Home BancShares Inc (HOMB) 2021 Q1 法說會逐字稿

Good day, and welcome to the Home Bancshares, Inc. First Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Donna Townsell, Please go ahead.

Thank you, Elisa. I am Donna Townsell, Director of Investor Relations, and our management team would like to thank you for joining our first quarterly conference call of 2021.

Reporting today will be our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; and Stephen Tipton, Chief Operating Officer.

Hopefully, by now, you have had the opportunity to review our proxy and read about the work that we have done in the last year on our ESG initiatives. While our work is not complete, we have made great strides, and this will be an ongoing effort at Home.

Some other exciting news that I'd like to share is on Tuesday, Home was named to the Forbes list of World's Best Banks. We made this list last year, and we have also been named to Forbes Best Banks in America every year since 2015.

One aspect of this is the performance metric. And the other aspect is driven by customer service. And because of that, that makes us very proud that we continue to excel in both of these categories.

Now for our first report on the quarter, we will hear from our Chairman, John Allison.

Thank you, Donna. That was a nice award. We continue to stack them up over a period of time.

Well welcome to Home Bancshares' first quarter earnings release and conference call. My name is John Allison, and I have the honor to serve as your Executive Chairman, President and Chief Executive Officer; and I'm also a co-founder of the company. We're here to discuss the results of our first quarter '21 performance.

Not to mention the first release as you've probably seen it, the first quarter from a pure net profit and revenue perspective was the most powerful quarter in the company's almost 22-year history, resulting in a record net income of $91.6 million. That's another world record as our company -- for our company as one of our former teammates would say.

Home Bancshares is known for being one of the top-performing banking corporations in America for the last 10 to 15 years, and this quarter was no different. Sales revenue was off the charts with total revenue of $207,927,000, a best ever. That's total revenue.

But what's more important is how much of the total revenue we bring down to the bottom line after tax for our shareholders. I want you to know that of the gross $207 million, we brought 44.05% to the after-tax bottom line or $91.6 million that is available to our shareholders.

In addition to total revenue, our net revenue was also the highest it had ever been at $193.4 million. And I think that's a beat on The Street, but our company also brought 47.36% of the net revenue after tax to the bottom line. These numbers reflect the earnings power of your company.

Through the low cost of funds, strong yields and best-in-class efficiency, it resulted in another high-water mark for our shareholders of $0.55 earnings per share for the quarter. PPNR, again, also hit a new record high of 120.5, representing a P5NR of 62.32%. That means that we brought 62.32% of the net revenue to the pretax, pre-provision shoebox as our longtime Director, Alex Lieblong, has labeled it.

Here are some additional highlights. Pretax, pre-provision ROA was 2.92%. I think that's a record. I think that's the best. After-tax ROA, 2.22%. Return on tangible common equity, 22.90. That's one of the best ever. I don't think we've had one better than that.

Earnings per share, $0.55. That is the best. And on the NIM, interestingly enough, we increased our NIM by 2 basis points to 4.02% from 4.00% basis points. Reserve to loans without the PPP loans remains at 2.40%.

Stable asset quality. Overall, yields have remained strong at $0.055, now that includes accretion of net income and PPP. And without those, the yield was $0.051.

Mortgage produced another strong quarter with $8,167,000 versus last year at $2.6 million. Efficiency ratio of 36.6%. That's got to be best-in-class or right at it. Are you happy with that, Donna? Are you happy with the 36%? You're the efficiency lady?

Considering the size of the bank and the regulatory hurdles we've overcome in the last few years, I'm happy to be below 40%, but I know that we will probably be challenged to continue to push that downwards.

I agree with that. That sure is fun to talk about when you get it. First quarter loan originations were $671,650,000 at 5.10%.

We only funded $250 million. It kind of came late in the quarter. March origination was the highest, by the way, of the quarter, and it was right at $320 million. 75% of the originations came from the community footprint, but $671 million, we need a little more than that, but it happened mostly in March. That appears to be continued in April also.

Last quarter, I said I thought loan growth would come in the second half of the year, but it may be coming a little sooner than I expected. On the negative side, we have payoffs of about $800 million in Q1, that's pretty much in line with what we had in Q4. Hopefully, that will slow down at some point in time when we'll be able to match on the origination side.

We had a $2 million charge-off. I just wanted -- don't remember reporting on this, $2 million charge-off was -- I made the statement to you all when we did our first fireside chat that I don't see any losses as a result of COVID, and I'm still saying that.

This was a problem credit before the COVID-19. And I'm optimistic we're going to recover here, but the conservative nature of our group is that we charge it off. And that was $2 million of the -- $2.6 million or something?

$2.5 million net.

$2.5 million net. Your team has also done a really good job -- found these numbers, now I wouldn't -- I haven't been tracking them in the past -- I mean I track them, but I -- not like year-over-year. This is year-over-year cost of your liabilities versus your assets.

Our total interest income for the year-over-year was down $9,524,000. That doesn't sound very good, but interest expense was down $17,887,000, which resulted in a positive net interest income of $8,363,000. That is a nice job by our presidents and Stephen Tipton hawks that -- of course, Tracy hawks it every day. So good job guys. That's pretty impressive numbers. That added $8.3 million to the earnings, so good job.

Over the year, we have tried to position Home to win. We've made several investments, both long term and short term, and we're continuing to do that again this year with all this excess cash.

Last year, we purchased some underpriced good dividend-paying bank stocks that have performed very nice for us. We're also in 4 or 5 different ventures that, likewise, have performed nicely for us. This quarter, we picked up several million dollars in income for the company. Our past performance is no guarantee of future performance, but Home is still in these investments.

Our investments produced income of $9.5 million in 2020. And so far this year, they produced $13.8 million. Home has continued to work on M&A and presently have active discussions going on, so stay tuned.

On repurchase, we spent about $8.8 million in the first quarter, repurchased 330,000 shares at a weighted average price of $26.55, and we'll continue to be active through our 10b5-1 even today, and we'll remain active for the rest of the year.

It certainly looks like Home is off to a great start. Business is picking up and I think we're in for a powerful recovery. My concern sit around inflation, which I think may already be out of control. Couple existing inflation with the new $2.7 trillion money printing coming down the road, and we could be back to March '80 during the Carter administrative.

