Greetings, ladies and gentlemen. Welcome to the Home BancShares Incorporated Third Quarter 2022 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 the cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2022. At this time, all participants are in a listen-only mode and this conference is being recorded.

[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. Today's discussion will include prepared remarks from our Chairman, John Allison; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG and Stephen Tipton, Chief Operating Officer. The rest of our team is present and available for questions.

Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; and John Marshall, President of Shore Premier Finance. In a year that continues to produce wild market swings and economic uncertainty, the third quarter with no exception.

However, with a fortress balance sheet conditions at Home remained strong and with a positive outlook and to provide more color on that, I will turn the call over to our Chairman, John Allison..

Thanks Donna. Welcome everyone to the third quarter earnings release and conference call. This headline for the quarter is similar to the statements we made last quarter about uncertainty and actually we're basically in the same place we were last quarter, except prices are and odds are they're going to go higher for longer.

If you remember what I said last time about [indiscernible] in the seventies, he took rates to 14% in the late seventies, but he didn't kill a snake before he pivoted. He pivoted under pressure because people said we got to turn it around. As a result, he had to come back in the eighties and take rates to 21% to cut the head off of the snake.

I think that's exactly where we are today and most everyone is hoping for a pivot and it's absolutely the wrong time to do that because we have not killed the snake yet. Another 150 basis points to 225 basis points and then hold and observe may get the job done.

Rates are certainly much higher than most of us thought, but there is still room for them to run. [indiscernible] is certainly the highest in 40 years and this administration is still trying to continue the inflationary spiral.

I said last quarter, they're either naive and confident or playing stupid or maybe they're brilliant, which I doubt, but time will tell. I will say there is no sub super experience. I heard Nancy Pelosi say that this morning and I may take that out of my vocabulary because I always heard her say there is no substitute for experience.

There is no one in this administration with any business experience period. You cannot take a bunch of PhDs that got their expertise out some book. The world business is much different than that.

I'll think a decision making opinion from an experienced person much quicker than I'll take some inexperienced politician and I don't care how many degrees they have. I'm still sticking to the possibility with 6% fed fund rate, as I said the last two quarters because the puppet show is continuing on by Powell [ph] and his group.

This is really not a time to panic and I like the world's not coming again because of high rates. Remember the average fed funds we talked about last time for the last 50 years has been 5.44. We've got along fine with those high rates and the world didn't craft.

The sugar high that we've all been on and enjoying the crazy low rates is nothing but an accommodation to allow Washington legislature to spend crazily year after year. As I said last quarter, the key for banks is to be premeditated and cautious with their moves and playing a little defence is not all bad.

When you see banks bending up CD rates in the newspaper now, you immediately know that they put all their money to work in lower rate securities and this will result in higher cost of funds and lower margins for them. We're getting looks at lots of stuff right now that we normally don't get to look at.

I don't know if that's good or bad, but banks are tightening up. We just had someone fly in, just Tracy met with them and they, one plane came in from Florida, one came in from California and I said, why are you in Conway, Arkansas? And he said, because our five big banks won't do this deal. The good news, it wasn't a bad deal.

We may be able to structure it and make a good deal out of it, but obviously there is some tightening going on outside with other banks. The good news is Home was prepared for the right side of what has happened as you see from these quarterly results, they're very good.

We did this in spite the damage that was done to us by the unprofessional actions of the West Texas former employees. Here's the good news. We talked enough about the bad news. We hope we'd be at a $100 million run rate sometime in '23, but the good news is we had almost $110 million for the third quarter, actually $108.7 profit.

Our non-GAAP was $109.9. Nice start and a record. Adjusted nine months earnings are $268.4 million or $1.40 this year and that's also a record. Q3 revenue was $256.3 million and that is a record. Pre-tax income of $142 million or 55% of the net revenue, another record for the company.

We ran a $181 ROA, NIM was for the third quarter was 4.05% versus a second quarter at 3.64%. That's up 41 basis points and here's how that's ticked. April was 3.35%, May was 3.57%, June was 3.71%, July was 3.83%, August was 3.98% and September was 4.08%. So that has clicked up so far and hopefully it'll continue.

ROTCE was not a record, but it was close at 20.93% and EPS was $0.53. Our adjusted non-GAAP was $0.54. After-tax net profit was 42.37% of net revenue. That's what I call P5 in our pre-tax, pre-provision profit percentage of net revenue was 42.3%.

I don't know many industries or companies can pull down 42% of the net revenue into profitable after tax profit. Asset quality remains excellent, non-performing assets were 0.27%, non-performing loans alone were 0.45%, charge offs were $5.1 million as we charged off the final portion of a professional athlete loan.

Already, we'd already allocated a 100% for it, but we had not charged it off until this quarter. We had hope, but it didn't work out. We held off making any loan loss allocation because of the hurricane damage. We're evaluating our customer damage and we'll make estimated allocations when we make a final determination.

Expect a reserve allocation of somewhere between $10 million and $15 million to $20 million. I would expect maybe, maybe not. Kevin will talk more about that. He's more up to speed on it than I am. Alliance for credit losses were 2.09% or $289 million.

Combined efficiency, I was pretty proud of this combined efficiency dropped from 46.02% last quarter to 42.97% this quarter. That's a nice, not a record number, but nice improvement. Continue maintaining strong capital ratios and Steve will talk more about those later. Intangible book value dropped a dime from $9.92 to $9.82 during the quarter.

We repurchased over a million shares of stock and we had AOCI, but our TCE is still standing strong as we continue to maintain strong profitability regardless of what they throw at us. Loans were down $94.6 million for the quarter led by CCFG.

I think they were down and Steven, you said they were down about $500 million, but they had -- the net was about $342 million..

Yeah, balances were down $340 million. I think they had about $500 million in payoffs..

Well, Chris will tell you there's nothing wrong with the payoff and I agree with him. In the legacy footprint though, we grew $273 million for the quarter and we had $26.4 million in PPP loans payoff. I had expected loans to be flat or up for the quarter, but, we didn't get there. We got a new loan system we put in. It's kind of complicated.

