Home BancShares Inc (HOMB) 2023 Q1 法說會逐字稿

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. First Quarter 2023 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. (Operator Instructions)

The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 2023. (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 first quarter conference call. Today's discussion will include prepared remarks from our Chairman, John Allison; Stephen Tipton, Chief Operating Officer; and Kevin Hester, Chief Lending Officer. The rest of our team is present and available for questions. Tracy French, President and CEO Centennial Bank; Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance.

It's been an interesting 90 days in the banking sector. However, Home is still standing strong. And to provide you with more color on this is our first speaker Chairman, John Allison.

Good afternoon. Thank you, Donna. We usually open with profitability the first thing, but during these times we thought it'd probably be more appropriate to talk about the strength of the company and the strength of Home Bancshares. Our strategy and patience has paid off for our customers, our employees, our depositors, and our shareholders. The strength of Home's liquidity and availability provides more than 100% coverage for all uninsured and uncollateralized depositors as of March 31, 2023, and that carries through today. So I want to say that again, Home has the ability and liquidity to cover all uninsured and uncollateralized deposits for any customer that we have in the company. We're very proud of that. The strong liquidity of Home has allowed Home to pay all collateralized depositors with deposits in excess of FDIC limits of $250,000 and still have $1.7 billion remaining. That really equates to the fact that Home has the ability to cover 133% of all uncollateralized deposits.

We're very proud of the fortress balance sheet we have built. Home Bancshares, Happy Bank, Centennial Bank is one of the strongest banks in America. There are only a handful of banks in the country that can be trusted to make this statement, and I think if there was any concern about from our deposits, I think this will comfort them. In the press release, there's also a table showing how the availability is available. I said last quarter that all banks are not created equal. Our goal was not just to say we were better but prove after years of excellent performance that Home should be separated from the pack as a very safe, strong, and well-managed financial institution. I hope you all agree that we have proven the strength of Home's balance sheet and the performance of a company that has stood the test of time again during a new and different bank crisis. What can possibly go wrong? I think we've seen about everything that could happen.

What are the key factors that have not only contributed to the strength of our bank but allowed top tier results quarter after quarter as well as year after year? Liquidity, capital, asset quality, loan reserves, profitability, and management experience. Liquidity was not important until it was. Banks get liquidity mainly from deposits, all forms of deposits, bonds, security portfolios as well as selling assets. During '21 and '22, the U.S. government was spending as some people would say like a drunken sailor. During that time, we grew liquidity deposits, basically, to over $3 billion in excess to liquidity. The great majority of these funds Home simply put into Fed funds because we assumed many of these excess deposits would run off as interest rates continued to increase and as consumers spent their free money.

If you watched the Wall Street guys, they said cash is trash. How many times did we hear that during the years? Actually cash was king then and certainly now more than ever. Banks with this newfound liquidity during that time decided to invest in low-rate securities and what I call a race to the bottom on loan rates, after we were in basically a low or zero-rate environment for a long time that lasted several years until the drunken sailor spending created something called inflation. It raised its ugly head, calls from the Fed to increase interest rates at the fastest rate in the history of our country in attempt to quell the monster. With banks hungry for yield, they blindly piled into low-rate securities and competed with each other in what I call creating a race to the bottom on loan rates.

This was a critical decision that the leaders of the respected banks made that created this crisis. I've said for years that bankers who do not have any business experience are not the guys you want handling your money. Nearly all banks acting like a pack of animals, they took their employees, shareholders, and depositors straight to the slaughter because they built their houses out of straw. Pull a list of banks over 100% deposit, coupled with a capital ratio of 8% or less, and you'll find those bankers that hoped the big bad wolf doesn't show up and blow their houses down. Many banks would fail, actually only a few would survive. Home built their house with bricks and steel.

The truth is many would have negative capital ratios if they had to mark to market their securities portfolio, scary stuff. If Home were to take the marks to mark to market, we would remain one of the best capitalized banks in America, different from many banks. A 100% or greater loan to deposit with 8% capital [less] is a recipe for disaster. When cash runs out and banks deplete their bonds, they have no choice but to go to brokered deposits and high-rate CDs, whether it kills their margin in profitability or not, they turn into their survival mode. Watch the CD ads. You've seen all these CD ads hitting the paper that'll tell you who is in dire need for money. You've not seen one CD ad from Home Bancshares, Centennial Bank or Happy Bank. That should comfort all our depositors.

Home has cash liquidity and availability, as I said, to pay all deposits, assuming Home was forced tomorrow to do that and had no liquidity and had to borrow $5 billion at an interest rate of 5% creating an additional $250 million in interest expense, Home would still run a 1.20 ROA, and that's better than 90% of the banks in the country run today. We have provided a chart to show you our availability of bonds. If a bank can pay out all uninsured depositors and still make a 1% ROA, one of the top bank analyst in the country said, banks that can do that are in the catbird seat. Well, welcome to Home Bancshares's capital ratios are in the top tier of all banks. The conservative management team will always maintain strong capital because you can't get capital when you have to have it. Prime example is Silicon Valley Bank, SVB. Enough said about that.

As your largest individual shareholder in Home and with this company being my largest personal asset, I certainly have a vested interest in protecting what my wife calls a chuckwagon. And Home is the chuckwagon; it feeds all of us. Most of you know, she's very protective of her dividend. And when I told her about the bank crisis, she said protect the chuckwagon at all costs. Circle the wagon with our strong employees, our partners, our shareholders, our customers, and depositors. That is exactly what we've done. Good liquidity, strong capital, huge loan loss reserve, strong asset quality, coupled with peer-leading profitability. By the way, it's also the largest asset of our executive committee and some of our directors. So we're all focused on the same goal, asset quality. While maintaining one of the highest loan loss reserves in the country rather than play Jack in the Box, raising and lowering quarter after quarter. Because of all the factors we've faced over the last 23 years, we know what has worked for the last 40 years, and that is a 2% reserve balance.

