Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc Third Quarter 2022 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. Please note that if you would like to ask a question during the question- and- answer session, please press star then one on a touch-tone phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. 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 three of their Form 10-K filed with the SEC in February 2022. At this time, all participants are in a listen-only mode, and this conference is being recorded.
If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.
Thank you. Good afternoon, and welcome to our third quarter conference call. Today's discussion will include prepared remarks from our Chairman, John Allison; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; and Stephen Tipton, Chief Operating Officer. The rest of our team is present and available for questions. Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; and John Marshall, President of Shore Premier Finance. In a year that continues to produce wild market swings and economic uncertainty, the third quarter was no exception. However, with a fortress balance sheet, conditions at home remained strong and with a positive outlook. To provide more color on that, I will turn the call over to our Chairman, John Allison.
Thanks, Donna. Welcome everyone to the third quarter earnings release and conference call. This headline for the quarter is similar to the statements we made last quarter about uncertainty. Actually, we're basically in the same place we were last quarter, except rates are higher, and odds are they're gonna go higher for longer. If you remember what I said last time about Volcker in the 1970s, he took rates to 14% in the late- 1970s, but he didn't kill a snake before he pivoted. He pivoted under pressure because people said, "We've got to turn it around." As a result, he had to come back in the 1980s and take rates to 21% to cut the head off the snake. I think that's exactly where we are today.
Most everyone is hoping for a pivot, and it's absolutely the wrong time to do that because we have not killed the snake yet. Another 150 basis points- 225 basis points and then hold and observe may get the job done. Rates are certainly much higher than most of us thought, but there is still room for them to run. Core CPI is certainly the highest in 40 years, and this administration is still trying to continue the inflationary spiral. I said last quarter, they're either naive and competent or playing stupid, or maybe they're brilliant, which I doubt, but time will tell. I will say there is no substitute for experience. I heard Nancy Pelosi say that this morning, and I may take that out of my vocabulary because I always heard her say there is no substitute for experience.
There is no one in this administration with any business experience, period. You cannot take a bunch of PhDs that got their expertise out of some book. The world business is much different than that. I'll take a decision-making opinion from an experienced person much quicker than I'll take some inexperienced politician, and I don't care how many degrees they have. I'm still sticking to the possibility of a 6% Fed funds rate, as I said the last two quarters, because the puppet show is continuing on by Powell and his group. This is really not a time to panic, and I think the world's not coming to an end because of high rates. Remember, the average Fed funds we talked about last time for the last 50 years has been 5.44%. We've got along fine with those high rates and the world didn't crash.
The sugar high that we've all been on enjoying the crazy low rates is nothing but an accommodation to allow Washington legislature to spend crazily year- after- year. As I said last quarter, the key for banks is to be premeditated and cautious with their moves, and plain old defense is not all bad. When you see banks bidding up CD rates in the newspaper now, you immediately know that they put all their money to work in lower rate securities, and this will result in higher cost of funds and lower margins for them. We're getting looks at lots of stuff right now that we normally don't get to look at. I don't know if that's good or bad, but banks are tightening up.
We just had someone fly in. Tracy met with them, and one plane came in from Florida and one came in from California. I said, "Why are you in Conway, Arkansas?" He said, "Because our five big banks won't do this deal." The good news, it wasn't a bad deal. We may be able to structure it and make a good deal out of it, but obviously, there is some tightening going on outside with other banks. The good news is Home was prepared for the right side of what has happened, as you see from these quarterly results. They're very good. We did this in spite of the damage that was done to us by the unprofessional actions of the West Texas former employees. Here's the good news. We've talked enough about the bad news.
We hope we'll be at a $100 million run rate sometime in 2023, but the good news is we had almost $110 million for the third quarter. Actually, $108.7 million profit. Our non-GAAP was $109.9 million. Nice start and a record. Adjusted nine months earnings are $268.4 million, or $1.40 a share, and that's also a record. Q3 revenue was $256.3 million, and that is a record. Pre-tax income of $142 million at 55% of the net revenue, another record for the company. We ran a 1.81% ROA. NIM was, for the third quarter, 4.05% versus the second quarter at 3.64%. That's up 41 basis points. Here's how that's ticked.