I'm not sure if we like it or don't like it yet, but and, it appears the company provides no help and we have to get third parties to help us. So I think that was new to us and kind of we stumbled with that a little bit.

And then the hurricane impact on loan closing, as of this day we're up over a $100 million that we've closed -- that would've closed we think had the hurricane, not yet. Anyway, we're fairly close, we're not too upset about that. We repurchased $24.3 million of Home BancShares. That was $1,32,732 million. That's a lot of stock.

We bought back a million I think last quarter, Brian, that about right, and a million this quarter..

That's correct..

Our holding company has about $55 million in bank stock and bank securities investments yield at about $6.5 million and that show a loss of $2.6 million because we have to mark that to market. These securities were purchased for the dividend yield at the holding company and they produce about $3.6 million a year in dividends.

So we'll continue to hold these securities. They'll go up and down. As you know, bank stocks do. Really, the only extraordinary items unless somebody got something for the quarter was, we spent $2 million in cost due to the unprofessional departure of some West Texas employees. That's number one.

Number two, we had, as I said, fair market loss on the securities of $2.6 million and number three, if I read correctly, Brian, we had a $1.1 million recovery on historic losses that were written off on prior acquisition..

And that was from one prior acquisition. You're correct..

So going forward, loan demand is staying strong. Investment yields are very attractive. So we'll continue to pick our spots on high yielding investments. And on the M&A side, the only thing we've really done is I met with a CEO of about a billion dollar bank for lunch and drinks earlier this month.

We had a preliminary discussions about possibly doing something together, but guess how much he wanted; two times book? That's, always the story and, that didn't work. However, I liked him and I think he likes us or who knows where that'll go. And that's about it for me.

Tracy, you got any comments that you want to make for the quarter or you happy or are you unhappy or what, how you feel?.

We got to be happy. When you look at the performance numbers of the bank, they're certainly are better than they been on a long time. So it's good to see that 2% ROA out there on the bank side and know we'll get that number pretty quick on that aspect. You mentioned the hurricane. All our locations turned out to be safe and sound back open already.

So staff's done above and beyond getting that operation going, Kevin, to give you a report on some of the lending aspects of that and, we certainly are watching the interest rates kind of like baseball season. We don't know if we're getting a curve ball thrown at us or a knuckle ball or we may get hit by the pitch. I don't know.

But, our deal here, Johnny, is just hit doubles. We're just going to hit doubles and keep on around on the bases and doing the right thing and taking what's thrown at us. And I do also want to say, the Texas operation has turned the corner tremendously.

The changes that have been made have just turned out to be great people and the leadership there has done a good job of bringing in the right folks and the support of Arkansas has made that doing well right now. So ready for the next quarter..

That's good. Well, thank you. It's been a kind of been a challenging quarter. It's been busy and rates up and down, not down, up, up, up. And it is for my, our shareholders, it is one busy place. I'm telling you. It's very, I don't know if we're accomplish anything, but we're certainly busy. Everybody's got their hands full with everything they're doing.

So Donna, with that, I let you have it girl..

Okay, well, sounds like a quarter with some more fantastic numbers, so congratulations to all there. As you know, the quarter did end with the unfortunate landfall of Hurricane Ian and I'm sure many of you're curious about the lending portfolio in those markets. So Kevin Hester is here to provide you an update..

Thanks Donna and good afternoon everyone. I know everyone's anxious to hear about how Hurricane Ian impacted the bank's Southwest Florida footprint. Ian was an incredible storm that had a tremendous impact on a large number of people in Florida, including several of our own employees.

Our hearts and prayers go out to all of those affected by this storm. We have about $1.6 billion in loans in the 20 plus counties in the designated disaster area. We had an established Disaster Deferral Program that we were ready to implement and our Florida lenders are very experienced in this process.

I am very pleased to report that we have only about $9 million in deferrals executed at this time based on lender reports who have been reaching out to those borrowers. We see this balance growing possibly to $45 million in total, which is much lower than the deferral balances resulting from Irma in 2017 or Michael in 2018.

Asset quality continues to be very strong with non-performing loans and non-performing assets down six basis points and two basis points respectively on a quarter-over-quarter basis. Both numbers remain near all-time lows for the company.

Early stage pass dues improved seven basis points to 0.5% as we completed our first full quarter after the happy conversion. Loan opportunities continue to be plentiful, as Johnny mentioned, as we continue to be diligent in evaluating both credit and interest rate risk.

It is our experience for both CCFG and our community bank footprint that volatility often reveals more opportunities as the overall market becomes disrupted. We will continue to evaluate those opportunities as we move deeper into this fed tightening cycle. Donna, I'll turn it back over to you..

Thank you, Kevin. Next….

I just want to make one comment. We had our -- the lady that runs our Pine Island branch, she was cut off from the mainland and she was taking her deposits and money back and forth by both. Pretty remarkable.

They've got the bridge in, temporary bridge in now and she pretty -- that's pretty good stuff, right? We've done a branch manager that goes that far..

That's, that's amazing. And the early reports that you have Kevin from customers are reassuring to. So hopefully they're all going to make it through better than we would imagine. So next we will turn to Chris Poulton for an update with CCFG..

Thank you, Donna, and good afternoon. Since the beginning of the year, we've been talking about a number of payoffs expected in our CRE portfolio. Johnny mentioned this earlier in his comments. The headline number for CCFG this quarter is the payoff number.

During Q3, we were able to realize about $500 million of these payoffs with four loans representing the bulk of this number. As a result, our portfolio reduced by $341 million to $2.1 billion. These were expected however, and year to date, the portfolio has positive growth of about $150 million. So many of you have heard me say this before.

As a reminder, payoffs are not only a natural part of our portfolio lifecycle, but we view these events as a sign of a healthy portfolio. A majority of these payoffs were refinanced us to the permanent market at significantly higher dollars versus our outstanding loan amount.

This quarter, CCFG originated just over $300 million of new loan commitments. Springing our 2022 totaled well over a $1 billion. As we approach year end, we're working towards closing out our existing loan pipeline and at the same time we're seeing an increase in demand starting to build for 2023 origination opportunities, should we so choose.