They also thought they could control inflation but had rates close to 20%. I wrote this, and then I'm watching TV yesterday, Tracy, and the Talking Head comes on, and he said, "If we're not careful, we'll be back where we were in the Carter administration." So I may not be the only one seeing it that way.

Have you bought in gasoline lately, it's up $0.80 a gallon. Food is straight up. Lumber went from $300 1,000 board feet to $1,050, that's a 350% increase in the cost of lumber.

I would hope that the Biden administration would shut down their discussions of a huge tax increase as we're just starting to recover from the COVID-19 crisis. I don't say this as a Democratic or Republican. I only say this as an American businessman that has the privilege of leading one of the best companies in America. The tax increase makes absolutely no sense indeed when we're currently trying just to climb out of one.

Instead of trying to suppress American business, the President should be offering ideas to help all businesses. Think about it. This is not the time for tax increase. The talking heads on business channels say 2.25% to 2.50% on the 10-year by June is going to happen and 3% by the end of the year. If true, If that happens to be the case, and it may be, I personally kind of believe that. Those banks writing fixed rates in the 2s and the 3s will pay the price, and those investing all of this excess liquidity they have in the low-yielding, long-term securities will also pay the price.

The risk is absolutely too dangerous for us. This is most of our largest personal asset, and I refuse, myself, and our executive team does of putting it in long-term fixed rate securities and selling the future of our company.

Those that remain disciplined, like Home, will win the race. So when you get to the winner circle, just look for Home standing in the middle of the circle.

I want to thank our teammates for an amazing start to '21 and the investment community for your trust that you've committed and many years of that.

Donna? I think it's a pretty good quarter, and I'm going to let you have the floor.

Well, thank you very much for that report. And that is a fabulous revenue and EPS result. So congratulations to all.

Now we will go to Tracy French for a report on Centennial Bank.

Thank you, Donna, and good afternoon to all. The first quarter for Centennial Bank and Home Bancshares is out, without question, a thorough, a good report. In fact, we might be the safest banking institution in the nation, along with being one of the best or top performer in the country. The results of our group we'll share today are phenomenal and not only show what hard work delivers, but also managing each detail that turns out to be financially rewarding.

Our banking company continues to work hard and remain disciplined in all areas of the bank putting our customers first. For the shareholders, the report today is very rewarding. All of our regions had a great quarter. You will hear from Christopher and John in a moment.

For Centennial Bank, our net -- excuse me, for Centennial Bank, our total net revenue was $192 million for the quarter, making our old fashioned ROA, John, at 2.25%. Our return on average tangible common equity non-GAAP was 21.03%. Our efficiency ratio was 35.36% with the last 2 quarters in the low 30 -- excuse me, last 2 months in the low 34s.

Great job, Tracy.

Thank you. And now what we know as the Allison P5NR was at 63.56% for the first quarter. These numbers are what they are because of all the effort from every single person that works on our bank. Brian will share with you our capital position, which is very strong with our risk-based capital at 18.76%.

Stephen will give the details on the loans and deposits as our excess cash has gone from over $1 billion at the beginning of the year to over $2 billion today with our liquidity ratio at 27.21%. Kevin will share the latest on our loan portfolio with a reported 0.66 nonperforming to total loans, while our allowance for loan loss, excluding the PPP loans, is at 2.4% at the end of the quarter. That makes up the 383.47% allowance on our loans to nonperforming loans.

These reports represent a very profitable and safe company. As always, we are staying in touch with our customers. And I'm glad to report all are doing better, and some have not missed a beat. Our markets and customers have navigated through this past year, and we believe the economy is doing fine, although the cost of operating that Johnny mentioned earlier is certainly up.

Our regional leaders reported that most of our branches are open to full service. We were -- with the few that are not, we should be open by next week. Our customer activity is increasing in both loans and deposits. Loan production is showing good signs of growth, along with our pipelines. Our deposit growth has been great and our managers are working hard on the cost of these deposits. The loans that have been granted deferrals are showing much improvement. While some are back full speed, even our hotel loans -- excuse me, our airport hotel loans are feeling very good.

Donna, I've always used the word better, as in getting better every day, every week, every month and so on, and our company will continue those efforts for our shareholders. Thank you.

I have no doubt that that's true, Tracy. Thank you for that report. Now we will turn to Brian Davis for a finance report.

Thanks, Donna. I'm pleased to report $148.1 million of net interest income and a 4.02% net interest margin for Q1 2021.

Our first quarter net interest margin increased 2 basis points from Q4. Today, I would like to give you some color on the Q1 NIM.

First, during the first quarter, we had $314 million of PPP loans forgiven. This forgiveness calls the acceleration of deferred fee income for the loans forgiven. The deferred fee income increased $3.5 million from Q4 to Q1. The acceleration was 9 basis points accretive to the NIM.

Second, the COVID crisis and resulting governmental response has created a tremendous amount of excess liquidity in the market. As a result of the excess liquidity, we had $581 million of additional interest-bearing cash in Q1 compared to Q4. The excess liquidity was 16 basis points dilutive to the NIM.

Third, for Q1, we recognized $1.1 million of event interest primarily from large payoffs. The $1.1 million of event interest was 3 basis points accretive to the NIM.

In conclusion, the 9 basis points increase for PPP loans plus the 3 basis points for event interest income plus the 16 basis points decline for excess liquidity results in a net 4 basis points of noise when comparing linked quarters. With that said, Our net interest margin is actually up 6 basis points on an apples-to-apples comparison.

I'll conclude with a few remarks on capital. Our goal at Home Bancshares is to be extremely well capitalized. I'm pleased to report the following strong capital information. For Q1 2021, our Tier 1 capital was $1.7 billion. Total risk-based capital was $2.2 billion, and risk-weighted assets were $11.7 billion. As a result, the leverage ratio was 11.1%, which is 122% above the well-capitalized benchmark of 5%.

Common equity Tier 1 was 14.3%, which is 120% above the well-capitalized benchmark of 6.5%. Tier 1 capital was 14.9%, which is 86% above the well-capitalized benchmark of 8%, and the total risk-based capital was 18.8%, which is 88% above the well-capitalized benchmark of 10%.

With that said, I'll turn the call back over to Donna. Donna?

Thank you, Brian. Those are amazing capital ratios, aren't they? Now Kevin Hester will update us on our loan portfolio.