The company's reserve is $287.2 million, or 2%, compared to December 31 when it was 2.01%. The allowance on credit losses on loans represent 383% of non-performing loans. What that means is if we have a $100 worth of nonperforming loans, we have $388 worth reserve to cover that $100 worth of loan. Stockholders' equity grew for the quarter $104 million. That was a combination of retained earnings at $66.3 million plus $49.2 million reduction in AOCI, as interest rates softened someone.

Let's go talk about the earnings. Earnings for the quarter were $103 million, or $0.51 per share, and adjusted earnings of $0.54 per share. Return on assets was 1.84%, adjusted at 1.95%. Return on tangible common equity was 19.75%, or adjusted to 20.90%. Tangible book value of 10.71, that's $10.71. That's an increase of 5.4% from the first quarter. Tangible common equity as a percent of total equity was 10.33 at 3/1 versus 9.66% at 12/31/22. And if we took the held-to-maturity loss of $86 million after tax, we would still remain almost 10%. We actually would be 9.97%. Pretty damn strong stuff. P5NR was 53.91%, total interest income was $284.939 million. I think that's a record, Brian. I don't think we've ever hit that number on total interest income.

No, I think that is record, you're right.

Net interest income was $214.595 million versus the fourth quarter of last year at $215.666 million. That was basically flat. Total revenue was $248.759 million. The difference there is the fair market adjustment on holding company bank stocks and preferreds, which hit us for about 11.3%.

11.4%.

About 11.4%. We didn't sell them, so we didn't lost that money. We expect and we see -- I'm seeing a recovery and those coming back today, so that's good. We'll keep them. We bought them for the dividends, and we'll hold them. Margin improved again to 4.37% from 4.21%, but (inaudible) from a year ago. A year ago this time we were at 3.21% and now we're at 4.37%. That's 116 basis points. That's pretty impressive.

Noninterest expense, great job, guys, $114 million versus $118 million. We're down about $4 million over last quarter. Efficiency ratio of 44.80%, adjusted to 43.42%. Tangible common equity as a percent of total equity was 10.33% versus 9.66%. Common equity Tier 1, I don't know, I had Brian run this for me. I said, Brian, run this. Show me capital ratio and then take the entire loss of the AOCI and HTM, both HTM and AFS, add those together, and tell me where we were running.

So when you hear Common Equity Tier 1, you're going to hear 2 numbers: one of them is before and one of them is after, so it's 13.2%, and I'll talk a little more about that in a minute. 13.2% now and 11.4% if we take all the losses, which we have no reason to do. Leverage ratio from 11.4% to 9.8%. Tier 1 capital from 13.2% to 11.4%. Risk-based capital from 16.8% to 15%. That's pretty amazing numbers. That puts us -- those second numbers of each one of those categories puts us in top class in the country.

Yield on our securities book, I'm very proud of, is 3.30%. Good job by our guys there. That's probably about what most banks' loan yields are. Yield on our book is 6.64% -- our loan book. That's 6.64% versus 6.23%. That's pretty nice increase. But from this time last year, it was 5.29%. That's 135 basis point increase. We bought back 590,000 shares during the first quarter, and we've repurchased over 250,000 shares so far this quarter, mostly through our 10b-5 filing.

It's been on sale, so we thought it was a [good buy]. I've not seen another bank present their ability to payout all their uninsured deposits, including the big money center bank that everyone's raving about. This does not mean they can't, but why would a bank not disclose their ability to pay out all uninsured deposits if they can.

I would imagine the difference is buried in the security book. If we were forced to liquidate our securities book today, which we're not, Home's loss would be pretax of $454.675 million, based on a $5.4 billion security book. That equates to 8.42% pretax, or after-tax 6.34%. Many banks have 30%, 40% and 50% haircuts to take, and that's -- I assume that's why they won't be wanting to disclose that. As I showed earlier, Home would still remain one of the best-capitalized banks in America. Home's customers can take their money out of the mattress and put it back in the bank.

Talk a little bit about a lawsuit. We had some West Texas headwinds. That is situation has improved some. We filed a lawsuit against 17 individuals March 3, 2023, that we derived through our forensic investigators had improperly transferred Happy's data. We're not going to say anything else about that. Some of those offices have been closed. There have been some changes out there, but until we're fully compensated in this suit, we'll continue against all those parties.

Conclusion.

Everyone says they're worried about regional banks. Well, you don't need to worry about Home. I think Home is in the best position of any bank in the country, so I hope that eases all of you. In addition to that, we've had a great quarter. I really don't have much to say negative about the quarter other than deposits went down some as we expected. But outside of that, we're hanging in really good.

I think I've said I want to run $100 million -- continue on a $100 million run rate per quarter. I think we can do that. We can do that. We're going to earn $400 million plus. And in the middle of a crisis like this, I think that's pretty darn good. And Tracy French, our CEO, who's had his head down and been pretty darn busy lately, I thought I'd just see if he had a comment. Well, Johnny, you made me feel comfortable just listen to your numbers and rattle off how safe and sound we are, which we've always known that. I'll compliment you and the Board on that. It's pretty simple, as you stated, basic banking. And I heard Donna say the last quarter has been crazy. I've been working for you for 84 quarters. It's been entertaining every damn quarter.

It really is coming back to just the basics of banking and us staying the course as we've done through several curveballs that's been thrown at us, but it's a compliment to our team. I know Stephen and Kevin are going to give a little color on the loans and deposits. We talk about the loan-deposit ratio. I've been doing deposit-to-loan ratio over the last 2 years and turns out to they've been in pretty good shape.

Our deposits, as you mentioned and Stephen will give color on, since the 1st of this month, we've seen a nice increase. Now Uncle Sam's going to get his fair share over the next few weeks, and we anticipate. And I'm proud to say, in the banking part, we've got another line item that's coming to be (inaudible) Trust Company. We've got Kevin Orr and Joby Mills and Jeff Kelly with the GoldStar, they're going to become a line item for us and that's positive for our company as we see other areas that can step up and pick the ball up for us along the way.