Donna, I'll hand it back to you..

Thank you, Chris. And now for our final report, we'll turn to Stephen Tipton..

Thanks Donna, It's a pleasure to get the report on our company today. As Johnny mentioned, our company's patience and persistence over the past couple of years continues to pay off today. The net interest margin improved again in Q3 to 4.05%.

Our intentional approach to maintaining cash balances at the Fed, variable rate loans and variable rate securities all help contribute to that increase. While we are cautious around customer expectations for interest rates on the deposit side, we could see additional improvement if rates continue to rise.

Our current ALCO model projections show 4.5% increase to net interest income in the next 100 basis point scenario. We continue to keep a daily watch on deposit balances and customer activity in this dynamic rate environment and our nude markets in Texas.

We'll continue to refine the deposit base and navigate what has been a rapidly rising interest rate environment. Total deposits ended the third quarter at $18.5 billion. Nearly half of the $1 billion decline came from our Florida markets while the other half was mixed between Texas and Arkansas respectably.

We've analyzed the changes we saw in a number of large customers opting to take advantage of treasury rates, front running bank deposit rates, and the Fed, as well as real estate investment projects and other opportunities. Chris, we may call on you to spin up the deposit machine in New York at some point if we need to.

With over $5.5 billion in non-interest bearing deposits, what comprises 30% of the total today? We continue to like our core deposit positions in the markets we serve. Pleased to see account opening activity remains steady over each of the past three months. Staying with liquidity for a moment, our loan-to-deposit ratio ended the quarter at 74.6%.

Our primary liquidity ratio stands now at 23.74%, which is more than double our historical pre-pandemic levels. Switching to loans, production was strong at $1.54 billion for the quarter with $1.2 billion coming from the community bank markets in Texas, Arkansas, Alabama and Florida.

Yields on new production have continued to increase each month throughout the quarter, now seeing sevens and even a few eights in committee recently. The unfunded commitment pipeline increased by nearly $200 million in Q3 and now stands at $4.4 billion.

Kevin can provide additional color on what he's seeing in the pipeline during in Q&A, but the activity in our committees in the past three months has been strong. Negating a portion of the production in the third quarter, payoff volume increased to a little over $1.2 billion.

As Chris mentioned, his payoff volume was elevated around $500 million, while the community bank footprints were more at more normal levels. We still see this as a sign of overall health in our markets and with the projects that are coming online. Finally, switching to a capital and a few key ratios.

We had total risk-based capital of 16.75%, leverage ratio of 10.39% and as Johnny mentioned, a strong TCE ratio, tangible common equity total assets of 9.24% as of September 30. All well in excess of our internal targets. As times like these where our balance sheet sure feels like a good place to be. Donna, with that, I'll turn it back over to you..

Thank you, Steven, Johnny and Tracy, before we go to Q&A, do you guys have any additional comments?.

I'm good..

I'm good. I guess it was a great quarter, the best quarter ever in the company's history. I don't know how you say that. We keep saying that. Lately, we've hit a bunch of these deals, but the Texas has worked out pretty well for us in spite of what we got hit with out there in west Texas. But it's been, we've overcome that.

It cost us some money, but we're fighting that battle. So other than that, I couldn't ask for much, much better. Things are going very well for us. So that's it.

Donna, if we will go, you ready to go to Q&A?.

And operator, we'll turn it back over to you..

[Operator instructions] The first comes from Matt Olney with Stephens Bank. Please proceed..

Hey guys, good afternoon.

How are you?.

We're good, Matt.

You have a quarter like that, you got to feel pretty good, haven't you?.

Absolutely. Well thanks for your commentary.

Always colorful and Johnny, you ever think that maybe Nancy Pelosi's been listening to your Home Banc conference calls and stealing some of your quotes?.

She and her husband are buddies. We're drinking buddies. No, we're not. No, I don’t know. She wouldn't get too much of a catch out, but I'm afraid, but anyway..

Well, I want to hit on some questions and thoughts on the third quarter results. But first, I came across a press release that Home Banc put out a few minutes ago, and it sounds like there was a lawsuit settlement with ServisFirst and some formal employees of yours.

And if I'm reading this right, it looks like you'll be receiving $15 million in the settlement. Any more context you can give us on this deal? It's been a few years since we've talked about this. I can't recall all the put to takes around it. Thanks..

Well, it's been a long affair. I wish ServisFirst the best. There's the right way to do something in the wrong way to do it. And as evidence, we thought they did it the wrong way. They thought they did it the right way, but it's such a fine line, really is a fine line and we're just glad to have it behind us. Kevin's been with it whole way.

Kevin, you got to comment on it..

Well, you said it. It's been a long, long road. We're -- it's almost seven years. It's good to get it behind us. We're pleased with the outcome and that's probably all we should say about it..

Anyway, it's done over and we'll get our money in a few days and we got it resolved..

And as far as the results and the outlook here, loan growth, you gave some good commentary on that. You mentioned some challenges near term, the higher pay down you saw, the new loan system and the hurricane obviously. Curious about the updated thoughts about loan growth from here.

You think some of those headwinds will continue or do you think some of those things will kind of ease up to produce some loan growth here? Thanks..

We're actually up. We just didn't get them all closed. We're up actually up $162 million as of today. That's pretty good. We just didn't get them closed and as I said, we got a new loan system and that's a little more complicated. It's creating some problems.

So I'm not going to call the name of the loan company, but it has created some problems throughout the system and I guess the jury's still out on it. We're trying -- we're trying to stay with it the best we can, but it is different and more complicated. But as of right now, we're up $162 million, Brian said as of today.

So loan, we had the loan, we could have had the loan demand, the hurricane slowed it down and the loan system slowed it down, but we're I'm proud to say, we're up $162 million and I hope that holds and continues on..

And anything specific from Chris Poulton? I know Chris called out some higher pay-downs that were likely to happen in the third quarter and we saw that.