Thanks, Donna. The accomplishments on the lending side this quarter are very impressive. I'll begin with PPP.

Round 3 approval in funding continues with the recent extension of the program through May 31. Applications have certainly slowed down but we have crossed the 4,000 loans approved mark. Those approved loans total about $350 million, and we have closed and funded just over $300 million of that amount.

Rounds 1 and 2 forgiveness continue with over $550 million requested from SBA and over $450 million paid. We have initiated Round 3 forgiveness as well, and we have a push to focus on these 2 efforts during the next 2 quarters. COVID-modified loans showed little change during the first quarter. This was not unexpected because a large majority of the $330 million modification balance was placed on an 18- to 24-month interest-only modification just 3 months ago to provide the runway to weather the remainder of the pandemic.

With the majority of these loans being hotels and just coming through the seasonally slow first quarter of the year, I didn't expect much movement in these balances.

Two positive developments did occur, though. First, anecdotally, virtually all of our hotel operators have experienced a significant pickup in occupancy in March. And in the Florida market, especially, we expect this pickup to continue throughout the year.

Even our hotels that were dependent upon airport traffic are showing signs of life. Given that this is a March trend, we do not have hard numbers on these, but we do expect the April reports from our hoteliers to look much more favorable.

In addition, since month end, the single largest deferred loan of $58 million went back to full payment, showing good occupancy and cash flow. This brings our overall modified loan balance to just below $270 million or 2.5% of the loan portfolio. We are very encouraged by the improvements we're seeing around this segment of loans.

As Johnny said, mortgage continues their strong showing from last year. First quarter closings were up 50% on a quarter-over-quarter basis with secondary market loans consisting of over 80% of those -- $100 million in each of the 3 months of the quarter, indicating a strong second quarter to be expected.

Lastly, the accomplishments of the asset quality area are certainly worth discussing. Nonperforming loans were 59 basis points, up only 6 basis points pre-COVID and down 7 basis points on a linked-quarter basis. Nonperforming assets are even better at 38 basis points, down 6 basis points pre-COVID and down 10 basis points on a linked-quarter basis.

The allowance coverage of nonperforming loans is at 384%, up 52% on a linked-quarter basis. Early-stage past dues remained very low at 46 basis points, which is below where we were pre-COVID. Combined with the encouraging reporting around modified loans, I feel very good about the asset quality of this company.

We are seeing new lending opportunities in our markets. And despite the low pricing and high leverage we're seeing, I'm optimistic that the second half of the year will result in some organic loan growth.

Donna, what a quarter. I'll turn it back over to you.

I agree, Kevin, and that's good information on the hotel occupancy.

Yes, it's great.

Next, we have Chris Poulton with our CCFG division.

Thank you, Donna, and good afternoon. The new year brought increased activity during the first quarter. Overall loan balances were roughly flat, and new fundings were offset by increased payoffs and paydowns as loans that would have generally paid off in 2020 were able to finally execute refinancings and sales.

During this time, we've been able to maintain margins and returns while ensuring our asset quality remains high. New loan commitments totaled close to $300 million, and we ended the quarter with over $300 million of loans that were -- loans that are approved, awaiting closing or in active underwriting.

By comparison, we generated $700 million in originations during all of 2020. Real estate values in our key New York and California markets appear to have stabilized with sales and leasing activity up significantly in Manhattan and Brooklyn during the quarter.

Thus far, that trend has continued into Q2 as well. With that said, we remain our usual cautious sales and continue to focus on leverage and structure that reflects the post-pandemic environment.

While many of our southern and southwestern markets have thrived over the past few months, we expect the recovery in New York, in particular, to take a bit longer to mature. During this time, we remain focused on our core purpose of building a portfolio that delivers above-average returns for below-average risk.

With that, I'll turn it over to you, Donna.

Thank you, Chris. And now John Marshall will update us on Shore Premier.

Thank you, Donna, and good afternoon. I'm pleased to offer an update on Centennial's marine finance division. The first quarter continued to reflect elevated activity as the 2020 consumer COVID yacht buying frenzy spilled over into the new year, tempered only by limited new boat inventories. We've seen our retail application shift from 80% new, 20% pre-owned to a 65-35 split just because of the lack of new inventory.

The quality of our applicants remained strong with declination rates dropping from 39% in 4Q '20 to 32% in 1Q '21. Funded retail loans were $50 million in the quarter with average FICOs of 780 compared to 776 for full year 2020. Our commercial floor plan business was essentially flat in the quarter as shipments of new boats from European factories have been presold prior to arrival. Utilization rates on inventory lines remains at 30%, down from a customary 62%. It may be mid-2022 before dealer stocks are restored to historical levels.

We're witnessing some pressure on marine margins as inventory lenders, hungry for assets, are unsatisfied. Dealer financial health is very strong as a result of this conversion of assets. The health of the consumer and commercial portfolios has been favorable as reflected in our asset quality metrics, achieving the lowest levels of delinquency and default since Shore was acquired by Centennial. The profit contribution continues to grow, and ROA in the quarter was 2.76%.

Cash has emerged as a formidable competitor in the marine lending space. Coffers bulging with stimulus money have continued to accelerate our prepayment speeds, offsetting some organic growth. The outlook for marine is good, factories are returning to sustainable production, dealers are placing optimistic orders and retail buyers are placing larger deposits on their next boat.

Industry experts believe that the COVID has pushed more consumers onto the water and with a long-term profound impact on pleasure -- the pleasure yachting industry.

On that positive note, Donna, I'll return the discussion to you.

Thank you, John. And our final report today comes from Stephen Tipton.

Thank you, Donna. I'll give color on deposit activity, repricing efforts and trends and a few additional details on the balance sheet today. On the deposit side, the wave of liquidity continued in the first quarter of 2021 as total deposit increased $787 million for year-end to just over $13.5 billion. That marks the nearly $2 billion increase or 17% year-over-year.

Most importantly, our noninterest-bearing account balance has increased nearly $600 million on a linked quarter basis and over $1.4 billion year-over-year. And today, noninterest-bearing balances stand at 29% of total deposits.

We have mentioned over the past several quarters how fortunate we are to operate in states that did not shut down, states that have seen an increase in tourism and steady population growth. Of the increase in the overall deposit base in Q1, $542 million, or 69%, of the increase came from our 4 Florida regions, all of which had 9-figure increases in total deposits.