Performance metrics you gave, Johnny, and I just want to mention some, and this is on the regional bank and the bank ROA. When you say it's a 2.09%, it's pretty damn good. And that's been a constant improvement. And I can tell you, you got 3 regions that did over 3% and you got 1 region (inaudible) that did over 4% the past quarter. That's a compliment to our regional managers, our retail leaders, our loan officers, and everything that deals with that because they've been working this all the time. It's not just been the last month.

It's not been the last quarter. It's not been the last half year. It's been constantly working and the proof's in the numbers on that. And to finalize that comment, Johnny, (inaudible) we focus a lot on our margin and our margin in the bank has gone from 3.74% to 4.13% to 4.29% to this quarter 4.46%, 16 basis point increase in a quarter. You can probably come give me a pat on the back on that. I think it's okay.

It's okay. Hey, Johnny, says it's okay for all the regional and retail folks, but outstanding job. So thank you for all the support that our team has given us, every single one of them.

Well, there are some very powerful statements in both of those messages. Thank you very much. And I'll just say, I'm for one proud to be on the chuckwagon. So thank you for those comments. Our next update now will be from Stephen Tipton.

Thanks, Donna. I'll start with the topics of liquidity and funding. As we have mentioned over each of the past 3 quarters, we've seen a shift to deposit balances going to investment firms, money market mutual funds, and some banks with an obvious need for funding. The first quarter of 2023 was no different. Total deposits declined slightly less than $500 million in the quarter. It was spread fairly evenly across each of the past 3 months. The quarterly decline in total deposits was the lowest since the Happy acquisition one year ago. So absent outflows this month related to tax filings, as Tracy mentioned, maybe we'll begin to see that level out.

Johnny mentioned the analysis we recently completed on uninsured balances relative to our borrowing capacity. Adjusting for collateralized deposits, which are generally the municipalities, local school districts, and higher ed relationships we've long banked, the calculated uninsured balances are 29.9% of our total deposits.

While our company's size and strength today allows us to expand and take on larger relationships, both on the loan and deposit side, we still believe in the franchise value of having core relationships in a granular deposit base. Currently, brokered deposits comprised 2.6% of total liabilities. And our internal limits will allow us to grow that by over $1.3 billion, if we ever needed to. Our top 10 list of depositors accounts for only 6% of our total deposits, and only 2 of those customers considered uninsured or uncollateralized.

An updated review of our deposit base shows nearly 500,000 deposit accounts with over 70% of those having been opened and active for at least 3 years and over 25% of those active over a decade. The mix and balances stands at approximately 2/3 commercial or business and 1/3 retail today, while the number of deposit accounts is approximately 80% retail. New account opening activity continues to be strong with over 14,000 new accounts opened in Q1. And March actually was a bit more active than we've seen in the past.

Switching to capital, as Johnny mentioned, the parent company total risk-based capital ratio ended at a very strong 16.8% and a TCE or tangible common equity to total assets ratio of 10.33%. As he mentioned, we repurchased 590,000 shares of stock during the first quarter and continue to be active under our 10b5-1 plan that's in place now.

On the asset side, coming off a very strong fourth quarter, loan origination volume softened to $1.09 billion, with over 75% of the volume coming from the community bank regions and that was split fairly evenly between Arkansas, Florida and Texas production. Finally, the net interest margin improved 16 basis points in Q1 to 4.37% as our bankers continue to do a great job managing this interest rate environment.

Interest-bearing deposits averaged 1.90% in Q1, which was up 45 basis points from Q4, and exited the quarter in March at 2.01%. The core loan yield, excluding accretion and other income, averaged 6.49% and was up 39 basis points from Q4 and exited the quarter in March at 6.54%.

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

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

Thanks, Donna, and good afternoon, everyone. As Johnny appropriately stated earlier, one of the key factors that has contributed to the strength of Home Bancshares has been our compelling asset quality. I believe that the following color on the activities of the first quarter will bear out that this continues to be a strength of our company. Nonperforming loans and nonperforming assets remain at very low levels of 0.51% and 0.33%, respectively.

A detailed review of the increase in nonaccruals of $13 million this quarter reveals 2 CCFG C&I credits totaling about $6 million. Our internal analysis of the entirety of CCFG C&I portfolio indicates a potential loss of only $5 million, which is all within its shared national credit portfolio. We shifted away from SNCs some time ago and this part of their C&I portfolio has been winding down accordingly.

The remaining $7 million is spread across a few credits in the community bank footprint, and based on payments that have been made to date or renewals that are in process, at least the same amount will be returned to accrual in the second quarter. For those of you that may not remember our Arkansas State banking law requires automatic nonaccrual at 105 days past due, regardless of whether it is in the process of collection. Timing of these payments and renewals will allow the reversal of most of these new additions.

As Johnny stated, the allowance for credit losses remains at 2% of loans and provides 388% coverage of nonperforming loans, both stellar measures. Past dues totaled only 0.62% of loans. Even with the total of $30 million in ALF and memory care loans added to the total this quarter. We have discussed these loans previously, and I'll give you an update on that portfolio momentarily.

At this time, I would like to turn it over to John Marshall, who will provide you some information on the asset quality for Shore Premier Finance. John?

Yes, Kevin, thank you. I think Centennial Bank enjoys very high asset quality. The division Shore Premier Finance in the marine finance space also enjoys very good asset quality because of our underwriting standards. And we haven't, through this cycle, seen any deterioration.

In fact, our delinquency, which normally runs -- this is for 30-plus days delinquent -- around 11 to 14 basis points. Kevin, at the end of the first quarter, we saw improvement, so that it was under $800,000 and about 8 basis points on a $1 billion book.

So I'm very pleased with the way asset quality in the marine space is holding up. Thank you.