Just anything from Chris on the long growth outlook from here?.

You can take that, Chris..

Okay, thanks. Hey Matt. No, I think, we continue to see good demand. I think, we're still up for the year, right? I think the last two quarters we kind of said, look, we've front run some of these pay downs.

I probably would've normally expected to have, one of those in the first quarter, one of those second quarter, maybe two in the third quarter type of things. We are seeing secondary market and takeout markets are a little choppy.

I think what ultimately happened on these four in particular is at least on three of these, I think they were waiting around hoping the market got better for them on takeout and they finally decided to pull the trigger. It's why they all happened to once. I think they probably made the right choice.

Two of those in particular, they were taking large cash outs in their refi and that may have been this past quarter, may have been the last time they could do that. We're seeing conditions tighten, especially on takeout financing with cash, cash out, etcetera. So, we always, we like to have pay downs. I mentioned that a lot.

These were projects that we help people achieve and they got through and they were able to put some cash in their pocket and reduce their rates. And I think that's good. Having done that, they'll come back and borrow from us again..

Yes. Okay..

It scares you a little bit. We're seeing -- we're seeing people come flying in here. more so than we've seen in a while. People we don't know which, what ties to what Chris is saying, where they've been getting their money, they can't get it and they're not loaning in that asset class.

Anyway, it's been -- it's interesting watching it and I think in my commentary, I said, we've had guy, they flew in one plane from California, one from Florida, I guess it was. And I said, why are you here? Why are you in Conway, Arkansas? They said, we can't get it from our normal sources.

So anyway, it's interesting watching this and this is a good time for Chris. He does very well in volatile times and I guess this is volatile time for us. So whether we'll do any of those or not, it is interesting, but you can feel the change in the air when it hit because all these people want to fly in or send a plane to pick you up or whatever.

And I'm thinking, wow, what's going, something, something changed and I guess that's it. So interesting times Matt..

Yep, it sounds like it definitely. Well I guess switching gears over to the -- on the fee side, fees were especially strong this quarter. I know those can be volatile, a bit chunky sometimes. Anything it in the call out and in the third quarter fees or any kind of outlook you can provide..

Our other service charges and fees were up about $1.4 million and $1.3 million that is all related to Chris CCFG. So if he wants to provide a little color on that, he probably can..

Yeah, sorry, on which fees?.

Your fees for the quarter were up about $1.3 million. It's probably..

Oh yeah, that's always tied. Yeah, Sorry about that. Yeah, no, I understand. I understand the question. Sorry. Yeah, that's always tied to will we get pay downs, we also collect fees and so big pay down quarter is always a big fee quarter..

Yep. Okay. That's right. Okay guys, that's all for me. Congrats on the recorder..

Hey, thanks Matt. Appreciate it..

Thank you. Our next question comes from Stephen Scouten with Piper Sandler. Please proceed..

I guess, I was kind of curious what your plans are and thoughts around continued deployment and kind of what you saw on new yields in the quarter, both in loans and securities, what you were able to obtain?.

Well, we saw some -- we're seeing sevens and eights on the loan side. We're seeing some sevens, six and sevens on the security side.

We're just kind of picking our spots when we see an opportunity, as our gentleman who runs that area for us said there was kind of an out of balance deal the other day and sometimes that happened and there was some opportunities to pick up some seven and three age triple A securities that he did. And so we're just kind of picking our spots.

So Brian, Brian's got a comment on there. Steven, either one of you all got a comment on that..

No, you hit on the loans. I don't have the securities yield handy, but it's, I know, like you said, Brian's -- Brian Greathouse has found some good opportunities here over the last couple months..

He has the authority to go buy and if he sees an opportunity to go buy, and that's what he did a while back when he found that security at seven plus. So he picked that up. So he's on top of his game and we're deploy, we're going to sit for a little bit here on the deployment side. I think we got another 75 basis points and another 75 basis points.

I think we got another 150 basis points before the end of the year. So we'll just take it on the fed's fund side and ask Brian Greathouse to, if he finds an opportunity to go ahead and you exercise that opportunity, that's, I think that's the best way to play it right now. I don't want, I'm not sure where this is going.

They're trying to get, everybody starts talking about pivot, pivot, pivot. But as I said in the commentary, I don't think it's time to pivot. I think we hold tight to where we are right now and we operated like this forever. This is people, young people think this is awful, but it's not awful. It's just a change.

We just have to adjust to where we are at 4%. We're not the 5.44%, not to the 50-year average yet. So anyway, I think we're going to be finally overall it's going to be an adjustment period.

But those that have done do good asset quality, have done proper loans and those who have not spent all their money, those who spent their money is going to have a tough time. But those that have liquidity, that the ability to deploy liquidity and pick their spots, I think they're going to do very well.

There's evidence by the increase in margin you saw at Home.

Does that answer your question, Steven?.

Yeah, absolutely. Absolutely. We also kind of conversely, how should we think about the balance sheet moving forward? I know there was maybe about a $1 billion reduction in deposit this quarter.

Do you think, we'll see the balance sheet shrink a little bit as you let higher cost deposits run off, or was that an aberration at all? Or how should we think about kind of deposits in the size of the balance sheet?.

Well, once Chris, once Chris cranks up that big deposit machine in New York, it's probably, we're trying to keep our deposits, but they're -- we lost $50,000 on a deal here today. I think somebody put it in a four quarter or some kind of deal. So, these banks that are out of money are really stretching out there right now. I don't, it's good.

Our margin was over four. I took over that, that was a goal of ours to get back on before and we got the [indiscernible] for the quarter. I think we'll continue to improve there on the margin side. Hopefully, we don't get eaten up on the deposit costs, but it's a battle out there right now, but so far so good.

We still got good liquidity and we'll, that's one reason I'm going to sit back a little bit and just play the Fed Funds market for a little bit and let Brown Gray house pick their spots. I think that makes sense. I don’t know we're going to get another 150 basis points between now and the end of the year, or at least I expect that to happen.

