equity. Are those deals even possible to do without government assistance? Does the math even line up for that to make sense for a strong buyer like Home?

No. I mean, they get to a point – they get to a point where you can’t do them. I mean they just – we’re on a trade with a great people, great market, but as rates have gone up, it has just killed their loan book. So, it makes it – it was possible at one point in time, but since we met them, I mean, it’s probably impacting another couple of hundred million dollars. So, just tough. I mean, it’s tough. I feel for them. I really feel for them. Good people, good markets, good bank, well – they just made a mistake that the people who are no longer there have made a mistake. Not the people there have made a mistake, but the people that are gone made the mistake. They just won’t – they don’t work, and I hate it. I really was – I was excited about the opportunity in these markets, but they don’t work. Then, we looked at – we were really involved in three transactions at the time, and we were so focused on the bigger one that when it reached a point of no return, so to speak, we let those others run off and we might should have moved on one of those. So I haven’t heard if either one of those other two sold yet or not.

And then moving on, it feels like you’ll have a shot at hitting your $400 million in earnings for ‘23 goal, which is great. Any idea what that goal will look like next year? It feels like another $400 million would probably be tough to hit. But any idea about your goal or the way you’re thinking about next year?

We don’t normally go backwards. I’m not a guy that looks at going backwards. I look at going forward. So I would expect something better. We expect something better. It has been frustrating here for the last three quarters, watching the interest expense, keep nipping, even though we’re getting – I mean, we’re in record revenue. It’s just interest expense nipping it. And I think that has slowed, that interest expense has slowed, and I don’t think the Fed is going to raise. I don’t think they’re going to raise rates. So, I think we may be stabilizing in here somewhere. And we’ve got some – as we continue to reprice our book and the new loans coming on stream are all in the 10%s range, 9.5%, 10% range, plus fees. So I’m optimistic that we can do that. And Tracy is committed to decreasing the expenses here at this company. So we’re going to work on that. We have not done that in years, and it’s not – we just – not that we don’t pay attention to it. We just let it creep up on us over a period of time, and it’s time to reevaluate every segment of this company and determine if we want to continue to keep it or get rid of it or what we want to do. It’s just that kind of time. I see where everybody’s doing that, not only us, but I see it being done everywhere. I saw where FBK cut $20 million out. They redid some nice – Chris did a nice job there, redid some 70-something-million dollars’ worth of bonds or securities, and he cut $20 million in expenses out of his $12 billion asset company. So, hopefully, we can find some room in there to cut some out and pick up some expense saving. We haven’t looked at that in a long time, and we’re going to – we’re diving into it.

So, expenses are an opportunity, you just mentioned a bond restructuring. Is that something that potentially would be on the table as well for Home?

Well, it’s interesting, we have an executive call every day at 10:10. And a couple of days ago, Tracy mentioned that. And he said, we looked at that a while back. And I said, yes, we didn’t get too serious about it. And after watching what FBK did, they did a pretty nice job with that, we’re looking at some – if you replace a 2% bond with a 10% loan, that’s a pretty – they’ve got my attention. So I’ve asked our securities department to look at that and bring it to the executive committee and let’s see what makes sense and what doesn’t make sense. So the answer to that is, yes, we may look at that. I mean if we got some 10% loans out here, we can take some 2% securities and sell them. I don’t know how much the loss will be on, but – and if they’re short, maybe it’s not a lot of loss, but put them back into 10% yield in securities, that’d be – you get an earn back pretty quick. We’re looking at it, already.

Our next question comes from Jon G Arfstrom with RBC.

Just want to understand the – just so I fully get the change in non-performers. So the California building and the Miami property are the two that went into non-performing loans, is that right, that drove the $30 million increase, those 2?

Plus the marina. Yes, the marina...

Plus, the marina? Okay.

Yes, the three credits that I talked about earlier, the three that are the new additions of any size.