Thanks, John. That's impressive and is directly related to your group's rigorous underwriting practices. As I mentioned, we've been working through a portfolio of about $100 million in ALF and memory care loans in Florida for some time. And in January, the equity partner disclosed that they were wanting to exit some of these properties. We have been negotiating a soft landing for these assets, and I'm pleased to report that there are multiple buyers for this equity position. We have always contended that we underwrote these assets conservatively with a low leverage position. Based on the ongoing negotiations, which are nearing finality, we do not expect any loss on this portfolio and expect all to be resolved by the time that we report again in 90 days.

Finally, I wanted to mention that due to the concerns of some regarding certain asset classes, we chose to refresh the deep dive into the office portfolio that we performed back in 2020. This analysis was completed during the first quarter using balances of the portfolio at 12/31/22 and the results were included in this quarter's press release. I would like to point out that rolling forward to 3/31/23 there is no change in the asset quality of this portfolio, which continues to exhibit low problem loan totals and less than 1% past due.

Notably, nearly 60% of the portfolio is located within our community bank footprint, with most of that in Texas and Florida, which are states that should be less impacted by changes in how office space is utilized post-COVID. Even within these states, the majority of these balances are in the very strong geographies of DFW and Miami, which continue to experience high levels of population and company headquarter inflow.

Positive attributes such as low leverage, high occupancy, and predominantly low rise come to mind as a result of this analysis. Outside of a couple of instances within the community bank footprint, most of our recent additions to this asset class have come through CCFG as a part of a multi-asset facility. For most of these additions, office is not the highest and best use, nor is it what the valuation is based on. We continue to be very positive about our exposure in this potentially fragile asset class.

Donna, that's all I've got and I'll turn it back over to you.

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

I think it was a great quarter overall. As I said, what can possibly go wrong? You think about the worst financial crash since the Great Depression in '08, '09, '10 and '11, we weathered that. We really didn't see this liquidity crisis coming. We called the shots to maintain lots of liquidity, and we certainly called the right shots. So I'm sure there's a lot of envious banks of Home Bancshares today because they spent their money and put it in different asset classes where we didn't. And when it ran off, we had the cash to let it go.

So anyway, it was -- I hope everybody thinks it's as good as I think it was. Based on what we saw, what happened in the marketplace, I also think there might be some opportunities on the buy side maybe to pick up some assets over a period of time. We'll be looking -- we bid on both Signature and pieces of Signature as well as pieces of SVB. We were not successful, but there's still some stuff left, so we'll see about that, see if there's something there that makes sense for us.

Outside of that, John, good report on the asset quality on the marine book. I'm proud of you guys and what you've done. And Kevin said it's your exhaustive underwriting that has certainly paid off for this corporation and congrats on that. Seems to be the world out there is scared to death of marine stuff, and I keep asking, are we missing something. But you keep producing the great numbers, so thank you for that and good report everybody. Donna, I'm ready to go to Q&A if you're ready.

I think we're all ready. We'll turn it back to the operator and open it up for questions.

(Operator Instructions) The first question is from the line of Jon Arfstrom with RBC.

Hear me all right? Okay, good. Good quarter. I agree. Good numbers. In terms of the liquidity that you lay out, you clearly have a lot of it, and you're prepared for I think any level of deposit outflows. But I'm just curious if things are settled down from your point of view, and are you starting to see some of these deposits, that may have left, flow back into the bank?

Yes, some of that. We were prepared for that. I think some people got -- I never got asked. I never got 1 question from any customer, period. And Tracy got a few, and I think Stephen got some, but overall, we didn't -- I didn't feel it. I saw we're losing a little bit, but I think that's naturally you see these people offering 5-plus percent for own CDs, that says we've borrowed all the money -- we need to borrow from the Fed in the forwards. That tells you something.

If they're offering 5% -- if they're paying you 5%, that means we borrowed it -- that means we spent all our money, we're borrowed up, and now we're trying to -- doesn't matter whether we're profitable or not, but I think we're good. I actually think we're good. We'll go through this tax time. If we get through the tax time, I think we'll be fine.

From the loan perspective, we're not aggressive on loans. So you remember back in '08-'09 and I think you asked the question what do we think about loans, and I said I don't think much about them. I don't care right now. The key is make sure the company is strong. That's the most important thing that we've done, and that's what we're going to continue to do.

So we're not aggressive on loans. We've gotten a little tougher on the loan side. We're seeing pretty good loan demand. We're seeing some [squirrelly loans] that are running around out there. So we're -- I don't know that we got the lines to pull up if we need it, as Brian says, but I don't know. If we need it, we'll use it. We haven't borrowed a penny this year. We haven't borrowed 1 nickel. So we got ourselves set up for it, but we haven't had to use it, and that's a blessing for us because it's higher-price money. But I'm pretty optimistic, we may slide on -- depends on how bad tax season is, I think that's really the point. Any comment on that, Brian?

Okay. Stephen, you had a comment about how there was deposit outflows, but it was the lowest that you've seen in a while. Did I hear that correctly?

That's right. Yes, I think deposits were down about [490] for the quarter. Those were higher levels in Q3 and Q4 last year just on the heels of the acquisition. And Tracy mentioned, through this point in April, we've bounced around in a positive position so far.

So we saw a little bit of inflow in March. We actually had a couple of surprise deposits from customers of ours that had money maybe out west that wired money in and said we were told by our Treasurer to park it at Centennial Bank. So we saw a few of those instances, but I think overall maybe just maybe focused more on strength and quality instead of, say, where the highest rate may be.

We're not going to solicit the big deposits. We've managed this thing properly where we've had the ability to cover our uninsured deposits and uncollateralized deposits. So I think we're not out -- we'll control those if they come in. I'm sure a lot of people would like to put their money here. We like to have some money from everybody maybe, but we don't -- it's not our goal to end up like SVB with a lot of lumpy deposits in the bank, so.

Yes, okay. This is a refreshing. It's the difference...

I'll tell you that, Jon. We're not going to be the highest rate, but we're damn sure the safest.

Yes, well, it gets to my next question, but this is I guess a good discussion because it doesn't feel like you're that concerned about deposit outflows, which is good. And I guess it's the next question where you're saying you're not going to be the highest rate and you're being a little bit more cautious on lending but seeing some opportunities. How do you guys feel about the margin from here? Can you keep pushing this margin higher?