April was 335 basis points, May was 357 basis points, June was 371 basis points, July was 383 basis point, August was 398 basis points, and September was 408 basis points. That's how it's ticked up so far, and it's hopefully it'll continue. TCE was not a record, but it was close at $20.93, and EPS was $0.53, or adjusted non-GAAP was $0.54. After-tax net profit was 42.37% of net revenue. That's what I call PPNR, pre-tax, pre-provision profit percentage of net revenue was 42.37%. I don't know many industries or companies can pull down 42% of the net revenue into profitable after-tax profit. Asset quality remains excellent. Non-performing assets were 0.27%. Non-performing loans to loans were 0.45%. Charge-offs were $5.1 million as we charged off the final portion of a professional athlete loan.
Already, we'd already allocated 100% for it, but we had not charged it off until this quarter. We had hope, but it didn't work out. We held off making any loan loss allocation because of the hurricane damage. We're evaluating our customer damage, and we'll make estimated allocations when we make a final determination. Expected reserve allocation is somewhere between $10 million and $15 million-$ 20 million, I would expect. Maybe, maybe not. Kevin will talk more about that. He's more up to speed on it than I am. Allowance for credit losses were 2.09% or $289 million. Combined efficiency, I was pretty proud of this. Combined efficiency dropped from 46.02% last quarter to 42.97% this quarter. That's a nice. Not a record, Donna, but nice improvement.
Continue maintaining strong capital ratios, and Stephen will talk more about those later. Tangible book value dropped a dime from 9.92 to 9.82 during the quarter. We repurchased over 1 million shares of stock, and we had AOCI, but our TCE is still standing strong as we continue to maintain strong profitability, regardless of what they throw at us. Loans were down $94.6 million for the quarter, led by CCFG. I think Stephen, you said they were down about $500 million, but the net was about $342 million.
Yeah, balances were down $340. I think they had about $500 in payoffs.
Well, Chris will tell you there's nothing wrong with a payoff, and I agree with him. In the legacy footprint, though, we grew $273 million for the quarter, and we had $26.4 million in PPP loans paid off. I had expected loans to be flat or up for the quarter, but we didn't get there. We got a new loan system we put in. It's kind of complicated. I'm not sure if we like it or don't like it yet. But appears the company provides no help, and we have to get third parties to help us. I think that was new to us and kind of we stumbled with that a little bit. The hurricane, the impact on loan closing.
As of this day, we're up over $100 million that we've closed, that would have closed, we think, had the hurricane not hit. Anyway, we're fairly close. We're not too upset about that. We repurchased $24.3 million of Home BancShares shares. That was $1,032,732. That's a lot of stock. We bought back $1 million, I think, last quarter, Brian. Is that about right? $1 million this quarter?
That's correct.
Our holding company has about $55 million in bank stock and bank securities investments yielding about 6.5%. That showed a loss of $2.6 million because we have to mark that to market. These securities were purchased for the dividend yield at the holding company, and they produce about $3.6 million a year in dividends. We'll continue to hold these securities. They'll go up and down as you know bank stocks do. Really, the only extraordinary items, unless somebody got something for the quarter, was we spent $2 million in costs due to the unprofessional departure of some West Texas employees. That's number one. Number two, we had, as I said, fair market loss on the securities of $2.6 million. Number three, if I read correctly, Brian, we had a $1.1 million recovery on historic losses that were written off on prior acquisition.
Yeah, that was from a prior acquisition. You're correct.
Going forward, loan demand is staying strong. Investment yields are very attractive. We'll continue to pick our spots on high-yielding investments. On the M&A side, the only thing we've really done is I met with a CEO of about a billion-dollar bank for lunch and drinks, earlier this month. We had preliminary discussions about possibly doing something together, but guess how much he wanted? 2x book. That's always the story, and that didn't work. However, I liked him, and I think he likes us, so who knows where that'll go. That's about it for me. Tracy, have you got any comments that you want to make for the quarter? You happy or you unhappy or what, how you feel?