It is the office building – it’s office building that we have that we got 22s five or seven something in. it’s the marina that just popped up out of Dallas. I can’t imagine – I’m a boat freak, so I can’t imagine losing money on a marina. And it’s indicated to us that the guy had other problems that caused this problem. So, I don’t know about that. We’ll look at that. And the other one was we’ve been messing around with this property down in Florida for some time, and it’s about $7 million, and we have an offer on that that is above our carrying value of $7 million. So hopefully that might be gone here before too long. That’s the three pieces of property. So I haven’t seen the marina, but I’m going to go see it. I know the Florida property and I went to look at the California property. I just wanted to see, it’s the first office building we’ve ever had. I just want to go see it, touch it and feel it. And you can tell by the address, it’s 1733 Ocean Avenue. So it’s on the ocean, I mean it’s Class A office space.

Yes. And you’re moving there, I like it.

I don’t think we’re going to have a loss in that property.

Okay. So next quarter’s $30 million rolls out of NPL into OREO around that level. Is that the right way to think about it?

At least 20, not sure about the marina at this point. It’s still early. The other two are further along than that.

Okay. Anything else in credit you’re worried about? And I know you’re prepped for it, and I’ve been through Florida with you guys when it was really dire, but anything else that you’re concerned about? And when you look out in the future, Johnny or Kevin or Tracy, what do you think credit looks like in 2024 for you and the industry?

Jon, I want to make sure I had the right number on the NPAs. It’s two of the three credits, the 23 and the seven will move in the fourth quarter. The 9, the marina, I’m not sure about. As far as the rest of portfolio, past dues are – they’ve been up a little bit a couple of quarters, a quarter ago. They were back down this quarter. The only thing I see is that our portfolio mortgage product has a little higher past dues in the middle of the quarter. It’s – some of it is the foreign national portfolio product that we’ve done in Florida for a decade. Those are at lower loan to values than the rest of our portfolio. And they’re in Florida, so I’m not concerned about them, but they have ticked up past due wise a little bit the last couple of quarters. Other than that, it’s just the three credits that we’ve talked about for the last couple of months.

I don’t know if you’re on. We have an offer or Kevin has an offer on the Florida property for more than our carrying value. And I don’t – I mean I’m very pleased with I don’t like taking property back, you can tell. But I only had one property to go look. I already knew the Florida property, one property to go look at. So I want to go look at it. I want to walk it, walk through it, smell it, touch it, and I’m pleased with what I saw. So – and we’re now 70% loan-to-value in this appraisal, which is a recent appraisal. So, we feel good about that. You think about it, had we done an 80-20, we’d be upside down now. But we didn’t. We did a 50-50 almost I’m afraid. So, anyway, I think we’re in good shape. I concern myself with a little bit of a guy with 4.5% loan and suddenly it’s 9. And as Kevin said, if you don’t think that’s going to not create some problem somewhere, you’re being awfully naive. So – but we haven’t seen it. We have not seen it. And I mean all of this – all this rate increase is not priced in right now. I mean, we’re continuing to increase and we got $1 billion worth next year to reprice. So it’s not all in the marketplace yet. So these people that are sitting out there with a 4.5% loan today or 5% are pretty happy with it. Even though they fussed at the time, they want a lower rate. They’re pretty damn happy with the rate on it now. So I don’t anticipate – who knows, but who’s in better shape in the country to fight that battle in Home if there is a problem.

We went through the loans that repriced the third and fourth quarters. We went through those and had a significant increase coming. We went through those two quarters ago, didn’t see a significant issue. We’re doing the same thing now for the credits that mature next year that Stephen was talking about, that $800 million to $1 billion. We’re looking at the larger ones of those now, just to see if we think we’re going to have any issues and that way we’ll be ahead of the curve if that happens to be the case.

You take $1 billion worth of loans and you raise it 400 basis points to 500 basis points, it generates lots of money for the bottom line. So we’re optimistic we’ll catch up.

Okay. Well it’s good, you were careful 12 and 18 months ago. I know you’ve talked about that in the past. Just one more – Yes, I know it was hard at the time, but because we’d ask about loan growth every quarter, and you weren’t doing it, but it makes sense today.

Jon, we’re going straight in...

Chris, just one question.

We’re going straight into Bitcoin and Fintech, like I told you at RBC, we’re going.