Jon, that's our goal, right? That's the fun part, not just over the past year, but forever in this company, we always want to try to get a little better if we can. We have to adjust and go where the market steers us. But we're just making good business decisions and right now the markets work in our favor, and we haven't had the -- we weren't in the position where we had to go out there and pay high interest rates on deposits. We've got great core customers and that's what's -- as we watch the deposits every day, and not just me, it's every region out there in the market. It's just cool how we want to pay attention to that.

So we've been able to bring some stuff in. But to answer your question, I'd probably say I'm always nervous about the margin, but Johnny wants me to make sure we get it better. And the great part about our company is everybody out there in the regions want to do the same thing. So just go with the flow. The loan rates are this today and deposit rates are this and as long as that holds, good, we'll swing. We didn't bet on the future. Thank gosh we didn't lock in a lot of the assets at 3.5% for 10 years because I didn't have anybody doing a 0% CD for 10 years.

We had a payoff this week, $80 million payoff, the loan rate was [9.845%] and the prepayment penalty is $420,000. So I told them we got to get something going to replace that $80 million-something at roughly 10% worth of prepay. So anyway, we didn't cry about the prepay. They asked for different things, and we weren't going to do that. We're not going to stretch, so we don't stretch. So we didn't stretch and they were able to refinance it, paid us off. But I thought it was fixed. I had forgotten it was floating, and I thought it was fixed like 6% or 7%. I said what was the rate when we got paid off, and they sent it to me and I said, wow. We're going to replace that, Tracy -- Kevin.

Now we're 4.46% in the bank. If that doesn't make you or the shareholder happy, I mean come on.

It's a good message on that.

Thank you.

The next question is from the line of Matt Olney with Stephens.

Want to start on the M&A side. You mentioned being opportunistic. Any color on what's in the marketplace today that you're looking at? Perhaps it's too soon, but just curious about this. And then specifically, within the Signature and [SVB] commentary that you mentioned, anymore color on the types of businesses from them that you were attracted to?

We're looking at some of their assets that they have. I don't want to get specific here, but we're looking at some of those assets to bid on. From an M&A perspective, the problem is that most banks are loaned up and they're in the 100% -- majority of them are in the 100% -- That won't sell particularly let me say that. They're 100%, they're tired, worn out, and they they're running lower capital ratios. And if you mark AOCI, it's even much worse. And I don't think we're in the mood -- I don't think Home is in the mood in this cycle to stretch. Donna and I looked at one, and we were in Dallas a while back. The bank was in Dallas, but the bank was somewhere else. And met with the owners and they're 108% loan to deposit and their margins going straight in the tank because they're out of money and they're going to pay high prices for money, and they're getting killed.

And the point is -- so I said, let me get this straight, you want me pay you a premium for that. And I said I'm struggling why I'd want to do that and why I'd want to take your mess that you've created and put on my balance sheet and put my balance sheet that is not stressed under any conditions and put my balance sheet under stress. So in joking, I said if you pay me $100 million, I'll take it. But that didn't go very well (inaudible). That's my attitude right now. I've never seen this crisis before, and it's pretty damn serious. And you see how fragile banks are. Banks are very fragile and there's not 20 banks in the country that could take a run. I don't believe. Maybe 50, maybe 100 that could take a run tomorrow. Home Bancshares can take 1, but there's not many banks that could take a run.

So I don't know that I want to buy some -- pay somebody a premium to buy their problem. That's where my stance is right now. We're doing fine. We're going to be fine. Home Bancshares will be open. Home Bancshares will be operating and Home Bancshares will be profitable. So you never heard that quite that talk out of me before like that. But I think it's time to be -- protect the chuckwagon. I don't think you stretch -- I don't think it's time to stretch. I don't think this is over, and I think it could be a while before it's over. So I think we're just going to sit here and protect the chuckwagon for a while. We'll take care of our customers. Our customers have no fear. We have the ability to continue to finance our customers. New customers will be difficult to get in the door, but we'll take care of our existing customers. They've been good to us, we'll be good to them, we'll be here to take care of their needs. So I think that's the safe way to play it right now, Jon.

On the office front, you guys gave some great details there in the press release as far as the geographies and amounts and LTVs and I think you did disclose about $45 million was criticized, which I guess is what 4%, relatively small amount. Anything more notable in that smaller -- in that $45 million, Kevin, to speak of as far as a trend or anything more notable there?

Yes, probably the most notable thing is that the majority of that is in the Texas market and it is stuff that we marked criticized in due diligence and not classified but an OLEM and as we get -- that happens a fair amount when we do due diligence on stuff that could be 4 or 5 or a 6, and we usually are pretty conservative and then take the next year or 2 to look at it closer. And so I wouldn't be surprised if the majority of that when we do an annual review looks better than we thought it did at due diligence. So that is the vast majority of that $45 million is in what I would call that bucket.

Okay, got it. That's good news.

About 65% loan to deposit -- about 65% loan to value and most of it matures in '23 and '24. So we'll get to look at it this year or next year, and I'm not particularly concerned about any of that. And I guess, Kevin, just taking a step back and thinking about this office deep dive that you guys did over the last few months, I'm curious about what you think about lost potential to Home Bank on this portfolio as it compares to a few years ago when you guys had a similar deep dive on the hospitality book back in 2020.

You guys carried some larger hospitality loans a few years ago, came out with no losses. How would you compare this office deep dive and potential losses to what you saw back then? Yes, we actually looked at this portfolio around that same time, we did the same deep dive. And it looks very similar to what it looked like I would say. And I think I said it in my remarks that the majority of what we've put on the last 1 year, 1.5 year has really not been traditional office, even though it is coded office, it's not what you would expect the ultimate disposition to be of that asset, and most of that's in the New York portfolio in a multi asset facility.