We got to be happy. I mean, when you look at the performance numbers of the bank, they certainly are better than they've been in a long time. It's good to see that 2% ROA out there on the bank side. I know we'll get that number pretty quick on that aspect. You mentioned the hurricane. All our locations turned out to be safe and sound, back open already. Staff's done above and beyond getting that operation going. Kevin will give you a report on some of the lending aspects of that and
We certainly are watching the interest rates. Kind of like baseball season, we don't know if we're getting a curve ball thrown at us or a knuckle ball, or we may get hit by the pitch. I don't know. Our deal here, Johnny, just hit doubles. We're just gonna hit doubles and keep on rounding the bases and doing the right thing and taking what's thrown at us. I do also want to say, you know, the Texas operation has turned the corner tremendously. The changes that have been made have just turned out to be great people. The leadership there has done a good job of bringing in the right folks. The support of Arkansas has made that doing well right now, so ready for the next quarter.
That's good. Well, thank you. It's been kind of a challenging quarter. It's been busy and rates up and down, not down, up, up. It is for our shareholders, it is one busy place. I'm telling you, it's. I don't know if we're accomplishing anything, but we're certainly busy. Everybody's got their hands full with everything they're doing. Donna, with that, I'll let you have it, girl.
Okay. Well, sounds like a quarter with some more fantastic numbers, so congratulations to all there. As you know, the quarter did end with the unfortunate landfall of Hurricane Ian, and I'm sure many of you are curious about the lending portfolio in those markets. Kevin Hester is here to provide you an update.
Thanks, Donna, and good afternoon, everyone. I know everyone's anxious to hear about how Hurricane Ian impacted the bank's Southwest Florida footprint. Ian was an incredible storm that had a tremendous impact on a large number of people in Florida, including several of our own employees. Our hearts and prayers go out to all those affected by this storm. We have about $1.6 billion in loans in the 20+ counties in the designated disaster area. We had an established disaster deferral program that we were ready to implement, and our Florida lenders are very experienced in this process. I'm very pleased to report that we have only about $9 million in deferrals executed at this time.
Based on lender reports who have been reaching out to those borrowers, we see this balance growing possibly to $45 million in total, which is much lower than the deferral balances resulting from Irma in 2017 or Michael in 2018. Asset quality continues to be very strong with non-performing loans and non-performing assets down six basis points and two basis points respectively on a quarter-over-quarter basis. Both numbers remain near all-time lows for the company. Early stage past dues improved 7 basis points to 0.50% as we completed our first full quarter after the Happy conversion. Loan opportunities continue to be plentiful, as Johnny mentioned, as we continue to be diligent in evaluating both credit and interest rate risk.
It is our experience for both CCFG and our community bank footprint that volatility often reveals more opportunities as the overall market becomes disrupted. We will continue to evaluate those opportunities as we move deeper into this Fed tightening cycle. Donna, I'll turn it back over to you.
Thank you, Kevin.
I just want to make one comment. We had our lady that runs our Pine Island branch. She was cut off from the mainland, and she was taking her deposits and money back and forth by boat. Pretty remarkable. They've got the bridge in, temporary bridge in now, and she's pretty. That's pretty good stuff. We're happy we got a branch manager that goes that far.
Right. That's amazing. The early reports that you have, Kevin, from customers are reassuring too. Hopefully they're all gonna make it through better than we would imagine. Next, we will turn to Chris Poulton for an update with CCFG.
Thank you, Donna, and good afternoon. Since the beginning of the year, we've been talking about a number of payoffs expected in our CRE portfolio. Johnny mentioned this earlier in his comments. The headline number for CCFG this quarter is the payoff number. During Q3, we were able to realize about $500 million of these payoffs with four loans representing the bulk of this number. As a result, our portfolio reduced by $341 million to $2.1 billion. These were expected, however, and year to date, the portfolio has positive growth of about $150 million.
Many of you have heard me say this before, a s a reminder, payoffs are not only a natural part of our portfolio life cycle, but we view these events as a sign of a healthy portfolio. A majority of these payoffs were refinances to the permanent market at significantly higher dollars versus our outstanding loan amount. This quarter, CCFG originated just over $300 million of new loan commitments, bringing our 2022 total well over $1 billion. As we approach year-end, we're working towards closing out our existing loan pipeline. At the same time, we're seeing an increase in demand starting to build for 2023 origination opportunities should we so choose. Donna, I'll hand it back to you.
