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

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. Fourth Quarter 2024 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued after the market closed yesterday. The company presenters will begin with prepared remarks and 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 2024. [Operator Instructions] This conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Thank you. Good afternoon, and welcome to our fourth quarter conference call. With me for today's discussion is our Chairman, John Allison, Stephen Tipton, Chief Executive Officer of Centennial Bank; Kevin Hester, President and Chief Lending Officer; Brian Davis, our Chief Financial Officer; Tracy French, Chairman of Centennial Bank; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. To open our discussion on the quarter, we will begin with some remarks from our Chairman, John Allison.

Okay. Thank you, Donna. Welcome to Home Bancshares Fourth Quarter and Year-end Earnings Release and Conference Call. The final quarter of '24 did not disappoint with strong performance of another $100 million profit quarter. And that is after taking a hurricane reserve of $16,700 million as an amount of abundance of caution we had as the second hurricane hit. Home still completed our first $400 million profit year. Actually, we earned $402,241,000 plus Home's first year to exceed $1 billion in revenue, the best performance in our 26 years. Think about the number. Your company brought 40% of the revenue to the after-tax bottom line. Simply 40% of $1 billion is $400 million, and that's what we earned. I am sure there are not many banks in this country with the ability to accomplish that feat. I'm very proud of our team for this great accomplishment. Additional hurricane reserve gained EPS by $0.06 per share for the quarter and ROA by 23 basis points. We're not crying over spilled milk, because we think it's prudent to maintain strong capital. But EPS would have been $0.57 and ROI would have been exactly 2% for the quarter. I want to congratulate our team with Stephen and Kevin's leadership in managing the net interest margin. I'll let Tim talk more about it in a few minutes. But if you remember, our models and a lot of your models show a decrease in income as rates come down. But as Tracy says, that is only a snapshot in time and does not properly give management credit for strong expense reduction in interest expense and strong loan yields. As I've said in the past, strong loan yields by Kevin's group and low interest expense by Stephen's group makes for peer-leading margin. The question is, can Home improve in '24? I know it's early. It's early in the year, but we're running slightly ahead of what we did last year. With interest rates possibly going up or holding steady, I don't believe they're going down. but I see it today, they may have gone down a little bit. I think we'll continue our strong run rate into 2025. The only difference -- only exception will be the actual increase in expenses for '25. We have broadcasted for a couple of years and we're going to cleanup and do what we call the Texas cleanup, which we did. And while we were doing Texas cleanup, we just continue to do a clean sweep of all asset quality with a total charge-off of $53,394,000 of which $47.6 million was loans in Texas or 89.1%. That left a balance of about $5.8 million from Arkansas, New York, Shore Premier, Florida and even Alabama, we charged off $8,000 plus any specific reserves that we thought were appropriate. I really feel good about the asset quality cleanup and I'm certain that I've overkilled again, as you know, my history of doing that, but I wanted to put Home into a position for a great '25. Expect recoveries in the $30 million range over time, and probably you'll start seeing some of the recoveries this quarter. Let's go to the numbers. Net income of $100 million -- $100.6 million for the quarter or $0.51 record income of $402, 241,000. You remember last year, we got hit with the Fed for the failed banks and that took us down below that, and we didn't quite make our $400 million, but we hit it this year. We had record revenue for the quarter of $258.4 million and Fed says, we had record revenue for the year of $1.017 billion. That's quite a mark. I didn't realize we'd hit $1 billion, but that's -- I'm glad that we did. Strong net interest margin remains at 4.39%. Return on assets for the quarter was 1.77%. I think it was for the year, too, Brian. I think 1.77% for the month.

It was, exactly right.

Record CET1 of 15.1%, record risk-based capital of 18.7% and record book value per share of $19.92 and tangible book value per share of $12.68. PPNR pretax, pre-provision, net profit percentage to total revenue was 56.57%. Efficiency ratio for the fourth quarter of 42.24%, mass improvement over '23 that was 46.21%. I believe that being an owner operator with my family being the single largest individual shareholder and Home being my largest asset, should provide comfort for all shareholders because every move made by this company that affects you also affects the Allison family and my executive team. Home is one of America's best-run banks and financially strong and has been for the last 26 years, and I want to thank all of you for your support. '24 was really a strong year for Home and '25 should be even stronger. Outside of that, I just wanted to comment we got tenant improvements on our 60,000 square feet out in Amarillo, Texas, for our new tenant. Hopefully, that will be finished in March. So we should see some of that happening. Some revenue maybe, Stephen, coming in next year?