So you would look at that completely differently than you would an operating office building that's going to be an office building now and forever. So I feel really good about the deep dive. I like the fact that the majority of our balances are in our footprint and even within that footprint in 2 of the strongest geographies, particularly for office. So I think that bodes well. I feel really good about the exposure and any potential loss for that group of loans.

Okay. Great report.

The next question is from the line of Brady Gailey with KBW.

I wanted to start on loan growth. Johnny, you mentioned a lot of your peers don't have money to lend. They're loaned up, but that's not the case at Home. You guys have money to lend, and relatively low loan to deposit ratio. Is now or is today's backdrop a time where you could see loan growth pickup for Home?

Well, as I said earlier, we're going to service our customers. We're going to take care of our customers. Kevin is seeing some credits that from the outside that we don't feel -- he doesn't feel comfortable in doing at this point in time. And I think that's probably a good time, but the key is we've got some great customers who've been with us for many years, enabled us to grow this company, and the point is to take care of them. To say we won't do somebody that comes from the outside, we probably will under our terms and conditions if we can build a long-term relationship with those people. If that's if that's available, but we're not interested in one-timers, and we're not interested in anybody can't [bring] deposits. We're interested in relationships and long-term relation. And we've built -- Tracy built a bunch, Kevin built a bunch, in '08, '09 and '10 when we were in that crisis. So that worked well for us during that period of time.

And there's an opportunity -- we'll look at about anything, but it's not the time -- it is not the time, I don't think, Brady, to be aggressive. I think it's to be real conservative and take your time because I don't know -- think about this. There's going to be opportunities come out of this, right? And where do you spend your money? You have some real opportunities to spend some money in different areas that could make a lot more money. So we think those opportunities, we have the opportunity to bid on some stuff now, we think those opportunities are out there. We've chosen to take a shot at some of those, and hopefully can increase profitability with those.

So we're just being real careful, very, very careful. I'm just afraid this is not over. I'm just this cycle is not over. And those who survive this cycle may have real opportunities. I remember '08, '09 '10, and '11 how well Home did, became 1 of the biggest buyers in the country of [failed bank] opportunities. Those opportunities could happen again. So we're just going to remain conservative. To say we won't do a new loan, we will. We'll just look at it, but we're not looking at M&A right now. We're not interested in M&A. I think banks are trading -- I think average multiple on banks now they're trading about 1.20 times book, I think that's about where they're trading. That sounds pretty enticing to me, with us at 2 plus times book, but I just don't want to buy somebody else's headaches and problems at this point in time. That doesn't sound like a conservative view.

Yes, that makes sense.

Doesn't sound like the go-go Johnny Allison you've already dealt with. That's just a conservative side, right?

That makes sense. And then you look at credit quality, it's still pristine at Home Bank. The reserve is still 2%, which is pretty high relative to where your metrics are running. Do you think the reserve percentage continues to go lower here or do you draw a line in the sand and say, hey, considering the backdrop, we need to keep this reserve at 2%?

I'm a 2% guy. I'm a 2% loan guy. I don't care what they say. I'm a 2% loan guy. It's always worked. 2% loan has always worked. And I understand we go through all the calculations, we do all that stuff, I understand the importance of all that, and I compare, I watch that and look at that. But I know 2% works, so it doesn't matter to me. I know 2% works.

And then lastly for me, you guys...

(inaudible).

Sorry, what'd you say, Johnny?

I didn't hear that. What'd you say?

My last question is just on the buyback. You guys have been active on the buyback. Is there any reason why that would stop, or do you think the stocks at a good value, you still buy it back here?

Well, we bought back 250,000 shares on our 10b5 so far because they've been hammering the stock. They're killing all the banks, but we just think it's time to buy. So Stephen, put in the 10b-5, and we're pleased with what we're doing as we buy the stock. And we bought 590,000 shares before, so we've got the ability to buy more. I say we get out for a little bit, but then the stock gets cheap and we just buy.

I asked my team to create a list of different ways you can say no because I was getting tired of the ways we were saying no to things. So we're up to about 27 different ways to say no and that'll probably grow. But we'll start saying yes at some point, and we are. We did 200-and-something million in the first quarter. We'll probably do about the same this quarter, and we continue to get payoffs and paydowns. I like to see that right now, too. One thing I've been concerned about is what the exit look like, and we just got paid off on 1 in the last week or so that was a CMBS takeout that I wanted to see how that was going to go before we think about some other things because if the CMBS market's there to take that out, it's great loan and that's good. If it's not, well, that's a really good loan if it can't take that 1 out at CBS so there cannot be much, but that went off well. It was good for our customer. They executed well, and we'll do more with that customer.

What we're probably a little more focused on right now is getting ready for what comes next and for us that's facilities business, that's institutional buyers and institutional lenders that are getting ready. They've raised money, they're getting ready to go buy assets, buy loans, make loans, et cetera. And so that's really where our focus has really probably been over the last couple of months. We've been gearing up, we're putting facilities in place for those folks, et cetera, because when they see opportunities, it's opportunities for them, it's opportunities for us. And so that's how we built this business, and we'll stay focused on that. So I think that's probably where I'd see a little more opportunity than just going out and finding that we're starting to get the phone calls from people saying I had a deal, but my bank's not there. That's an interesting discussion sometimes, but I think the facilities and backing folks that are going to put new fresh capital in is a little more interesting.

That's great caller. I appreciate it, Chris. And then maybe 1 for Stephen Tipton. The DDA mix is at about 28%. Any thoughts around where that could potentially bottom, or do you think we've seen the worst of it?

I think if we go back pre-pandemic levels, we were in the 20 -- I think mid 20s or so range. I think in our -- just looking back over the last several quarters, it's drifted down in step with some of the other categories on the interest-bearing side. So it certainly our focus. I think as it goes, as we mentioned, tax payments and some of those things may pull it down near term but that's our focus and conversation with all of our bankers and presidents are on those operating balances in those real core customers that are out there. So it's certainly a focus.

Johnny, if you're taking applications for that chuckwagon, let me know where I can sign up.