Thank you, Chris. Now for our final report, we'll turn to Stephen Tipton.
Thanks, Donna. It's a pleasure to get to report on our company today. As Johnny mentioned, our company's patience and persistence over the past couple of years continues to pay off today. The net interest margin improved again in Q3 to 4.05%. Our intentional approach to maintaining cash balances at the Fed, variable rate loans, and variable rate securities all help contribute to that increase. While we are cautious around customer expectations for interest rates on the deposit side, we could see additional improvement if rates continue to rise. Our current ALCO model projections show a 4.5% increase to net interest income in the next 100 basis point scenario. We continue to keep a daily watch on deposit balances and customer activity in this dynamic rate environment in our new markets in Texas.
We'll continue to refine the deposit base and navigate what has been a rapidly rising interest rate environment. Total deposits ended the third quarter at $18.5 billion. Nearly half of the billion-dollar decline came from our Florida markets, while the other half was mixed between Texas and Arkansas, respectively. We've analyzed the changes we saw, and a number of large customers opting to take advantage of treasury rates front-running bank deposit rates and the Fed, as well as real estate investment projects and other opportunities. Chris, we may call on you to spin up the deposit machine in New York at some point if we need to.
Charge it up, Chris.
With over $5 .5 billion in non-interest-bearing deposits, what comprises 30% of the total today, we continue to like our core deposit positions in the markets we serve. Pleased to see account opening activity remain steady over each of the past three months. Staying with liquidity for a moment, our loan-to-deposit ratio ended the quarter at 74.6%. Our primary liquidity ratio stands now at 23.74%, which is more than double our historical pre-pandemic levels. Switching to loans, production was strong at $1.54 billion for the quarter, with $1.2 billion coming from the community bank markets in Texas, Arkansas, Alabama, and Florida. Yields on new production have continued to increase each month throughout the quarter, now seeing 7%s and even a few 8%s in committee recently.
The unfunded commitment pipeline increased by nearly $200 million in Q3 and now stands at $4.4 billion. Kevin can provide additional color on what he's seeing in the pipeline during Q&A, but the activity in our committees the past three months has been strong. Negating a portion of the production in the third quarter, payoff volume increased to a little over $1.2 billion. As Chris mentioned, his payoff volume was elevated around $500 million, while the community bank footprints were more at more normal levels. We still see this as a sign of overall health in our markets and with the projects that are coming online. Finally, switching to capital and a few key ratios.
We had total risk-based capital of 16.75%, leverage ratio of 10.39%, and as Johnny mentioned, a strong TCE ratio, or tangible common equity to total assets, of 9.24% as of September 30th, all well in excess of our internal targets. It's times like these where our balance sheet sure feels like a good place to be. Donna, with that, I'll turn it back over to you.
Thank you, Stephen. John and Tracy, before we go to Q&A, do you guys have any additional comments?
I'm good. I think this is a great quarter. The best quarter ever in the company's history. I don't know how you say that. We keep saying that lately. We've hit a bunch of these deals, but the Texas has worked out pretty well for us in spite of what we got hit with out there in West Texas. We've overcome that. It cost us some money, but we're fighting that battle. Other than that, I couldn't ask for much better. Things are going very well for us. That's it. Donna, if we want to go, are you ready to go to Q&A?
I am. Operator, we'll turn it back over to you.
We will now begin the question- and- answer session. If you would like to ask a question, please press star followed by one on your touch tone phone. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first comes from Matt Olney with Stephens Inc. Please proceed.
Hi, guys. Good afternoon. How are you?
We're good, Matt. If you have a quarter like that, you got to feel pretty good, haven't you?
Absolutely. Well, thanks for your commentary, always colorful. Johnny, you ever think that maybe Nancy Pelosi's been listening to your Home BancShares conference calls and stealing some of your quotes?
She and her husband are buddies. We're drinking buddies. No, we're not. No, I don't know. She wouldn't get too much of a kick out of it, I'm afraid. Anyway.