Yes, early spring is what we're targeting now.

Early spring.

I want to comment on the Texas lawsuit. It's continuing on nicely with fruitful depositions going on at this time. In conclusion, as I've said, '24 was a very strong year for Home. We produced record revenues, record profits. We weathered 2 hurricanes so far, high interest rates, crazy inflation, bank failures and administration level regulations. And in addition, the Texas cleanup to mention a few. I think Home is prepared and has a clear path for '25. Donna? You got it?

Thank you, Johnny. And congratulations on a record-breaking year. That was amazing. Our next report today comes from Stephen Tipton.

Thanks, Donna. The numbers for Home BancShares and Centennial Bank this quarter clearly display the balance sheet strength and earnings power of the company. I want to congratulate all of our team on our first $400 million year and achieving over $1 billion in revenue in 2024. I'll start my comments with the net interest margin, which continued to improve in Q4. The reported NIM expanded by 11 basis points in Q4 to 4.39%. We continue to maintain healthy excess cash balances despite retiring the BTFP advance earlier in the quarter. Excluding the event income noted in the press release, the net interest margin was 4.36% for the quarter, an increase of 9 basis points from Q3 and exited the quarter in December at 4.42%. As a result of the recent rate cuts, the yield on loans, excluding event income, declined by 14 basis points to 7.45% in Q4. Our bankers did a fantastic job on the deposit side, reducing interest-bearing deposit costs by 22 basis points, 2.80% for the fourth quarter. And exited the quarter in December at 2.75%. We continue to negotiate deposit rates on a case-by-case basis and are proud to have been able to offset the reduction in rates on the asset side. The excess cash we continue to hold gives us flexibility to work deposit rates down further and be aggressive if needed on the asset side. Switching to liquidity and funding, total deposits increased $441 million for the quarter, highlighted by growth of $69 million in noninterest-bearing balances, which now account for 23.4% of total deposits. Nearly all of the community bank regions posted deposit growth for the quarter. And from a geographical perspective, we saw growth of $232 million from Florida, $92 million from Texas and $77 million from Arkansas. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.4% of liabilities. And with the deposit growth, the loan-to-deposit ratio trended back down to 86.1%. On the asset side, in-period loan balances declined $59 million, largely driven by lower balances at CCFG and were offset by growth from the Arkansas, Florida and Shore Premier Finance regions. On loan originations, we saw volume of a little over $1 billion in Q4 at a coupon of 8%, with the community bank regions making up 80% of the production for the quarter. Payoff volume increased, as we mentioned, might happen in Q3 to just shy of $900 million in Q4. And in closing, with the cleanup behind us, we're excited about the prospects for growth and look forward to a great year in 2025. With that Donna, I'll turn it back over to you.

Thank you, Stephen. And our final report is from Kevin Hester on the lending portfolio.

