Home BancShares, Inc. (HOMB) Earnings Call Transcript & Summary

[Audio Gap] 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, Alissa. Hello. I am Donna Townsell, Director of Investor Relations at Home BancShares, and I would like to welcome all the participants to our fireside chat series. There is a slide deck on our Home BancShares website that you might want to reference during the call, and I'll direct your attention to our forward-looking statement on Page 2. Now we kicked this series off back in June, and it's really proven to be a tremendous tool in providing clarity on our loan portfolio during these uncertain times. Once we walk through today's prepared information, we will welcome any questions that you might have. And at this time, I would like to pass the call over to our Chairman, John Allison.

Thank you, and welcome to the call today. In an attempt to be totally transparent, we -- as you know, we are. We have a reputation for telling it like it is. We think that's important. And this is, I think, our third and final, is that correct? This will be our third and final one. I think there will be updates. I think Kevin plans on updating during the quarterly call as to particularly the hotel book and how it's going and maybe the other assets as well. But thank you for joining us today, and I think this will complete it. And this is really the Kevin Hester show. Kevin is senior lender responsible for all lending in Home BancShares and has been here since day 1. So he knows the customers, he knows the credit, he knows -- he's familiar with every facet of the lending process. So Kevin, it's your show.

All right. Thank you, Johnny. This is the fourth in a series of calls to provide a little more info on our loan portfolio. The first piece was back in June, centered on the hotel portfolio. July was a call on CCFG. And in August, we covered retail and other CRE. Today, we'll talk about the Office portfolio. It is our third largest segment in the CRE area with $635 million outstanding. A year ago, it was our largest segment at over $800 million. Looking back a little bit further, beginning in December of 2016, it became our largest CRE segment and stayed there until January of 2020. Getting into the slides for today, on Page 3, you can see that we have 363 loans that total this $635 million. The largest of these loans is $66 million and only 12 loans are over $10 million. So overall, it's a pretty well-balanced portfolio with an average loan balance of around $1.7 million. Our collateral consists of just over 9 million square feet of space, which works out to an average of about $70 a square foot. I would say that we have one CCFG loan that I would consider to be an outlier when you're computing that loan per square foot. It's a $44 million loan that's at about a 59% LTV. It's secured by a fully leased Class A office building in California that's very near the beach, and it computes to a high loan to square foot. So it kind of skews the rest of the group. Excluding this property, the average drops to $66 a square foot. The LTV of the portfolio is low at 56%, and the current weighted average occupancy is 84%. A little bit over 40% of these balances are in Florida and another 20% are in Arkansas. If you combine that with 6% in Alabama, almost 50% of the balances are in the states in which we have our community bank footprint. In Florida, outside of Broward County, which is the Fort Lauderdale area, the Florida loans are geographically dispersed throughout the state. Most of the other states in the top listing are states that are close to us like Texas, Missouri and Georgia. As mentioned above, the California exposure was generated by the CCFG West Coast group. On Pages 4 and 5, I give you some stratifications for the portfolio. While class can be a largely subjective measurement, we would consider about 55% of our square footage to be Class B followed by 36% as Class A. In terms of loan dollars, the split is much closer with Class A actually higher at 48% followed by Class B at 46%. In terms of location, the split between CBD and suburban is very close with both being in the mid-40s of both square footage and loan balances. If you look at the building height, I stratified the portfolio into 3 segments: low at 1 to 3 floors, mid at 4 to 10 floors and high at over 10 floors. A very large percentage of both the loan balances and the square footage at 78% and 74%, respectively, would be considered to be low rise. Only 3% of the loan balances are secured by a property of higher than 10 stories. If you segment it by collateral square footage on the next page, Page 5, 75% of our loans by number are secured by properties under 20,000 square feet, and that covers about 30% of the balances. On the other end of the spectrum, 13 loans are secured by properties of over 100,000 square feet, and that covers nearly 40% of the loan balances. A review of these 13 properties reveals that this square footage largely consists of multiple building properties as is noted by the low number of high-rise properties indicated on Page 4. Moving to Page 6. Given the current question of how COVID will impact an office market going forward with more people presently working from home, I wanted to try to capture rollover risk. So we've taken each property and we've provided the percentage of current rents by their maturity so that you can see when the current risks could be at -- rents could be at risk. The first thing I'd like to point out was not something that I expected to necessarily see. Two of the most prevalent tenant types, government and medical, consisting about 40% of the balances would not be expected to be at risk from this feared home-to-work trend -- home-from-work trend. In terms of maturing rents, almost half mature no earlier than 2024, which provides time for the economy to rebound from COVID before this occurs and possibly to provide other demand drivers such as de-densification or job growth. Page 7 discusses deferrals in the portfolio. As we indicated in July on the earnings call, we were very liberal with the first 90-day deferral process, but our second deferral process was very defined and required an approval process very similar to a new loan request. As of July 31, 15% of the office portfolio is on deferral. This amount was reduced further to 9% at August 31. One credit makes up the majority of this balance and while it's technically on deferment, it matures very soon, and there's a rebalance obligation that's likely in excess of the deferred amortization. So we really expect that to be remedied at that time. At this point, I'll also share our progress in reducing deferrals on the overall loan portfolio. After the completion of the review of the second round of deferrals, we were able to reduce them by 70% to a total of $940 million. This includes $300 million of loans that are only deferring principal. So the $640 million of loans that are on full P&I deferral total about 5.5% of the loan portfolio. These will end over the next 30 to 60 days, and the process of review for the need of additional assistance is already beginning. Any additional modifications would likely take the form of a longer-term solution in order for us to get them booked under the provisions of the CARES Act, which currently expires on December 31. Lastly, Pages 8 and 9 are slides from last month's presentation that break down our CRE portfolio by property type and geography. We have now specifically covered the 3 largest property type segments. As I wrap up this presentation, I want to thank you all for your time and your interest in Home BancShares. It's always our desire to give you more information -- as much information as possible. And as Johnny said, you know that we'll always call it like it is. With that, Alissa, I'll turn it back to you, and we'll take any questions.

[Operator Instructions] The first question today comes from Michael Rose of Raymond James.

Appreciate all the color on the office portfolio. Looks like you guys had about a 22% increase linked quarter in the second quarter in criticized balance. And I just wanted to see, if we break that into special mention and classified, do you have any office exposure there? And I guess, more broadly, what is the subsegment of this stratification and breakout that you provided that you would see as kind of most concerning over the next, let's call it, 6 to 12 months versus longer-term structural issues?

I don't recall any office in that -- just to answer your first question, I don't recall any office in that Q2 number, any additional office. As far as going forward, I think like everybody else, hotel has probably been -- it's about half of our deferrals that are remaining and would be the one that would present the most risk probably going forward.

Okay. I appreciate it. And then from a demand point of view, I assume that there's not much demand for commercial real estate or office at this point. I have heard rumblings that hotel will become a bigger issue once the deferments kind of broadly end, and we could see a slowdown in construction in hotels going forward. Is there any desire or incentive to maybe look to offload some of these properties? I know Johnny has talked about the airport hotels kind of before a lot of the stuff would potentially hit the market.

That's -- I'm talking to several folks that could help with that. And then there are some folks that are taking that tack. I think we feel pretty good about the operators that we have and the ones that we know are on deferral. I think we've already started working on plans for those going forward after this deferral is over. So I'm not ready to do that yet. I am seeing -- the numbers are pretty good. Those folks that are doing that, the numbers they're getting are pretty good.

Numbers they're getting on the sale.

On the sale.

Yes.