While the increase is certainly attributable to the government's response to the pandemic, we believe the growth is also a result of the business development efforts, the customer service our bankers provide and the resiliency of our customer base and geographic footprint.

Switching to funding costs. Interest-bearing deposits averaged 33 basis points in Q1, down 11 basis points on a linked-quarter basis and exited the quarter in March at 30 basis points. Total deposit costs were 24 basis points in Q1 and were down to 22 basis points in the month of March.

We continue to work rates down as liquidity levels persist. In addition to certain negotiated demand account rates, we have $745 million in time deposits maturing over the remainder of the year at an average rate of just under 1%.

Switching to loans. We saw total production of a little over $670 million in the first quarter with $400 million coming from the community bank footprint. As Johnny mentioned, only slightly more than 1/3 of the origination volume in Q1 was funded at quarter end. Although loan balances declined, this, along with robust -- the robust origination volume in March, gives us optimism going forward. Payout volume was in line with Q4 at $844 million as we saw a number of borrowers monetize large assets or go to the permanent markets.

As Brian Davis mentioned in his remarks, when normalizing for the impact from PPP lending, event income and excess liquidity, the NIM would have shown a solid increase linked quarter. We are extremely pleased with how the NIM has held up over the past year.

The word discipline has been mentioned a number of times today and over the past year. That discipline has put Home in a great position to capitalize on the continued economic recovery and as Johnny mentioned, the prospects of rising interest rates in the future.

And with that, I'll turn it back over to you, Donna.

Thank you, Stephen. A lot of good reports today. Johnny, before we go to Q&A, do you have any additional comments you'd like to make?

It was a great quarter, as you know. Loans were down a little bit, but we'll get our fair share of that. If Tracy and Kevin, our group would go out and take that $2.5 billion's 5%, that's another $125 million pretax. So that's what I see in front of us. I see -- and if we wrote it in full, which we could do, that's $100 million. So I think that is pretty exciting as this economy picks up with the company hitting on all 8 in every area, except for that and not doing too bad there in the middle of it.

It's interesting, even though loan totals have gone down, you're not performing percentages, Kevin have even gone down with it. So I remember back in '08 and '09 and '10, I kind of got a snapshot of our loans, you really got to look at the book of business because it was a solid book and didn't move too much, up or down. And that's the same thing that's going on right now to see our nonperforming numbers come down on -- percentage-wise, our little book of balance that's impressive.

So Donna, I think, I don't have anything else to say. I think we need to hear from Q&A, and I'll let you have it and go to...

Okay. That sounds great. Yes. Thank you. I guess, Elisa, we are going to turn to you now and go to Q&A.

(Operator Instructions) The first question is from Michael Rose with Raymond James.

Maybe we could just start on credit quality. Good to see non-accruals come down. It seems like everything is moving in the right direction. Is there any reason to think that you guys would have a provision expense anytime soon, understanding that you don't expect any losses from COVID and the charge-off you had this quarter was the previously identified credit. It just seems like all the pieces are there, your reserve level is really high, you guys wouldn't need to provision kind of anytime soon.

This is Kevin. I would say no.

Yes. I'd say the same. Tracy?

Yes. Say the same.

I think -- back when we had -- it was really kind of sad, I asked Chris. I said, Chris, when COVID first hit -- he had some slips over there. He said -- I said, "How much money we'll lose today if we sell that today? He said, "If we sell it today -- I think, Chris, you correct me if I'm wrong, Chris, I think you said $15 million. And I asked Chris that today before the call. And he said, "Maybe $1 million." Am I saying that correct, Chris?

Yes, sir. I think, that's about right.

Okay. And then just curious just on the expenses, it looks like expenses were down sequentially. Expense control has always been a hallmark of the company. Any sort of color there on a run rate perspective? And what -- any considerations for the year in terms of bonus accruals or incentive compensation that we should be thinking about?

I'll take that one, Mr. Allison. Like on the salary employee benefit, we accrue those salaries on a day-by-day basis. So we had 92 days in Q4 versus 91 days in Q1. So -- I mean so we had 90 days in Q1. So they're down a little bit there. We did have a little bit of incentive reversal from the end of the year, but it was primarily offset because we also have an increase in the FICA taxes that we have in Q1.

We did have some PPE expense in Q4, fogging buildings and doing that kind of stuff, and that was several hundred thousand dollars. So while it is down a little bit, most of it is really due to the number of days on our salary employee benefit accrual plus we didn't have really a whole lot of the PPE expenses.

Our FDIC assessment was down just a little bit, that was mostly due to a true-up on the accrual. So there's really not any noise other than the PPE from last quarter in the numbers.

Okay. And then maybe finally for me. So there's a big increase in the share repurchase authorization. I guess, given where your stock is and how much capital you have, I mean how active would you expect to be as we move forward?

I'm might have asked Brian that question, but you asked me that question. We're active. We're going to continue to remain active, and I think our average price was $26.60 that we bought back about 330,000 shares the first quarter. Our team, with the earnings has hit the Home $2. So that's going to create a few more shares that will be in the float and -- which is a good thing, really, is a good thing, but we will -- we'll probably buy those shares back so we don't impact the -- so we don't dilute our shareholders.

So we're active, and we really -- Michael, looked at stepping in and buying. We increased our authorization by 20 million shares, and we looked at stepping in there. We decided that probably it was time for us to look at doing some M&A. So we just -- we're buying a little bit, and we'll probably buying up where we don't dilute our shareholders on the Home $2 program.

The next question is from Jon Arfstrom with RBC Capital Markets.

You guys touched a little bit more on the pipelines. It seems like it's better. It seems like it's materially better, but maybe, I don't know, Kevin or Tracy, if you want to touch on it.

And then Chris, can you expand a little bit more on that -- the commitment numbers and why you think it's jumped so much?

Yes, this is Kevin. So yes, pipeline looking right now compared to this time last quarter is definitely stronger than it was. We're seeing some good projects across the footprint, some construction projects that are back on the table. So I do think we've been talking for a couple of quarters that we think second half of the year is where it looked like things would get better, and I think we still feel that way, it may be that this quarter is even better than we expected, but it is stronger right now for sure.

Chris?