Thanks, Donna, and good afternoon, everyone. In the 26 years that we have existed and in the 14 years that I've been in this position, there have been only a handful of quarters that are similar to this one. In the previous ones, we tried to ensure that we address any concern and sometimes it felt like Johnny was being too aggressive. This quarter feels similar to those in some ways. I'm very happy to say, though, that it feels really good to be able to take this kind of quarter in stride and not have any concerns about moving forward. During the fourth quarter, we had an extended conversation with our regulators about the accrual status of a large Texas C&I credit. We've agreed to disagree, and as a result, we chose to charge off a portion of the credit to keep the rest on accrual. Once that decision was made, it made sense to rightsize a few other credits that we've been working through over the past couple of quarters. As Johnny has mentioned, it is primarily a Texas cleanup with $48 million of the $53 million in charge-off loans coming from that state. Virtually all of these happy credits were initiated either right before or right after the happy acquisition. Roughly half of the charge-offs are related to the disputed Texas C&I credit. We expect recoveries to begin to be received immediately on this credit as payments remain current on the entire relationship. As for the other credits, we fully expect to dispose of these credits and have some recoveries. We could experience a couple of those in the coming quarter as well. In fact, I fully expect that over time, we will recover in excess of $30 million of the $53 million balance. To the numbers. NPLs and NPAs are basically flat quarter-over-quarter and are at very manageable levels. Even after this challenging quarter, our allowance for credit losses still provides a 278% coverage of NPLs. Early-stage past dues inched up 12 basis points to 1.08% but included one large mature memory care credit that has been extended since year-end and has been placed under contract to sell. We expect it to pay off during the first quarter and the removal of that credit would bring the past due number in line with that of previous quarters. Earlier, I mentioned dispositions, and with assets that are under contract to sell this quarter, we expect to reduce NPAs by $9.5 million or 7% and expect to see a $4.5 million recovery. In addition, through assets that are very close to being under contract, I expect to reduce NPAs in the first quarter by another $28 million or 19% and provide an additional $3 million recovery. At that point, NPAs would be at approximately $105 million or 0.47%. Roughly half of that remaining balance would be the California office building that's in OREO and the Florida memory care credits that we have discussed before. The office building has reached a point that it makes sense to talk about marketing the property, but its proximity to the ongoing fires will likely delay any real opportunity to move that asset. The Florida memory care credits have exhibited strong occupancy improvements over the second half of 2024 due to a management change, but we are waiting to see that translate to an improvement in profitability. The good news is that ownership is still motivated and are continuing to cover any operating shortfalls and the occupancy improvement is promising. I mentioned last quarter that the loan pipeline felt a little soft, and that translated into a small loan decline in the fourth quarter. A positive takeaway from that, though, is that for the second quarter in a row, the community bank footprint produced an increase of over $120 million, while CCFG contracted by 13% over the last half of 2024. We know that CCFG's loan balances will come back and we still see solid production out of the community bank markets. As for the hurricanes that we experienced in Florida in September and October, we placed approximately $33 million in reserve for potential losses. As of year-end, we had approximately $110 million in loans in those areas that are in some form of payment deferral. It's still too early to tell what losses we might experience here. But as these deferrals mature, the picture will become more clear. We may be able to shed some more light on that next quarter. As you can see, it was a challenging quarter, but there are very few companies, maybe none that can make the moves that we made while continuing to maintain strong profitability and a loan loss reserve that is still higher than almost anyone. This is why we built the fortress balance sheet and more than ever, I'm very proud that we did. Donna, that's all I got.

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

Well, let's see if Brian, do you have any comment, Brian, any quarter?

No. It's been a good year, a record year for the $400 million. So...

Tracy. Good report. But you, Mr. Allison, good leadership. Thank you. Stephen, Kevin, good reports on all that, but also just like to thank the Centennial Bank, the Happy Bank, the Home Bancshares staff for making improvements in loans, deposits, noninterest income, noninterest expense, but also would like to remind them the guy to be a little better...

Exactly right. Well, I think lots of highlights, but I think deposits were Stephen was surprised and, Brian, they're really strong. Our deposits were really strong. I think the strength of our company being able to pay out all insured deposits is probably served us very well. We're still in that position today. But I was -- I think we were pleasantly surprised by the amount of deposits we've got.

Yes, particularly on the core deposit balances with noninterest bearing balances being up. Very pleased to see that and look forward to continued growth this year.

That's good liquidity. I like the fact that we said -- we told them last -- I told you last quarter, we wouldn't get ourselves in a position where we couldn't pay out all insured deposits, and we have not done that. This actually strengthens that. And Brian, you paid off the Fed program, right?

No, we paid off all $700 million of that, and we still have about $0.5 billion of the Fed today.

That speaks well for the company. So anyway, I think Donna will go to Q&A if you're ready.

We are ready. Thank you.

[Operator Instructions] Our first question will be from the line of Catherine Mealor with KBW.

I wanted to start on growth and see growth was a little bit slow this quarter as you predicted that it would be on the last quarter's call. But just curious what you're thinking about for '25. And Johnny, if we're right, if we are going to be in a higher for longer rate environment, how do you think that impacts growth for this year?