So that's a pretty good kick. If the Fed goes 150 basis points, it may not be over, but they can stop for a little bit. We don't need to pivot immediately, but they can stop for a little bit and catch their breath and watch and observe and see what impact that has.

Let me say this to you, we had a big customer that our, one of our largest construction customers, that friend of Tracy from way back came in and interestingly enough, he wanted to talk about his projects for the next 12 to 24 months and half his projects were retailed and did not work. They would not work, the numbers did not work.

So he said, we're going to scrap those or put them in the drawer because those projects don't work. He said that the cost, the costs were so much higher on the retail space that he said they can't, the retail customer can't, that rents, that can't pay that kind of rent.

So he backed up, he thinks things might settle down and get better in the future and he'll come back to those projects. But you like to see guys out getting estimated costs on projects 12 months to 24 months in the future and see if they work. So that's -- he's a good customer.

He's been a good customer rider for many years and a large customer, but that's the first sign I really saw of that happening to a guy like him.

I see some people coming in with some deals that don't make a lot of sense right now, but they're trying to get -- trying to squeeze all kinds of -- they just going to have to put equity in the deals right now.

There's just opportunity out there, but they're going to have to put lots of cash equity in these deals to get financing, and as Chris will tell you, as I'm saying. So I think that's the future is that you're going to be able to pick your spots. You'll be able to pick your loans and pick your securities, right.

So, but you just -- you're going to be able to make some money for a period of time here, I believe..

Yeah, makes sense. Okay. And then just lastly what are you seeing or what are you -- how are the M&A conversations going that you may or may not be having? I know you mentioned maybe a larger transaction this quarter that you had some conversations on.

I guess what do you think in this rate environment and the related marks is the likelihood of you doing the deal the next six months, 12 months, something like that, and would you rather do a larger deal or smaller deal if, if they were both on the table?.

Oh, I really like the larger deal. I'm just not ready to pull the trigger on the deal that size. I like the people. They're good people. I like them a lot. I just don't, I don't think I'm ready to do that at this point. I think, you'll see us active on the M&A side.

You find the right partner in the right market and I talked to this be out money, I like the guy a lot. I think he knows his business. I think he runs a good management team, but they all have to get off of that 2%, two times tangible book. It's just the same thing and it didn't do anything for us. I like his management.

He would've been a nice, nice individual bringing on the management side. I might still do it. I think we like each other. We'll see where that goes. But we just pulled off of one recently that we were invited to bid on and the reason we pulled off was because of the culture, the anticipated culture of the bank as compared to our culture.

And we didn't think that our culture would mix well with that culture and we decided not to go forward with that transaction. Other than that, my friends at Steven's got me some stuff they want to show me and I'm sure Scott Clark's got some stuff, even what you show me. So, everybody's got a deal to look at. I think you deal the next day.

I think we'll do a deal the next six months..

Got it. Well, you're doing something right over there. No one's sending any planes to come pick me up or no one from California to see me. So it sounds like you're in a good spot..

Well, I was just doing to you, I was going to mention to you, I was going to send a plane over during duck season to pick you up, but you've come hot with me..

Sounds great. There you go,.

Okay, thanks Steven..

Thank you, guys. Appreciate it..

Thank you. Our next question comes from Brett Rabatin with Hovde Group. Your line is open..

Hey guys, good afternoon..

Good afternoon.

How are you, Brett?.

I'm doing good. Thanks. Wanted to first ask Johnny, you've been 100% right on rates and in the past year, you've been talking about the fed's going to have to do more and you've been aggressive with that and that's proven to be true.

I'm curious if you think about the outlook from here, if maybe you think now's the time to batten down the hatches, so to speak, and maybe tighten more than folks have on credit standards, and was also just curious if you think about '23, one of the hard things is if rates are 200 basis points higher, what does that do to demand? So just curious on your thoughts on each..

Well, I think it's I think you can see the 200 basis points that as I -- the story I tell about Voker in the seventies and he didn't fix it. He almost fixed it. He slowed it down enough, but the pressure came from everybody to pivot and pal's going to get that same pressure. It's just a matter of whether he pivots too soon or not.

I don't think it's time to pivot where we -- when you think about this, again, I go back to the average of 5.44 for the last 50 years. We're not, it's not the end of the world. We can continue to exist here. We just have to adjust. Now, add to that inflation in material costs on all of these multifamilies or office or whatever you're building.

That adds a lot to the factor too. So, we're -- multifamily still works. I'm not sure retail works anymore, but multifamily still works if you watch your Ps and Qs and getting the right area. The scary part is you're seeing, as Chris Paulson will tell you, he never uses forecasted higher rents above the market.

If the market's a $1.5 and you say, we're going to get $2, that's a stretch because the cost, you are using that. So you have to be careful. It may work, you may get $2, but you're much better off pricing it at $1.50 if that's the market and see if that works, rather than Garrett didn't think you were going to get too.

So, I think we're going to see -- I think we're going to see business okay. I think there'll be some projects slow down. Like I told him about our construction guy at Orlando, he's, half his projects don't work. So if they don't work, he's smart enough. He's a smart enough guy to get out front and that's the kind of customers we have.

Kevin, you got any comment on the loan side?.

Well, I would just comment, you ask about tightening underwriting and we've been historically pretty conservative anyway and we err on the side of more cash and deals and rates go up. That's just going to mean that more cash gets into deals. So we see ourselves as that this is a good time. Volatility certainly works in Chris's business.

It works for us in the community bank footprint too. So we're excited with the opportunities we're looking at and we'll underwrite them appropriately for the rate, the rate environment we're in. Johnny does believe, we all believe that we're not close to the end of this rate cycle yet. There's more it's probably higher for longer.

It makes more sense to be. So we understand that and that's how we'll underwrite it..

That's great color. And then Johnny, you did mention one lung category that you we're -- you grew this quarter, multi-family is still working. I assume that's one loan category.

You still like to add to, what loan categories look good to you at this point and which ones are a little bit more scary to you? Is construction and land development, is that something maybe you might deemphasize going forward to some extent?.