Okay. I want to be 1 of [your darts]. Did you hear me?

I hear you. Well, if it gets cheaper, we'll see. Hope not though, hope not.

The next question is from Brett Rabatin with Hovde Group.

Wanted to start on expenses and I'm not sure if all of the Happy expense savings have been pulled out. So was hoping for some color maybe on where you are on that. And if the first quarter run rate is a good level to think about going forward?

At this point in time, for our plans on Happy, we're pretty much there on what we're going to be having in savings. I think it's a pretty good run rate. We had a little bit of a reversal in some accruals that we had in the first quarter, which was about $1.6 million. But then on the flipside, salaries and stuff could go up because everybody will start maxing out on FICA and stuff. But it's not far from the regular run rate.

Okay. That's helpful. And then, Johnny, earlier in the conversation you said we weren't done with this turmoil, that maybe there was more to come, and a quarter ago you were talking about people flying in planes to see you and talk about credit. And it sounds like you've pulled the horns in somewhat. Can you talk maybe -- and I've noticed that the 1 month T bill is back down even lower than where it was with those failures. Can you talk maybe about what you're focused on in terms of additional potential turmoil? Is it liquidity oriented or is it other things? And just it sounds like you're buckled down for a recession. So I was just curious if you had some thoughts on what that might look like for the industry or what you were focused on?

Well, I think we're going to be higher for longer. The Fed cannot pivot. I don't think they can pivot. If they do, we'll be back in the 70s with [Volcker] and they'll have to come back at a later date and fix it. It does look like things are slowing down, which is positive. I think that's positive. I think that's good. There is a chance that they can hold interest rates maybe another quarter and then just pause and not do anything for a while and watch it. And that's probably the smart thing to do. But I think another 25 basis points could be cooked in right now. It depends on what the Fed thinks as a result of what they're seeing. If they just pushed rates at the fastest rate until the stick broke, they pushed it and pushed it and pushed it till it broke, that's really sad as it is, that needed to be done because we got to stop this inflation monster and it's not over yet.

So it may be coming back, it may be coming down. It certainly appears that way. So I think we're going to be higher for longer. And I think we're about in an environment here where we're going to be for a while, so maybe 25 bps up, maybe flat, maybe 50 bps up, but I don't think any more than that. So these people that -- the banks that are in trouble will remain in trouble for a while. They'll continue to have to pay higher and higher rates for money, and they'll struggle through this process. So you just got to figure out when it's about to end and when it's when it's going to be over and then maybe at that point in time we could get more aggressive on the acquisition side.

But to think about Home, maybe the only bank in the country that bet the way we bet on rates the way we bet, to go out and buy somebody today that didn't do that, that spent their money and leveraged the hell out of their balance sheet, and for us to buy them -- of course, they want a premium, right? So they don't sell at much premium, but the point is, I'm not willing to leverage my balance sheet in this crisis right now. I've never seen a liquidity crisis. This is my first time to really see one. So [Bonny] and I talked about earlier, we did see some semblance of it back in the '70s when every SNL went broke. I'm surprised that credit unions are still hanging there. I don't know how those credit unions are hanging in today. They did low rate loans and guaranteed they're paying higher rates than what their loan book is. And that's what broke all the [savings] loan. And I wouldn't be surprised if it didn't break a bunch of credit unions.

So I'm not predicting that. I'm just saying it certainly appears that when you look the way things are lined up, you see some banks out there. I know some banks out there that are really, really tight right now, really struggling. And it's going to be years before they unwind. They're not going to solve this deal next week, next month. They've got 2 or 3 or 4 years of this maybe, maybe as strong as 4, depends on how. I remember the guys walking and doing 3.70% fixed for 10%, told Tracy, now that's the number that worked forever, right? And what they told us, want to sell them back to us. Well, I'd hate to look at his book today you know because he's paying 4.5%, 5%, 5.5% for money.

So I think it's cautious times, and I think just be smart and be careful because Home has -- I don't know what that opportunity is yet. I don't know where it is. But I believe it's there and I believe Home has the opportunity and the liquidity and the ability to step up and buy something that makes some sense, be it pieces of assets or be it another financial institution. But how big do you want to buy and how much risk will you take when you do that, and what does it do to our liquidity at that point in time, so those would be the questions. That's about as good as I can do. I don't know where it is, but I know [I'm going to] see it, does that make sense?

Yes. That's good color.

We've been pretty good at knowing it when we see it.

The last question is from the line of Brian Martin with Janney.

Maybe just a couple just at the end. Just on the -- I guess within the last quarter, I guess in the December quarter, I'm not sure where it stands now, but just level of stuff, standard loans or classified loans, can you give any color? It looked like they increased a little bit at year end and just wondering where that trend is today and just in conjunction with the dive you did on real estate in the office book.

Hey, this is Kevin. So yes, we had a little bit of an increase at year end. There was 1 pretty large relationship at the timing of the review, just came at a bad time for them. And things have turned back around for them. They're in the energy business and time has turned back around for them. I would expect that either this quarter or next, we'll probably see them come out of the classification. So other than that, I've not seen a lot of movement downward.

Okay. So no real change from that fourth quarter level to today, not a whole lot on either the criticized or classified levels from that base?

Not materially, no.

Yes, okay. All right. And then how about just -- I know you talked a lot about M&A, just the opportunities, but how about just with some of these banks that are struggling out there, Johnny, I guess are liftouts a possibility? Is that something -- I know you're looking at the FDIC, just the banks have failed, but outside of that just liftouts of people as opposed to acquisitions, is that something that's realistic to think about or probably not?

I don't like that. I'm not a liftout guy. I don't like liftouts. I don't like to be lifted out. I don't like that stuff. I think it's [chicken], you can figure the rest of it.

I got you.