Well, I think that plays to us well, higher for longer. I think that you can see the run rate that the company has maintained through this higher rate environment. And Stephen and Kevin have done an excellent job. Kevin holding up the yields and Stephen working on the cost of fund side. You can see the margin came out. I think you said we exited it...

4.42%.

4.42%. So I think that plays really well to Home. I think -- so it looks like we're running about where we ran a little better when we ran the first month of the fourth quarter. So I'm pretty optimistic. I think loans are going to be a little slow this quarter. But I think they'll come on in the second quarter. We'll start seeing that, particularly in Florida seem to have a lot of stuff. Kevin, you got to comment on that.

Yes. I mean I think the higher for longer is going to -- it's going to be a plus and a minus. I mean it will be interesting to see how that plays out with -- we're seeing -- when rates dropped 100 basis points, we saw a lot of folks coming back with some of the 6s and other stuff that's hard to compete with. This may slow them down a little bit, if their belief is that rates are going to stay where they're at. So that will play to us. Rates staying up don't help -- doesn't help underwriting. So that may work against us a little bit. So just be interesting to see how that plays out. I will say that we've had good -- as you can see from the comments we had, we've had really good couple of quarters in the community bank markets. They've held up well and each region has grown over that period of time. So I'm encouraged by that for sure.

And would you expect -- I mean the 4.42% exit margin is really high. Would you -- do you see expansion from there? Or is it more about just keeping it stable.

Catherine, this is Stephen. I think same message as last quarter. I mean I think with where we're at with rates today, if we can keep in line with where we're at, I'd be pleased. We'll continue to be able to reprice the CD book, which is small relative to the overall deposit base, but that should continue to come down a little bit and then still trying to work some of the fixed-rate maturities this year that potentially can reprice a little higher. So -- but I would be pleased if we can hold in that range where we exited the quarter.

The toughest time for us is when rates start coming down and the rest of the market jumps and things are going to lock people in at 6. And then that becomes pretty tough times. And as rates come down, someone said, well, you've got a lot of fixed rate. And I said, well, what is a fixed rate? I said fixed rate is about 1 point. That's what it is. Somebody drop a point below you, if you got a fixed rate, if you don't have a prepayment penalty, they're gone. So -- and then they just end up -- it becomes race to the bottom again, like we had in the last cycle. So I hope that's the toughest time in the space. And hopefully, so far, so good here in Home Bancshares, but it gets -- it's frustrating -- that's really frustrating times.

Our next question will be from the line of Brett Rabatin with the Hovde Group.

I wanted to start on deposits. And Johnny, you said you were a little surprised at the deposit strength this quarter. Was there anything that you would call out as maybe unusual in the deposits this quarter? And just as you think about the outlook for the year, assuming deposit -- or assuming rates don't change much, do you have a pipeline of deposits you think will continue from the strength in the fourth quarter? Or any thoughts on where you see the deposit outlook from here?

I can't answer that. I was concerned about deposits. And when Brian paid off the Fed, $700 million I thought well, we may end up having to be in a borrow position. But it just -- it didn't. It just flowed. I mean the deposits flowed in the Home, and we haven't done anything uncharacteristic as you can see by the cost of funds, and they've just rolled in. I think the fact that we can pay out all uninsured deposits has separated us from the pack. There's lots of -- several banks that can do that, but most banks can't do it. I think that has helped us. We have promoted it. We never run a CD ad, not one during the entire time cycle that we went through. We never run a CD ad. We ran strength ads. And I think that paid off for Home Bancshares that we got the ability -- we have the ability to pay out. And we committed to our depositors that we wouldn't get ourselves in a position that we couldn't do that, and we haven't done it. So we're extremely pleased. Brian, you got to comment on the deposit side?

No, it was just kind of from all over the board. And so it wasn't one big smoking gun that brought it up.

Which is good. I mean it's coming from different areas. It's not -- somebody can walk in and put $400 million to bank. So that's positive. That's very positive. When I continue? I suspect we're a business bank. We have actually customers we're not a transaction bank. We're a real business bank and maintain those relationships. And I guess that's paying dividends. Stephen, do you have anything...