Well, hotel, get all the hotel on what you want right now. You can get, you can get more than you than we have available cash to do. It's just picking the right hotel loans. We're not afraid of hotel loans. We like the space.

You just got to get, you just got to get the proper capital stack in there to make yourself feel comfortable because we're not sure what the, if we do hit a recession, how much it slows, how much it slows the economy down. So you're just better off getting extra equity in a deal at this point in time.

That's kind, if we've done anything, we've kind of asked our people get a little additional equity in a trade. So, I don't want to do any office, as I told you, my guy from Orlando said, Office doesn't work right. Or, excuse me, retail doesn't work. I'm not sure about office. I guess it's more with the family.

Multifamily and industrial, industrial's been really hot. We've been kind of out of the play because it has been so hot now that people are getting a little skittish in some areas. Some of those opportunities are coming to us. Again, the volatility brings us into things that, sometimes when things are really great, we're priced out of.

So, and both in Chris's business and for us in the community bank footprint as well..

Interestingly some of our biggest customers we have picked up in times like this, when other people are not lending in, we're continuing to lend into the markets. And I can name a handful of customers that we picked up in really difficult times like this.

So I'm looking for the opportunities there to pick up some of these really good customers and build long term relationships with them because I think this is a good time to do that because a lot of people don't have any money. They're loaned out and they're having to borrow money, having the bar fed funds and I think it's a good opportunity for us.

So we're already seen it this week in our loan communities. We had one yesterday that….

That's right. Our Jonesboro operation, David Carter [ph] brought a really great credit in yesterday with a great customer that we never would've gotten a look at except for the dis some disruption out there in the marketplace. So long time family, very wealthy out organization.

So this brings this, even though it gets a little tough once in a while, but you know how conservative we are. We underwrite properly, we do the right thing and keep ourselves reserved properly in case there's a problem. And we'll try to continue to do that in the future..

That's great color. I'm kind of surprised, the stock's not doing that well today. It feels like the market wants to punish the banks that have already burned through their liquidity. So it's a little bit unusual, but congrats on the quarter anyway..

Well, thanks. I don't know why we're down. We don't, if they got us down a dollar and a quarter, I don't know why we're down. We don't deserve to be down. There's no reason for Home Banc share stock to be down. It's all 4.99% that on the best earnings and liquidity. We're in great shape. Lots of reserves.

Everybody's got strong fortune balance sheet as we do, but it is what it is. They just don't like banks today. So….

It seems that way. Congrats again. Thanks Johnny..

Thanks. Appreciate you..

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

Hey, thanks. Good afternoon guys..

Hey, Brady,.

This says the margin was up. I'm doing fine. The margin was up pretty nicely in the quarter, a 40 basis point move linked quarter. I think, certain, there's some other banks out there that are talking about NIM expansion not being that great going forward just as maybe, deposit betas catch up.

So, how do you think about, a big move in the margin this quarter, but how do you think about the margin going forward? Do you think there's still some notable upside or does the increase start to decelerate in the quarters to come?.

Well, I look at it every day and right now I'm a little backwards for the month of about $300,000 and I don't like that. So we're going to correct that around here if we can. So I think there's going to be a little more pressure on the margin than there has been. But however, the model, I'll let Steven talk the model, what the model shows..

Yeah, I think mentioned in enough in the next up 100 basis points scenario, we show NII up about 4.5%. Yeah, I think we've talked in the past that assumes I think 40% or so deposit beta on checking and savings and then a 100% on CDs. So I think all of this ties back to -- we've got asset yields moving in the right direction.

I think we've done all the right things there and we continue to, if I see right, we've picked up a little bigger percentage of variable rate loans to some of the production this past quarter from Texas. So we're doing all the right things there.

I think it's just a function of being able to control deposit costs on the way up while retaining, everything that we want to retain and that's been front of mind with our top of mind with all of our presidents,every day and every week over the last two or three months is really trying to kind of act like a 100% loan and deposit ratio bank today, just to keep the deposits that we've got and then we'll cultivate.

We were talking at loan committee yesterday. In some respects, it's been a couple years since we've really focused on the lending side to obtain, deposits from these customers. And so we're some of those efforts and these loan committees and making sure that we get the deposit opportunities and relationships when we do the loans as well..

If you're asking if we're going to be up 41 basis points this quarter, I don't think so, but I'd like to be up 20 basis points..

All right. Then my next question was on the expense space, you all did a good job of holding quarterly expenses pretty flat. We're actually down a little bit. So how do you and a lot of banks are seeing a lot of inflation pressure and expenses going higher.

Is home any different than that? Do you expect to see some more meaningful expense increases or maybe not with how efficiency minded you guys are?.

Interestingly enough, Tracy called me up to his office yesterday about $1.2 million increase for the next 12 months, about a $100,000 a month. We were discussing it yesterday. Outside of that, we are going to have -- we'll have some increases, but I don't think it's going, I saw where somebody said we were looking at 12% or 13% increase.

I don't -- we don't see that. We're not seeing those kind of numbers. And I think there's more, we haven't really refined Texas yet on the efficiency side. It's not being refined. There's lots more room to get out of Texas over a period of time. Particularly on the facility side, we have lots of big facilities that we'll be working on.

Oh, as I told you, we got a 240,000 square foot corporate office out there, but there's lots of little things that need to be done that we haven't even started doing on the Texas side yet that we operate the way we operate on the Arkansas side.

What do you say Tracy?.

Yeah, I think that's fair. I think we're, I think there's going to be opportunities when you look at anything. Today the size, we are just company wide too, but the Texas, we've been focused on the acquisition and focusing on the merger and taking care of the customers at this stage of the game.

So a lot of good opportunities we'll be able to check into..

Okay. Got it. Thanks guys..

Thank you. The next question comes from Brian Martin with Janney Montgomery Scott. Your line is open..

Hey guys, how you doing?.

We're doing really good. Set there. Stocks down. There's no reason for this stock to do that. When you report these Northeast County earnings, I don't, it's about as good as we can do, right? So….

Yeah. The winds of the market, so, well, you guys are staying patient. We'll see where the stock trends.