I want to hit on some questions and thoughts on the third quarter results. I came across a press release that Home BancShares had a few minutes ago, and it sounds like there was a lawsuit settlement with ServisFirst Bank and some former employees of yours. If I'm reading this right, it looks like you'll be receiving $15 million in the settlement. Any more context you can give us on this deal? It's been a few years since we've talked about this. I can't recall all the gives and takes around it. Thanks.
Well, it's been a long affair. I wish ServisFirst Bank the best. There's a right way to do something and a wrong way to do it. As evident, we thought they did it the wrong way, and they thought they did it the right way. It's such a fine line. Really is a fine line, and we're just glad to have it behind us. Kevin's been with it the whole way. Kevin, you got a comment on it?
Well, you said it. It's been a long, long road. We're almost seven years. It's good to get it behind us. We're pleased with the outcome, and that's probably all we should say about it.
Anyway, it's done and over, and we'll get our money in a few days, and we got it resolved.
Okay. As far as the results and the outlook here, loan growth, you gave some good commentary on that. You mentioned some challenges near term, the higher pay downs you saw, the new loan system and the hurricane obviously. Curious about the updated thoughts about loan growth from here. You think some of those headwinds will continue, or you think some of those things will kind of ease up to produce some loan growth here? Thanks.
We're actually up. We just didn't get them all closed. We're actually up $162 million as of today. Now, that's pretty good. We just didn't get them closed, and as I said, we got a new loan system, and it's a little more complicated. It's creating some problems. I'm not gonna call the name of the loan company, but it has created some problems throughout the system, and I guess the jury is still out on it. We're trying to stay with it the best we can, but it is different and more complicated. So but as of right now, we're up $162 million, Brian said, as of today.
That's correct.
We could've had the loan demand. The hurricane slowed it down, and the loan system slowed it down. I'm proud to say we're up $162 million, and I hope that holds and continues on.
Anything specific from Chris Poulton? I know Chris called out some higher pay downs that were likely to happen in the third quarter, and we saw that. Just anything from Chris on the loan growth outlook from here?
You can take it, Chris.
Okay, thanks. Hey, Matt. No, I think we continue to see good demand. I think you know, we're still up for the year, right? I think the last two quarters, we kinda said, "Look, we front run some of these pay downs." I probably would have normally expected to have, you know, one of those in the first quarter, one in the second quarter, maybe two in the third quarter type of things. We are seeing secondary market and takeout markets are a little choppy. I think what ultimately happened on these four in particular is at least on three of these, I think they were waiting around hoping the market got better for them on takeout, and they finally decided to pull the trigger. It's why they all happened at once.
I think they probably made the right choice. You know, two of those in particular, they were taking large cash outs in their refi. This past quarter may have been the last time they could do that. We're seeing conditions tighten, especially on takeout financing with cash-out, etc. I mean, we always, you know, like to have pay downs. I mention that a lot. These were projects that we helped people achieve and they got through, and they were able to put some cash in their pocket and reduce their rates, and I think that's good. Having done that, they'll come back and borrow from us again.
Yep. Okay.
We're seeing—
Thanks, Chris, appreciate that.
It scares you a little bit. We're seeing people come flying in here more so than we've seen in a while, people we don't know, which ties to what Chris is saying, where they've been getting their money, they can't get it, or they're not loaning in that asset class. Anyway, it's interesting watching it. I think in my commentary, I said they flew in one plane from California and one from Florida, I guess it was, and I said, "Why are you here?
Why are you in Conway, Arkansas?" They said, "We can't get it from our normal sources." Anyway, it is, it's interesting watching this, and this is a good time for Chris because he does very well in volatile times, and I guess this is a volatile time for us. Whether we'll do any of those or not, it is interesting because you could feel the change in the air when it hit because all these people want to fly in or send a plane to pick you up or whatever. I'm thinking, "Wow. Something changed," and I guess that's it. Interesting times, Matt.
Yep. It sounds like it, definitely. I guess switching gears over to the fee side. Fees were especially strong this quarter. I know those can be volatile, a little bit chunky sometimes. Anything to call out in the third quarter fees or any kind of outlook you can provide?