Yes, this is Chris. Yes, with regard to our pipeline, I think what you're seeing, and I think we saw in the first quarter, and we're seeing now into the second quarter is the vast majority of probably what we're looking at closing now are deals that we worked on for the better part of last year. We worked through the summer and the fall and such with a number of our borrowers on transactions that I think we talked during the second half of last year, things were just taking longer to close, taking longer to get the equity together, et cetera. And part of that is really starting to get to a point we felt like there was a recovery coming in that you could start to see some post-COVID trades, et cetera. So I think we're seeing that. Majority of what's in our pipeline to close for the second quarter are those types of deals that have been long time coming.

We have one closing tomorrow that we worked on all summer with the borrower. It's just finally gotten to the point where they can get their deal together and close. So I think we're seeing, in our pipeline, what the economy is seeing, which is things starting to open up and therefore, transactions starting to be completed. Most of our first quarter volume was facilities, which was nice to see. We like that part of our business, and seeing a couple of facilities close where folks have got money together, and they're looking to put that money out over the rest of the year. So I think we feel good about where we're at now. Last year was only $700 million, that was probably down 30% from what we normally do. So I think that was the anomaly.

I think not to put -- go ahead, Johnny. Sorry.

Go ahead, Jon.

I was just going to say, it seems like some of this is catch-up and I guess, or lingering projects. Is the new -- call it, the new-new pipeline, the new activity, is that increasing as well, Chris?

I believe so, yes. I mean we're seeing -- now what starts to come in is new transactions, et cetera. But I think still, the market overall was down last year and a lot of projects that were on hold are starting to come through. So it's going to take -- I think it'll take some time to get through that backlog.

Good. Maybe one for you, Johnny, on inflation. Are your -- are the borrowers telling you the same thing that you're feeling? Or is that not part of the narrative yet?

On inflation, you say, you're asking Johnny?

Yes. Yes, exactly.

Yes. I mean Kev & Sons is a homebuilder, we kind of track a little bit of that. And I mean he just had a special order home for a customer. And when he got through adding up all what it costs, the guy said, I can't afford it. I can't do that. So I don't think there's any doubt about inflation being out there. And our bet is to sit tight on this $2.4 billion as tight as we can sit on it. Tracy is about to rub all the hair off the front of your head because he can't expand it, but he knows it's the smart thing to do is to sit tight and remain disciplined, and that's what we're doing. And we'll have our opportunity to deploy this money at some point in time. And we have not done low rates. If we need to do that, we can do it. We have not done that. We have not entered into those markets.

So there really wasn't a lot of business after the pandemic. Chris is right. He said he worked on those projects all summer long. That's because of the uncertainty that was in the market, and we're seeing that. Now we're seeing it change. We're seeing it turn over where there's optimism, and there's excitement about new projects. And I mean, some of the projects one of our good customers bring us, we can't -- have brought us, we can't do them all. We don't have the -- I mean we could. We just don't go to that level of loan to one customer. But yes, he's a great customer, done well. I just think we're off and running. I mean I think inflation has got to hit us at some point in time. But think about it, we -- the job this team did over the last year by reducing cost of funds by more than the loan yield and increase in profitability. It should be like a roller coaster on a track and it ought to track exactly. Do not always do that.

I know it's better for banks in raising rates environments, and I think we're going to get that. So I think the Fed has done a hell of a job, and I think they're trying to do that. But I don't know what they're seeing. It says inflation is only 1.5% or 1.75% because I see it everywhere I look all the time. Our customers are talking about it. It was a piece of -- was it plywood or OBS (sic) [OSB] or what it was the other day, it went from $7 to $21. It's just those guys in supply on getting appliances is the problem. I think some of that might impact the economy a little bit but if they keep building houses, these rates stay on, they're going keep selling them.

And so the message is you're just -- you're being patient, you're going to wait it out, and that's the way to kind of take advantage of some of your views on inflation is let other people make the mistakes and see what happens longer term...

I think that's exactly -- that's exactly -- that's exactly. Now it's coming a little faster. Our comment was it will be the second half of the year. But Chris is coming pretty strong, and Kevin's peak with his -- his report looks much better than -- I mean, normally, we look at a report like this, we're down $200 million or $300 million at this time. We're not now.

So I'm not going to forecast loan growth because last time I did it, we went down. But it is much better. I can say that. It is much better. And it's good customers. It's good equity in the deals. It's not a bunch of funny money stuff. It's the real deal like we underwrite. So there were some deals that went by us because -- but they were 80% or 85%. We're not going to do that. So we don't operate that way.

The next question is from Brady Gailey with KBW.

So I wanted to just hit on loan growth from a slightly different angle. I mean if you listen to a lot of the other Florida banks, everybody is talking about Florida really being on fire right now. They've seen a lot of population inflow. They've seen a lot of business relocations down there.

I know you guys -- I think Florida is now your biggest market, even bigger than Arkansas. But will Florida specifically play a big piece in the loan growth returning? And just maybe any commentary about what you guys are seeing in that state?

Yes, this is Kevin. I believe it will. I mean, obviously, it is over half of our footprint and it has to play. It always has because it's -- there's obviously a lot more economic activity going on in Florida than there will be in Arkansas. And they really never shut down. So -- and you are coming into, for most of the markets, the busy time of the year. So yes, I fully expect that it will play a large role in that.

All right. And then just looking at when loan growth returns to Home, what should we expect? Like, excluding any sort of noise with PPP forgiveness, but should we expect loan Home to be growing in kind of the low single-digit range? Or could it be higher than that as we come out of this...

Let's say low -- let's say low -- Brady, let's say low but it -- that way will make me -- I'll be wrong, let's say low, but it looks pretty good right now. I don't -- I think it's sustainable. I think I think this is sustainable. Tracy talks to our customers all the time. We're certainly getting opportunities for better than we've had in the past year. I guess the question that comes to my mind when you ask that question, Brady, is really more the payoff date.

As we are hearing some customers that are getting some good opportunities to cash in on what they've done over the past few years. So that's always the question for us is the payoff amounts that trickle in on, primarily, what we've seen on the larger payoffs we're seeing lately as they have sold their opportunity, and it's a good thing for them. And they'll be back, and they'll continue to come back if it's construction-type projects. It takes us a little time with that on the books compared to if it's -- got a full balance and gets paid off today. But we actually feel pretty -- I think that we got the sentiment, this all feels pretty good in all our markets where we're at.