So maybe just a couple follow ups just on the expenses, should we think about the expenses, given the opportunities you have in Texas, what you kind of outlined there that the net expense number should trend lower in the next couple quarters from the current level we're at, if you're what, around $114 million today this quarter.

Should we see them trend down? Is that your expectation or is that that kind of wrong? I know it may take some time as you kind of work through the Texas part, but is that the outlook or just how quickly would you expect to realize some of those benefits you kind of outlined?.

Well, we got a little investigative work going on in Texas. We spent a couple million dollars and we'll probably spend a little more over a period of time as we look into some situations that have arisen that we have found.

So that could have pulled it down this quarter, a couple million dollars, but we don't want to talk much about that right now, except the fact that we're working on some stuff out there. Other than that, we just need to fine tune it.

Texas people don't waste money, but just a lot of savings, little things that we did, many over the years here that Donna and her team created and our branch managers came with more and more and more. We just haven't instituted any of that in the -- really in the floor, in the Texas market as of right now.

So we just -- we got enough, we had enough going on, didn't we try to see plenty going on. We got plenty going on. It's been, it's been a busy, busy place in Conway, Arkansas, and I know it's with our -- with all over the country, everywhere. Everybody's working hard, so….

Okay.

So probably not trending down, right? Immediately they have two, the couple million you talked about that wasn't something non-recurring that just comes out to you do step down, or is it just more just going to take some time to kind of work through what you're doing there?.

Yeah, that is -- that will be -- that will be reoccurring for a little bit here as we continue to do our investigations..

Got you. Okay. And then maybe just one on the -- back to the margin for a minute.

Your comments about getting half of the pickup you saw this quarter, Johnny in the fourth quarter, but just maybe one more for Steven, just as the Fed, if the Fed does begin to pause or pivot as you get later in this year, if you get your two increases at your end, how does the margin behave, once you get to that end? It should be, think about the margin maybe peaking in the first or second quarter next year, and then maybe it's stabilizes or drops.

Is that how you guys are thinking about it keeping in mind, I guess the liquidity is obviously a wild card depending on how you deploy that, but is that how we should kind of be thinking about it today?.

Hey Brian, this is Steven. I don't know if, quite frankly, if we're out that far in front of it, I think we're focused keenly today on stabilizing the deposit base. Out in the future we certainly as payoffs continue to turn through those can be, reinvested at some of these higher loan rates that we're doing.

Same on the investment side as cash flows come in. But yeah, I think it's our expectation belief today that we're going to see some continued rate increases and are focused on position in the balance sheet to take advantage of that..

Got you. Okay. All right. And then maybe just two last questions was just more housekeeping. I think, Brian, you mentioned there was some higher fees from Chris in the quarter. Was there anything in the other line item on the fee income side? I think the other fees were up another couple million bucks.

Was there -- was that just kind of a core maybe from the happy deal or is there -- was there anything unusual there? It didn't sound like it if you didn't call it out. So I just want to confirm that..

Well, it's up $1.8 million, then we did have an item, it was related to a fair value adjustment on our equity investments of $3.3 million. And if you remember last quarter we had some pretty large recoveries on from acquisitions that had been previously charged off. And so we're kind of down $1.3 million on that for this quarter.

So that's pretty much the change that you're looking at there..

Okay. That's what I figure. I just want to confirm that. And then the last one was just on maybe for Chris was just the payoffs you saw this quarter, typically fourth quarters, a heavier payoff quarter. Given what we saw this quarter, Chris, is it, I guess your expectations, you still see more payoffs coming in 4Q.

I know you talked about originations being, solid for '23, or at least the outlook there, but just the payoffs in 4Q, are you still expecting more to occur or kind of an elevated level in 4Q?.

I don't think we're going to see an elevated level, at least what we're looking at now. We'll probably see our, we'll probably head back to a normal runway.

There are a couple, there's a couple things that are out there that are a little more bridge that they're kind of binary, right? They'll pay us off at the end of the year or they'll extend off another year type of thing. So won't know that until December. I'm up right now.

I expect our balance to stay up through November and then, we have a December surprise every once in a while and something pay down. Right now I'm forecasting sort of flat to up overall, which would put us at a kind of a normalized payoffs. We don't have a lot of these large loans left either, right.

We do a most of our stuff's $50 million and less and we have a few larger ones every once in a while to pop. But, it's not our bread and butter business either. So, it's hard to say fourth quarter, historically, sometimes this is quite high for us, but I think we have a pretty good handle on it this time.

Something will surprise me, I'm sure, but in general, I think this was -- these were the loans we were looking that we were expecting to pay off. And quite frankly, at some point if they hadn't paid off, I'd have gotten a little worried..

Yeah. Okay. No, that's helpful. And last one was just Johnny, you talked about, or I guess maybe Kevin, you talked about the hurricane reserve or provision, the timing of that, I guess is your expectation at the fourth quarter event.

And then just outside of that, just kind of how we think about the reserve going forward, given credit, and then just, how good credit is today along with just kind of the counterbalance of just kind of macro environment?.

I may have been overestimated, what kind of reserve we have to have it, based on what I'm hearing, it may be better than I anticipated..

Yeah, in my comments, we said, we feel like $40 million to $50 million is, you know, the most that we could see on deferment. That's only as like a fourth of what Irma was and less than Michael and Michael was up in the panhandle. So, at this point I don't see it as a big event for us, but obviously it's still early too.

So, we'll continue to track that and be able to report it as we go..

Okay.

And then just outside of the hurricane, just how to think about the reserve, as we go forward, I think where you're sitting at today, a little bit over 2%, is that kind of a line in the sand where you'd like to stay? Is that your outlook today?.

Well, yeah, think about it. You've had the worst financial crisis. You've had the pandemic, you've had a hurricane. It would've looked like a up and down, up and down, up and down if you played with it. And, 2% reserve has worked. It's always worked for us.

I don't know, I don't know if the see some works or not, but we're running parallel systems right now and we're keeping up with that. But, what I do know is that 2% reserves worked and in this volatile time, I think we certainly need to maintain anybody that's running 1% or less, they don't, certainly don't have enough reserve.