Alight, that’s funny. You just resisted all of the temptations, which is good. Just Chris, what do you – Chris, what are you seeing on your pipelines and the quality of the pipelines? And that’s all I had, but just curious.

Yes, sure Jon. We look at a lot. We get the phone rings a lot. We take a look at a lot. We had growth this quarter, it was – all the growth was in our facilities business on the real estate side. So we have facilities out to lenders and serial acquirers, etc., and they’re active, especially on the loan on loan side. So, most of the growth we had were banks aren’t necessarily getting aggressive on things, but that opens up opportunities for non-bank lenders, and those people need friends too, and we provide that leverage. I like that trade today because it lets us come in at a very, very low basis and it’s helpful to the borrower as well. Our product is useful to the extent that we can help people achieve their goals and their returns. And sometimes a senior loan at five over at 40% cost isn’t going to help the underlying borrower achieve their goals, but by partnering up with some non-bank folks that go make that loan a little higher leverage, a little higher cost, and a little different structure, and then we come in behind that at lower leverage. We’re helping everybody. So we’re seeing good demand for that product. We like it. We’ll continue to probably – when I look at the pipeline today, there’s a number of asset ads on our facilities that we’ll look at today where we’re continuing to look at other single asset new opportunities. I think somebody mentioned earlier about loan growth and about getting aggressive for loan growth. I think you don’t need to get aggressive today to make loans, you need to be patient today to make loans. And I think that’s what we’re seeing more than anything is we’ll be patient and we’re happy to help people achieve their goals, but we’re not going to get aggressive.

Our next question comes from Michael Rose with Raymond James.

A quick question here. Just, Stephen, I just want to dig into the deposits. I’m sure like everybody else, I’m getting bombarded by 5.5%, 6% CD rates, and your loan-to-deposit ratio has crept up a little bit. Obviously the mix has changed a little bit. Just wanted to get some assumptions and kind of outlook as we think about next year as it relates to betas where that mix could trough and what you guys are doing to just make sure that loan to deposit ratio doesn’t really accelerate from here. I know there’s not a lot of loan growth, so that helps, but just wanted to see what the strategies are, and any updates on the deposit side.

No, that’s fair. Hey, Michael. I mean, certainly, if you look back over the first part of this year, we were clipping 10 basis points to 12 basis points a month in terms of an increase on interest-bearing deposit costs. That’s slowed a little bit just in terms of the number here lately. The calls and the conversations haven’t necessarily. So maybe that’s just something as yields have drifted up over the course of the year. I mean we – I think we’ve said for the better part of a year or so, we were at 20% or 21%, I think, non-interest-bearing deposits to total kind of pre pandemic. And so that said, it’s logical to think that maybe it drifts back that direction. But it certainly is the #1 conversation we have on a daily, weekly basis with their presidents, the folks that are out driving the business in the field. And like I mentioned, at loan committees, in terms of deposit gathering and opportunities there, we’ve had a nice relationship in Texas that functionally started from scratch, give or take. That’s grown to be a good $20 million, $30 million relationship today just over the last month or so. So, it’s those targeted type things that are tied to loan relationships that are probably going to drive volume over time, at least we think.

Great, that’s helpful. And then maybe just as a follow-up. Johnny, at the beginning of the call, I think you obviously pointed out something that’s fairly obvious to most of us, that the only way to expand profitability is to either grow revenues or cut expenses. You spent some time maybe talking about the expense side, but just maybe as it relates to the fee income side, are there areas that you can invest in or deepen your presence in that might help just on the revenue side?