Yes. No, I don't have anything to add. I mean competition is still rampant today. You have to deal with that, but that's nothing new. But I'm very pleased with the quarter and see where the year goes.

Okay. That's helpful. And then -- I'm sorry, what was that, Johnny?

I said that's the best we can do.

Okay. Yes. All right. Great. The other thing I wanted to ask about was just capital and the outlook for M&A and your capital ratios are the highest they've been past decade. And I know you've been thinking that maybe the BTFG program winding down would create some opportunities. But I wanted just to hear your thoughts on usage of capital and just how you see the M&A environment? And if it looks good for you? And any color on any conversations you might be having how those things are going?

Well, you're excited. We have this big charge-off you've seen. We did cleanup -- had our Texas cleanup. We were on a trade. We had signed a letter of intent on the trade and we paused that transaction because we didn't want to, number one, we will be totally transparent with the other side. So we just paused the transaction. Will it come back? Maybe it will, maybe it won't. I can't answer that. But we're obviously looking at M&A, and we -- you look at it, the company did a 1.77% ROI and without the hurricane reserves, it did 2%. So I can't answer any more than that. As you heard me say in the past, we need more assets. We need to bring in more assets, and we need to find something that -- and the other transaction we're on was a good transaction, and I think it would have worked out well for us. It was in a market where we already have business. And -- but we want -- will that come back? I don't know. I said you move on to do what you need to do. We want to be fair with you. We got this loss and you don't understand it. So we'll explain it to you. And we're going to charge it off and clean it up. And if you want to come back after some point in time, come back and if you don't, that's fine, too. So we're totally transparent, and they were very appreciative of the fact that we told them what we told them. So -- the answer is yes, we're looking for the next train.

Our next question today will be from the line of Jon Arfstrom with RBC.

Kevin, can you walk through what went into NPAs this quarter and then review again what was coming out? I was writing kind of fast, but I just want to make sure I understand what went in and what do you think is coming out in Q1?

So a couple of the deals that were on the charge-off list were not in NPAs yet, and that's primarily due to the fact that we were -- we've been working with these clients for a couple of quarters. Johnny's been telling you guys that we had this coming. We work through a couple of these credits. These were larger credits that we were working with customers trying to figure out a way to make it work and keep them limping along. And I think we reached that point where we decided this is not the best exit. So when you take that charge and you move it to nonaccrual, that's why those went up during the fourth quarter. What you will see, as I talked about in the comments, you're going to have some dispositions in this quarter that I think could total between $30 million and $40 million that will reduce those NPAs back down even below where we were at 9/30. And so that's -- I mean, that's the timing of how this will work.

The big charge-off of the group is current...

Yes, half of it is not even in anything.

Half of it -- that's a credit we argued about. It's current, and it never hit nonperforming. It's a current credit. They're current today. They were current yesterday, last week, last month, 6 months ago. So anyway, that's a credit that we disagreed about. But that's the reason. That didn't come out of nonperforming because it never went on nonperforming.

Right. Okay. Okay. That's helpful. And then it seems like you guys scrubbed things pretty hard, but how do you want us to think about a provision from here?

Well, we've scrubbed as hard as we could including -- I mean when you get down to right now, Alabama of $8,000 and Florida of $444,000. When you get -- when you scrub that hard, I don't know that we're probably going to leave provision in the realm that it is right now. I like a 2% reserve because it's always worked for me. And it's always work day in and day out. And when you think about how we've been through with the pandemics and the worst financial crisis in the history of this country, inflation, what can possibly go wrong next, right? We just were prepared with a 2% and it worked for us. And that I don't know about all the analytics and Kevin and his team works on that, but I do know 2% works. So I just -- I'm comfortable with that. We'll go back to that at some point in time, but we're not in any hurry, particularly after this scrubbing. I mean, you got to dig to find something. So if there is something, I don't know what it is, I can tell you that. So I'm pretty pleased with where we sit. We're really teed up really well for '25. So I wouldn't expect us to be making any big allocations. If we have an opportunity to have a windfall if we can put it in reserve, we'll try to do that.