I don't care how good their asset quality, it's not enough because we don't know what's going to hit us next. Right? We never know, something's going to hit us. We just don't know what it is..

Yeah. Okay. Perfect. Thank you, guys for taking the questions and nice quarter..

Thank you. Our final question comes from John Arshtom [ph] with RBC Capital Markets. Please proceed..

Right? Close enough. Good afternoon, everyone..

Hey John..

Hey can you just, I know call's gone a little long, but can you give us a quick update on Shore Premier and I don't know if it's hurricane related update, but just how did the business do this quarter and how you're thinking about that?.

Well, I will turn it over. John's on the phone and you can hear from the horse's mouth.

So will it let John tell you what he's saying for the quarter? John, you want to take it?.

Yeah, this horse is ready to speak. So John, thank you for the question. As far as the hurricane my folks tell me that so far we've only had one yacht that was totally destroyed. And the risk to us is that we got a 100% payoff of that loan. We haven't had anybody file for any of deferrals the deferment program that Kevin Hester was talking about.

And as I was talking to Mr. Allison earlier this week, third quarter was a good quarter for us. We had nearly a $100 million that we pushed out the door. Mr. Allison, I think the number was actually $90 million, so I'm stretching that just a bit. Had about $55 million in repays and prepays. So $35 million net growth, which is good for us.

But as I was telling Mr. Allison, the importantly, the components of that was $12 million on the retail side of our business. But the pendulum seems to be gradually coming back to us on the commercial side of the business. So of that net $35 million in growth, the bulk of it, the $23 million of that was commercial inventories.

So we're happy to see that. But the outlook is positive. We're starting to see some slowing of applications. But as you would expect in this current environment of limited supply we're seeing the average application is going up because inventory values are going up. And so I think they've risen year over year by about a $100,000.

But asset quality is holding strong and so our outlook is positive, but as we're entering this the boat show season, we're expecting there perhaps to be a seasonal rebound in that application volume, but so far the business has not been negatively impacted by the macroeconomic headwinds..

Okay. All right. That's good to know. Thanks John. Just last, yeah, thank you Johnny. You talked on several calls prior to rates going up about some of the fixed trade commercial real estate loans that were being made in some of your markets.

Have you seen any of those banks struggle or have problems or come to talk to you about acquiring them or, how do you think those banks are doing? Thanks..

Well, they got to be sent that they put so much money in low rate real estate loans and securities. You'll see them, you look in, look what's the local newspaper for Sunday's ads? That's what I'm seeing is they've just run outta money. They spent all their money, put it as I've called that over the years. I couldn't believe it.

And Happy did the same thing too. The Happy group did the same thing. They took extra cash and put it into securities and why we were not doing that, but we didn't own them at that time. And since then, a lot of people have done that. I haven't heard the squealing yet, but I'm confident we'll hear the squealing.

I think from an M&A perspective, it really makes it tough to do a deal with someone if their ALCI [ph], you look at their Bond book and they're down upside down the bond book, everybody is, but, that impacts the value significantly impacts the value of the company.

And then you look at their loan book and they got a bunch of twos and threes on their loan book in this market. And by the time you get through marketing that to market, I don't know how back really do an m and a deal right now but you got the fees that are attached to it and the cost of doing one, it's just tough to do.

They just - they're just really, really tough to do. Thank goodness we didn't do that. I don't, I'd rather be lucky and smart. We just got lucky and didn't do it then and held a line. And I think we may, I'm not looking for a pat on the back, but I think we made the right call..

Yep. It seems that way. So, Okay. Thanks. I appreciate all the help..

Thank you. There are no further questions at this time, so I will now pass it back to John Allison..

Thank you. I'm going to go to Tracy French for any closing remarks that Tracy might have. I think the group did a good job of covering all the questions. They didn't hear much on the Texas deal.

So if I'll give you a little short summary of that, how that process, we talked about some of the challenges that are out there, but I don't know if Michael Williamson's listening on the phone, but I'm just say they're doing pretty good if he is. And there's team that may be listening, but they're really doing outstanding from what we've seen so far.

You talked about the loan growth. We're seeing the activities there come through for us where the first two, three months that they was with us, we was working on the merger and conversion challenges and everybody was dealing with customers and so forth.

So that part turned out extremely well and internally we do -- we rank them and allow them in our board meeting to report to the board just like Johnny does here today. And I think for the first month Monday, Texas will go first on the meeting. And that's thanks to Robert and his metro team that picked up the ball and run extremely well.

But overall for the banks, Johnny, when I look at all the states, it's the first time Arkansas, Florida, Texas and New York operation has all been above the 2% range in a long time.

So I think we have a lot of good way and so I think we have a lot of good momentum and I think Scott and Michael and Robert have put together their teams out there that's survived and we've got some really bright bankers that's going to probably be taking my job someday that, works there today.

So, very pleased with it outside all the chaos that you've mentioned out there and kudos to the rest of the Florida operation, which we know what they've done down in Florida and North Florida and Arkansas's. You said pretty good. If the world doesn't throw us too big curve balls, that hits us in the back. Thank you for that.

Anybody else got any comments? Well, I think it was a great quarter. I'm very pleased with the quarter. I couldn't have asked for much more from this group. We teed up last quarter telling you that how good last quarter would've been had we not had the one time $107 million expense last quarter, but we didn't have it this quarter.

And the proofs in the put and so we're pretty pleased. I'd like to get it, I have another number in mind as we hit one goal, I changed to another goal and create another goal to go higher and what we got sent out.

I sent out a deal a couple weeks ago and I said, here is how, here's how do we get to this number? Here's how I think we can get to this number. He said, do you ever quit pushing? And I said, No, not yet. Anyway, we just keep, you told me I had to the end of the year to get there. Amazing how that changed there for 63 days, Tony.

Anyway, I thank you all for attending today. We appreciate this for. No, I think we're done..

Jay, some things just never change..

This concludes the Home BancShares, Inc. third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line..