You train somebody, you bring them in, you teach them, you give them lots of business, and suddenly they go home inside, they're a hero, and they go -- somebody could give them $100,000 signing bonus, and they're going to walk out on you. So I'm not -- once we had that happen to us, as you know, in West Texas, as you saw what happened to us out there with those guys. And that has not worked out for those people, let me explain that. That has not worked out very well. I think -- I don't know if what I got back is total correct or not, but I understand nearly every one of those people that left that we have found that may have moved some information improperly or unemployed now. So I don't know how well that works out really. So I think they've closed branches and those people are gone, all those people are gone, so what they did was not right.

So I don't want that. I don't do that to other people. I don't want them doing it to me.

Hey, Johnny, I'll remind you, we actually talked to a group a few months ago and really liked them. I think it'd been a great opportunity, and we just put it on hold and passed for now because it makes sense. As Johnny said, we're going to take care of our customers and take care of new opportunities that are going to be significant relationships that's more important to us right now than lifting out.

Kevin is exactly right. And I was at a bank conference shortly thereafter and I saw that CEO. And I just thought here I am talking to his people behind his back, and I wouldn't want somebody doing that to me. And I just really felt bad. If I'd hired this guy, I don't know how I would have felt about looking him in the eye. Some people have no conscience and they're able to do what they want to do. ServisFirst mistreated us what they did, and they paid for it and that's their style of operation that just happens not to be ours.

Got you. That's helpful. And maybe just 1 for Stephen, I guess. Stephen, I guess, I know you gave some ending points for the rates. Where did the margin end in March end of period and just with where what Johnny was alluding to as far as maybe 1 more hike and stopping. Just wondering feels like we're near a peak on the margin, just wondering if that's consistent with how you're thinking about it. I understand that the thought you want to take it higher and loan yields are going higher, but just try and understand where it ended and then just maybe if we are ending the tightening cycle here.

Sure. So we ended March at 4.40% on the NIM. I think there may have been a little bit of event income in there, but it was fairly consistent with where the quarter averaged. I'll echo Tracy's comments. Everybody's focused around here every day. If we see rates continue to go up, our ALCO model shows that we benefit slightly from another -- if we get another 100 bps from here. But as rates go up that we still benefit slightly. I'd like to think that with the events over the last month that the world focuses on strength and flight to quality may be instead of where the highest interest rate might be. So that's our focus. We've got the investment portfolio, cash flows come in, we've got variable component to that, we've got the loan portfolio that will move either as rates go up or as loans mature and have the opportunity to reprice. So whether or not we see rates go and how far will continue to have the opportunity on the asset side to offset what we have to do on the deposits.

Got you. And you said...

I suspect there will be lots of people looking around for opportunities with different banks in the future because so many of these banks are loaned up. If they're on a commission scale, they're going to struggle for a period of time. Some of the lenders have told our lenders, their banks said we're out of the lending business. We're totally out of the lending business, so that hurts some of those lenders I'm sure of the income of some of those lenders. So you may see some of that moving around.

Yes, that's true. And Stephen, just the deposit beta the where you think -- do you have any sense on where you think that may end the year as you get through the next couple of quarters, the cumulative beta all in?

No. I think we've been in the 50% range, each of this past quarter and Q4. And absent something changing on the funding side, I think that's where we would target that to be.

The key is can we outrun the deposit costs. And we've been fairly successful at outrunning the deposit cost. So the daily report shows that we're a little behind this month. But overall, the last quarter was fairly -- we won some and lost some on different days I guess. But overall, we won. So hopefully we can hold that together.

Thanks for all of the added disclosure on the office book and the liquidity. It's very helpful. Definitely standouts.

We have one additional question from the line of Stephen Scouten with Piper Sandler.

Sorry, I hopped on a little late, but I did want to ask what you're hearing from regulators currently, if this hasn't been covered. And I just remember when you guys crossed through $10 billion in assets and felt like you were required to add people you probably didn't need at the time. And I'm just. wondering if you think those sort of incremental oversights and headcount additions might get pushed down due to all of this that's transpired as well?

Stephen, I don't think it could get pushed up. I think I worry about new regulations coming down on the banks as a result of SVB and Signature. That wasn't what we needed. That's not what we need. We just need the regulations to be enforced. I promise you one thing, that wouldn't have happened out with St Louis region. That wouldn't happen with our regulators. That's what happened in California. That would have not happened here. Our regulators are on top of the game. They do a great job. We have a great relationship with them. They keep us in line, and we stay in line.

So I think that was -- I think if you want to throw stones at somewhere, I think that may have been somebody else's responsibility. It was not properly tending the store because I can promise you 1 thing, as close as St Louis stays with us on what we're doing, that would have never happened here and Arkansas too. Arkansas State Bank Department [did offer to] keep us, and we don't get too far out of line ever, but I think that was a mistake.

But I fear they're going to come down with some more regulations and more and more and more think that will fix it, but I think that was a lapse in judgment in those liberal communities out there. We've been -- some of that stuff didn't look very good. They only had 1 guy I think on the bank Board that appeared to have lots of banking experiences. That was a former member of the Fed I think so. They just didn't pay attention.

To me, they didn't pay attention. So it was a mismanagement of the balance sheet, and it lasted 2 days and it's over. Bam, that's how fragile that bank was. So that's what -- that gets your attention as a banker and as a large shareholder and a financial institution when you see 1 go bam, it blows up in 48 hours, so tells you it's time to be conservative.

Yes, yes, for sure. Well, like we discussed, no bank is really built to withstand the bank run. So you got to prevent that in the first place I suppose. So congratulations on a great quarter, one of the few green tickers on my screen right now. So market appears to agree that you're in that catbird seat, so well done.

All right. Well, thank you very much for your support. Great report. Thank you, my friend.

That concludes the question-and-answer session. So I will turn the call back over to Mr. Allison for any closing remarks.

I think we've said it all. I don't think we've anything else to say today. I think we've said it all. We had our shareholders meeting today. And then we moved from there to our conference call, and we have our -- we're in line for our Board meeting that starts 10 minutes ago. It starts 10 minutes ago, so look forward to talking to you'll in 90 days and thanks for everybody's support.

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