And then finally, I just wanted to ask about M&A. Johnny, I know you said earlier that you were active having some conversations. But I know you sometimes also give us a little additional color. I think the last time we connected, you were chasing 2 or 3 deals, but maybe just an update -- a little more detailed update on M&A and if you feel like you're getting closer on anything?

I don't know the answer to that. I've been disappointed in a couple of deals recently where we made an offer that was the highest priced offer that a bank had sold for in the U.S. in the past 6 or 8 months and the CEO commented that if he made that offer to his Board, they'd laugh him out of the room. I didn't quite know what to say. I was somewhat speechless at that point in time. And I said, let's go to lunch. And we had lunch and Tracy and I left. But I guess Tracy had one yesterday that what they're trying to do, the bankers are getting away was spruce stuff up most of the time because what they're doing is they know we don't dilute and they know how we operate so they take -- they back into a price. They take their customer just back into a pricing, and everybody is going to make more money next year, and I've started tracing. I tell them, (expletive), you need to sell it next year. You don't need to sell it this year.

But anyway, we have a couple of really good opportunities out there, we feel like, right now. We actually have a total of 3. And we're working on one as we speak, and we'll see that will resolve itself in the next 2 or 3 weeks. And then we'll move to the next one and the next one, and we've taken a couple off the table because they weren't realistic and the bankers were really, I don't know if they bumped their head or what they did. So -- but anyway, they were somewhat unrealistic. But what you say, Tracy?

Yes, sir. It's pretty -- kind of just, wow.

Tracy said, let me give me what they asked for that bank and he brought in and he showed it to me and I started laughing. I said, "That's a joke." He said, "No, it's not a joke." I mean they seriously meant that. And I asked, well, I don't know, maybe they bumped their head on the way to getting that run -- doing the run.

But anyway, that's -- you got to be realistic. It's got to be a fair trade on both sides, and you've got to allow room for a stock to breathe. And -- but I think we've got 2 or 3 deals out there that could took off. So we'll just continue in the market and will continue to be smart about the deals and you know how disciplined we are, Brady, we're disciplined on everything. And as I tell one seller, I said, you'll be proud. You think I'm too disciplined now. Once you become a Home Bancshares' shareholder, you'll be really proud to be with a disciplined company because we protect this stock as much as we can.

So anyway, that's -- it is interesting as Tracy and I have been out here working on some of these trades. But I think we've got one we can get done and maybe another one.

The next question is from Matt Olney with Stephens.

Sticking with the M&A discussion, we've seen some pretty sizable deals recently that are more MOE-like. Would love to hear how Home bank's thinking about M&A with respect to the size of deals. Are you becoming any more open to larger deals over $10 billion of assets? Or do you think you're going to stick with the smaller deals that we've discussed in the past?

Well, we're primarily sticking with the smaller $2 billion or $3 billion deals to $4 billion at this point. We're not afraid to do a $10 billion deal if we understand their asset classes, Matt. One of the larger deals done recently, we just really didn't understand or have the expertise in some of those asset classes, primarily oil and gas, we don't know much about that except it's -- price of oil and gas going up. I know that. But we've just stayed pretty conservative there. Tracy, you got any comment on that?

The only thing I'm going to add, it's a combination. We've got some good sized banks that we would fit well with us and larger banks probably wouldn't fit that niche today.

Kevin talked about some of the asset classes on one of these larger deals a while back, and it kind of -- he was right. We don't -- we're not a big C&I lender. We're really a construction lender a lot. We do a lot of construction. We like it. We've done well in that business, and we'll continue doing that. So if somebody got a big book, 25% of the book's oil and gas, that's probably not a place where we're going to be. So we'll probably be somewhere else.

Okay. Got it. That's helpful. And then switching gears over to loan growth. I appreciate the commentary that the loan pipeline have seen a nice inflection kind of late in the quarter. What about on the other side, the payoffs still remain elevated during 1Q? Would love to hear more details around those payoffs. And any way to think about the payoffs with respect to customer deleveraging or just exiting lower-quality credits? And was there any change in the pace of payoffs during the quarter?

Yes. I think -- this is Kevin. I think Tracy -- both Tracy and Chris mentioned that -- and for the larger credits, the 2 biggest things that I saw this quarter were customers taking advantage of selling their project and refis after a project gets completed, multifamily, those sorts of things and customers taking it permanent, taking it nonrecourse, things like that. Those were the 2 biggest things there.

Sprinkled in there a little bit of refi for rates, but those other 2 were the main things this quarter. Just looking at payoffs for the past several quarters, yes, the last 2 look pretty much the same at over $800 million. I would anticipate you're probably still going to see some of that because we've got -- I think we've got more customers that I know of, a few, that are selling that will materialize this quarter or next quarter. So I think you're still going to see some of that. We're going to have to outpace that to have loan growth.

Matt, there's a shot at it now because things have turned and even for others who ever shut down is those projects that are coming back on stream in Florida. So I'm optimistic that we're going to see some loan growth, maybe better this quarter than I anticipated. I really weren't looking forward until the third and fourth quarter. But it may sneak up a little bit up on this. Now I don't get too optimistic because every time I do that, it goes the other way. So...

Our next question is from Stephen Scouten with Piper Stanley.

Maybe one question just for Brian first. Do you have the number on the remaining PPP -- deferred PPP fees that could come through over the next few quarters?

I did. As of 03/31, we had $20.9 million. And as of today, it's up about $1 million to $21.9 million.

Great. And then maybe -- I don't know if this will be Kevin or who, Tracy maybe, but with your lenders, do you feel like they have gotten distracted at all by PPP lending? Or do you feel, like, you could actually see better core growth as PPP kind of winds down? Or have they been able to kind of manage both effectively?

I would say -- this is Kevin. I would say they've absolutely been distracted by both the funding and the forgiveness aspects of PPP without a doubt. Funding has slowed down -- I'm sorry, funding has slowed down a lot. As I mentioned, we're not doing that many, and we're not really actively looking or responding to requests for funding but we are still -- we still have a lot of forgiveness to deal with, particularly round 3.

Got it. Very helpful. Okay. And then maybe one for Stephen on the deposit cost side. How much lower do you think you could get deposit costs? Because you guys have made phenomenal progress, but it seems like maybe still some room to go with CD costs. Could we see deposit costs down in the 10, 15 basis points kind of range in a few quarters?