Well, it’s primarily – we’re not buying any securities to speak of right now, but we’re primarily got some opportunity on several loans. The advantage we have is we got the ability to fund them. And not everybody has got the ability out there today to fund these loans. And when you start talking about 10%-plus on loans, that gets our attention here. If they’re good loans, period. We underwrite. We don’t change our underwriting standards because it’s got a tenant in front of it, I can assure you that. So I think that’s primarily where we’re going to go. We looked around for other opportunities. We’re constantly looking for other opportunities. There’s got to be some more fallout through this crisis. Michael, you see it like I see it. There’s got to be similar fallout and got to be some opportunities coming up. I mean, our regulators told, Tracy said, and I think I’ve said this before, but just months ago said save your money. But I’ve talked to some people lately. There may be some more stuff coming. I think there’s another bank that blew up here in the last week or so and there’ll be – I think there’ll be more coming. So hopefully we’ll get an opportunity to play in that arena and we got the muscle to play. So that’s – you got to be careful, you want to spend your money, spend it properly in the right direction. So you remember ‘08, ‘09, ‘10, ‘11, how much money we made on those trades in that time. So, I believe there’s going to be another bite at the apple here before long. M&A is kind of off the table. By the time you mark all this stuff. It, it makes it really difficult. So maybe it’s going to be government kind of stuff that you do. But we’re open to whatever makes sense, you know that. You know how we’re business people first and bankers second. So if it’s an opportunity that makes sense for Home, we’ll do it. I don’t know if I got you – if I answered the question

Yes. No, it totally makes sense. And hopefully you make some money on this property on Ocean Avenue. It looks pretty sweet, a lot better than my office here in Gray, Illinois.

If you want to move out there to that property, well, I’ll fly you out and you can sign a lease. I’m thinking about Chris moved his office in there, so the vacant space, I’m thinking about charging him enough on the vacant space to get it cash flowing positive,

I got all the property taxes I need here in Illinois, so I’m good.

Our next question comes from the line of Brian Martin with Janney.

Say most of mine have been answered. Just a few items here. Just back to the fee income for one section, it was a pretty notable decline in the other line item in the fee income section. So, I thought maybe you could give a little bit of color on that. I think Brian talked about last quarter the equity investments were a bit elevated. But even with that, it still seemed like it was a greater decline on the fee income side. Curious if there’s anything else in there.

No, I’ll give you the answer to that. It’s down $9 million. And you’re right, we had $7.5 million in our equity investments last quarter versus $858 million this quarter. So that’s a decline of $6.6 million. The other piece of the decline is we had BOLI life insurance income from a death benefit last quarter of $2.8 million, and we had another one this quarter and it was $338,000, and that’s a decline of $2.5 billion – I mean, $2.5 million. And so, those two combined are the primary decrease of the $9 million.

Okay, appreciate it, Brian. And then just on maybe over – I guess, for the criticized and classified trends, I mean, can you give any color on the trends this quarter, obviously, with the NPAs going up to classified, but maybe just criticize or is it similar trends that you’re seeing there? And anything on the criticized side?

There’s been a little bit from a smaller standpoint, nothing that I would call systemic, but I mean it’s just some of the smaller stuff, both on a classified and criticized, I mean, I think you’ll see those number. But I mean, we’ve been really low over the past four to eight quarters, So anything, it’s an increase.

Got you. Okay, so it’s small.

We had some we resold the property and you left them criticized over the member care deals just to be sure it was abundance of safety.

Yes, those are the memory care deals we did two quarters ago. And – I mean we still left them in there just because we want them to prove out, right, even with the new equity and everything we expect there. So we’re – as we do with everything else, we’re pretty conservative in our grading.

Yes, okay. I just want to make sure that. And then lastly, just so I have the right numbers. On the loans that are renewing in the fourth quarter, what’s renewing in the fourth quarter versus all of next year? And then they’re just all roughly going from 5% type of level to the new rates are 9.5% to 10%. Is that accurate?

Yes, that’s – Brian, it’s Stephen. I think there’s about $200 million – a little over $200 million, $203 million. That’s 5% range or below that’s maturing this quarter, and then it’s a little over 800 next year. So, we should be – we should be able to pull those up 400-ish plus basis points we talked about earlier.

There are no questions registered at this time, so I will pass the conference back over to Mr. Allison for closing remarks.

Thank you very much. I really think we’ve said it all today. Thank you for your attendance. And we’ll say hello to our friends in love with Texas today. They’re on the phone. So anyway, I appreciate everyone’s support of Home BancShares and give us – we’ll talk to you in 90 days. Thank you.