Stephen, I think the way we looked at it here over the last 6 months at least, is kind of where we were prior to the last tightening cycle. I think interest-bearing costs were down in the low 20s, which that was, obviously, a number of years into that low rate environment. Interest-bearing costs today are down below 30%. So that would continue to move down.

We have some under contract that will come up over the course of this year. You mentioned the CD maturities that will continue to help. So we'll find the floor somewhere, but given the liquidity that is in the system and in the bank today. I mean I think we will continue to push on it as we go. And whether we can get down below 20%, we'll see, but there's still opportunity over the next couple of quarters for sure.

Got it. Perfect. Okay. And then, Johnny, maybe last one kind of for you would be jumping back to M&A. I know you mentioned maybe $2 billion to $3 billion kind of deals will be the sweet spot. But have you broadened the horizon at all in terms of geographies? Or would it still largely be kind of Arkansas, Florida? Or do you start looking at Georgia or Tennessee or any other states kind of in between, so to speak?

Well, I'll just tell you that we've always liked North and South Carolina. We thought that was -- we've all thought it was a lot like Arkansas over the years, and we've always liked Texas. And there's maybe some opportunity -- pretty pricy in Texas. But I think we're just looking for what comes our way right now and a couple of them have come our away and some of them are falling by the wayside.

So it's just a misunderstanding. We're quoting one deal, one guy and -- when our stock was $21, now it's $26 or $27. Had he taken a deal, he left about $50 million on the table. So some people don't understand what can happen to the market, and bench stuff was starting to move up and it would have been a great opportunity for them. And they're a good bank. It was a good bank. It was a nice bank, nice people. But as usual, the bankers kind of get in the way. Or it appears to me that they did it, it may not be correct.

Fair enough. Fair enough. Well, we look forward to seeing the next one. We know it will be a good one, and congrats on a good quarter.

Thank you. Don't count out. I think Brady counted out all our extra income. I think he took it all off. You didn't need to take it all off, Brady, because we're still in those investments. I want you to understand that. I don't know that we'll have that kind of return coming the rest of the year, but we're still in all of those investments. Every one of them that we're in, we're still in. So -- and we didn't get in them just to be there. We got the got there -- got in them to make money. And as you can see, we're making money with them. So we're investing a little bit ourselves, Stephen.

Our next question is from Will Curtiss with Hovde Group.

I wanted to kind of piggyback on the Florida discussion and just in terms of how well the market is doing. I'm just curious, as kind of this recovery moves along, is there anything that's of concern or you're watching a little closer these days, Johnny?

Well, from an asset quality perspective, I always keep an eye on our hotels. But the information coming on our hotels is much improved from where it was. So I've kind of pushed that off the side. I do worry about inflation. I think inflation's here, Will, and worry about the devaluation of the dollar, I'm scared to death that's going to happen. I listen to a guy who I've done pretty good with on investing. And he says it's coming, and he says it's going to be quick and severe. So I -- he said, if you got cash, get rid of it. That just concerns me, the buying power of the dollar goes down and inflation goes up, and we have to fight that battle.

I said earlier, I think the Fed has done a good job, and I think they're trying to make piles to go ahead and do it. I mean by do it, I think he can do it. But I just don't believe -- I don't believe they're not looking where I'm looking. So the thing that bothers me the most is the inflationary side. But that could be good, too. A little inflation doesn't hurt us all. And then a little kick up in rates wouldn't hurt us. I mean you got -- you think about it, you tie up your money -- you tie up, we got $2 billion, we tie it up in 1.25 today or 1.30 or 1.40 today, and the 10-year goes to 3% by the end of the year, and you look so stupid. You think, why did I do that? What happened? So that's -- my deal is whether Tracy is going to have any hair left on the front of his head because he is rubbing his head every day I walk and he said, I know we're doing the right thing but (expletive), it's tough, Johnny. He said, it's hard. It is really hard not to invest some of this money. We've talked about everything in the world.

I mean we bought some bank stocks. They've done extremely well for us. They're paying a good dividend. Some good banks that we all know, know the people that run them and know how well they did. They run their companies, and those have done well for us. They're good dividend-paying stocks. So we might as well sit with those for a little bit. And -- other than that, I don't know what -- I don't have any -- I think -- I feel this -- if they go to -- we go to 31% or 32%, 30%, what did he say, what did Brian said a while ago, Brian, what we're going to do on the tax rate? Would did you say, Brian?

Well, we were talking before the call and you were asking me what the marginal rate might go to. And the marginal rate that we have right now is $26.135. And if we get the 28% tax bracket, it would go to 32.68% would be our marginal tax rate, which is an increase of 6.545%.

Yes. And think about it, you buy something today based on today's tax bracket and then you turn around and get this -- you're hit with this. So it's a dangerous -- in some respects, it's a dangerous time to be in M&A business trying to do a deal because they're all going to price it off of what today's tax rate is. And if it goes up 6%, and they'd pull -- I mean we made $300 million a year, right? $310 million, something like that. 7 points, that's what, $21 million, $22 million a year comes out of our shareholders' pocket. I think that delays the dividend probably for our shareholders.

Instead of doing 1 every year, it might be 1 ever -- might be 3 years or 2 years before we do another one. That bothers me a little bit. And I know my wife's concerned about that because she likes -- if you remember, she likes our dividend every month. She likes the amount we pay. She just wants the same amount every month. She said she's doing business with Tracy and Brian Davis about that. But I think that -- I guess the government would spend it wiser than we spend it. So that concerns me a little bit.

Outside of that, I mean the company, he run at 2.92% pretax ROA and a 2.22% after that, and a 36% efficiency ratio. And you make the kind of money we make and you've got some good investments kicking in for you. I could not be happier. I just -- I'm ready for a loan growth, and I think we'll get it. But you know us, we are not going to push it, and we're not going to chase 2% or 3% loans. We're not going to do that. We're not in that business. We're not going to sell our future.

I mean we're looking at one bank right now. The problem is that nice banks, their yield sucks. You've got to pay that price, right? If you're going to write low rates, you can pay me now or pay me later, and that's my fear is -- not my fear, we don't do that. So -- but in the future, I hope rates come up a little bit. I think it's time for a little kick in rates. I don't think that had hurt banks, it might slow mortgage down a little bit. I probably told you more than you want to hear it, didn't I?

No, that was great. I appreciate your thoughts, and a nice quarter.

The next question is from Brian Martin with Janney Montgomery.

Just the -- a couple of things. Maybe one for Brian or for Kevin. Just on those PPP fees, Brian, I think you said they were $22 million. So the remaining -- do you have the breakdown of what remains on 1 and 2 versus 3?

And then just maybe for Kevin, just the forgiveness that you talked about, just the -- how to think about that forgiveness, particularly for round 3. Just how are you thinking about that? Or just how should we big picture? Any thoughts on that?

I'll go first. Of the approximately $22 million of PPP fees, we have $7 million of it left approximately from round 1, and we started at $30 million at that point in time. And so that would leave about $15 million from round 2.

So Brian, I think we're going to see the rounds 1 and 2 slow down. Those have been pretty consistent the last 2 quarters -- or really the 2 quarters that we've been doing it. You're going to see that slow down but you're going to 3 pick up. So I would think that the next quarter or 2 should be pretty consistent with the last 2 quarters.

And then past that, I'm not sure. I don't know how round 3 will finish up because some of that stuff, we won't be able to start on until later in the year. Some of it will get to start now, but some folks will wait as long as they can. So I do expect a couple of quarters similar to the last 2.

Okay. So not much bleeding over into next year to '22?

I would -- I hope not. I mean I really hope not. I hope to get it done this year for my people's sake.

Got you. Okay. And then maybe just one, I guess, I'm not sure for who, but just on the liquidity. I guess I understand about sitting tight, but just think I guess your comments about the loan growth funding late in the quarter, but then you have a full quarter impact of the liquidity from the deposit growth. Just kind of wondering how to think about the size of the balance sheet going forward and then maybe just kind of the margin impact, I guess, particularly as you get to Q2 here with the full quarter of both those items?

Brian, this is Stephen. To answer the last part first. I mean we had, I think, on average for the quarter, about 40 basis points impact to the NIM from the liquidity that we had, and I think it was about 50 basis points in the month of March. So we try to -- we really try to strip all that out and see where would we be on a core basis. I think we're still in that 4% range on a core basis that we've tracked in the past.

Some of the stimulus -- well, the last round of stimulus came early March, that's still -- we'll see how some of that gets spent over this period of time and certainly seems like people are saving money of interest. Our debit card spend in March was up 50% over what it was a year ago, and it was probably up 25% or 30% from what it had been in the last 4 or 5 months in a row. So certainly, some of that money is getting spent and put out in the economy. But maybe some of the liquidity gets spent over the next few months and maybe some of that gets traded in the loan balances for us. So earning asset size today, to me, it's probably flattish to maybe down a little bit over the next several months.

Okay. Perfect. And then, Stephen, just the deposit flows, you talked about them, as strong as they were this quarter, I guess, is your expectation those kind of slow down a bit at this point? I guess now that...

I do. I mean we -- Q1, historically, when you have tax refunds and those kind of things is good for us. I mean then you had PPP funding and you had the latest round of stimulus, that all helps that. So I would not -- I wouldn't necessarily expect the deposit increases that we had this past quarter to continue at that level going from here.

We'll continue to watch where interest-bearing balances are and what we're paying there and try to mitigate some of the inflows there just from an interest rate standpoint.

The next question is from John Helfst with Voya.

Any -- can you -- I dialed in a little late, maybe you've discussed -- but in the construction, like, your crystal ball, what subsectors do you see potential growth or demand, like, industrial or medical office? Or maybe you don't -- maybe it's a bad question, maybe you only focus on 1 or 2 areas, so I apologize. But if there's a few areas and are you seeing any green shoots or whatever you want to call it in terms of construction demand?

Yes. I think you could -- several areas, I think, at least in the footprint, and Chris can talk for his group because it may be different for this group. But in the footprint, certainly, multifamily and part of the footprint, industrial, in that Central Florida area, there's a lot of that to be had, although that's generally pretty cheap.

There will actually be probably a little bit of hotel that comes around. And so it's going to be dependent upon which market we're talking about will determine kind of what -- which asset classes there are. Chris, do you see something different than that?

No, I think that's right. Industrial is hot everywhere, maybe a little too hot. And so we're a little cautious, to be honest with you, on industrial. But anything residential is doing well. A little bit of mixed-use is okay, depending on the market. But yes, I think it's the stuff you'd expect for the most part.

On industrial, it just depends a little bit on what you're taking a look at. Cold storage is really, really in demand. But as a subset of that. But again, it's everything from single-family homes to condos to rentals, all pretty good in most markets.

John, yes, Chris mentioned single-family and certainly, I didn't mention that in my comments, but definitely, the single-family construction side is strong in really all of our markets.

Okay. And then ex that, and this is maybe too theoretical, like, the loan to cost, the cost has got to be coming higher. So that gives you more comfort. Maybe do you underwrite to higher rents as a result or higher loan-to-value? Or do you -- I guess what I'm saying is loan-to-cost, loan-to-value are maybe getting separated a little bit. So that would seem to me, like, put upward pressure on rent. Are you underwriting that? And it's not a trick question. It may be too theoretical. I just was curious.

Yes. We're definitely seeing the relationship between cost and value changing in our appraisals. I mean we are seeing that as costs are going up. I mean we're -- it's not normal for us to really try to underwrite to higher rents than the market. I mean that's not something we typically will do. Although a lot of our projects do project that, we're sensitive with -- about that and really try to -- while we may give them credit for it on one side, we're also conservative and look at what happens if they don't get that premium. So that's not something that we typically would hang our underwriting on.

That's makes sense. Good answer. So it's a little cushion maybe for the underwriting in the future as well. Okay.

Right.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Allison for any closing remarks.

Thank you all for joining today. Thanks for your support. Hopefully, next quarter, we'll have another good one. We're off to a good year, and things are picking up countrywide. And I think rates are going to tick up a little bit, and I think it's good for banks. So I'm pretty optimistic that this could be another really good year for Home, and we certainly are out to a great start. This is -- we've never made $90 million a month. And I don't know if we've ever run a 36.60% efficiency ratio. Have we? Somewhere we've gotten down close.

Very close.

Very close? Okay. Anyway -- I don't want to say something's wrong but -- anyway, thank you very much for your support, and we'll talk to you in about 90 days.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.