On other service charges and fees, we're up about $1.4 million and $1.3 million of that is all related to Chris' CCFG. So if he wants to provide a little color on that, he probably can. Yeah, sorry. Sorry, on which piece? Your fees for the quarter were up about $1.3 million. I mean, it's probably r elated to fees.
Yeah. That's always tied. Yeah, sorry about that. Yeah, no, I understand the question. Sorry. Yeah, that's always tied to when we get pay downs, we also collect fees. Big pay down quarter is always a big fee quarter.
Yep. Okay.
Good math.
That's right. Okay, guys, that's all from me. Congrats on the quarter.
Hey, thanks, Matt. Appreciate it.
Thank you. Our next question comes from Stephen Scouten with Piper Sandler. Please proceed.
Hey, good afternoon, everyone.
Good afternoon, Stephen.
I guess I was kinda curious what your plans are and thoughts around continued liquidity deployment. And kinda what you saw on new yields in the quarter, both in loans and securities, what you were able to obtain?
Well, we're seeing 7s% and 8s% on the loan side. We're seeing some 7s%, 6s% and 7s% on the security side. We're just kind of picking our spots when we see an opportunity. As our gentleman who runs that area for us said, there was kind of an out-of-balance deal the other day, and sometimes that happens, and there's some opportunities. He picked up some 7 .375% AAA securities, and he did. We're just kind of picking our spots. What's up, Brian? Brian, you got a comment on that, or Stephen, either one of y'all got a comment on that?
No, you hit on the loans. I don't have the securities yield handy, but it's, I know, like you said, that Bryan Greathouse has found some good opportunities here over the last couple months.
He has the authority to go buy, and if he sees an opportunity to go buy it, and that's what he did a while back when he found that AAA security at 7%+. He picked that up. He's on top of his game, and we're gonna sit for a little bit here on the deployment side. I think we got another 75 basis points and another 75 basis points. I think we got another 150 basis points before the end of the year. We'll just take it on the Fed funds side and ask Bryan Greathouse to, if he finds an opportunity to go ahead and exercise that opportunity. That's. I think that's the best way to play it right now. I don't want to. You know, I'm not sure where this is going.
You know, everybody starts talking about pivot, but as I said in the commentary, I don't think it's time to pivot. I think we hold tight to where we are right now. I mean, we operated like this forever. This is people, young people think this is awful, but it's not awful. You know, it's just a change. We just have to adjust to where we are at 4%. We're not to 5.44%. We're not to the 50-year average yet, so anyway, I think we're gonna be fine. Overall, it's gonna be an adjustment period, but those that have done good asset quality and have done proper loans and those who have not spent all their money.
Those who've spent their money are gonna have a tough time, but those that have liquidity, the ability to deploy liquidity and pick their spots, I think they're gonna do very well, as evidenced by the increase in margin you saw at Home. Does that answer your question, Stephen?
Yeah. Absolutely. We also kind of conversely, how should we think about the balance sheet moving forward? I know there was maybe about $1 billion reduction in deposits this quarter. You know, do you think we'll see the balance sheet shrink a little bit as you let higher cost deposits run off, or was that an aberration at all, or how should we think about kind of deposits and the size of the balance sheet?
Once Chris cranks up that big deposit machine in New York, he's probably. No, we're trying to keep our deposits, but they're. I mean, we lost $50,000 on a deal here today, I think. Somebody put it in a four-and-four or some kind of deal. I mean, these banks that are out of money are really stretching out there right now. You know, it's good our margin was over 4%. I'm tickled over that. That was our goal to get back over 4%, and we got to 4.05% or 4.08% for the quarter. I think we'll continue to improve there on the margin side. Hopefully, we don't get eaten up on the deposit costs. It's a battle out there right now.
So far so good. We still got good liquidity, and we'll. That's one reason I'm gonna sit back a little bit and just play the Fed funds market for a little bit and let Bryan Greathouse pick his spots. I think that makes sense because I know we're gonna get another 150 basis points between now and the end of the year, or at least I expect that to happen, so that's a pretty good guess. You know, if the Fed goes 150 basis points, it may not be over, but they can stop for a little bit. We don't need to pivot immediately, but they can stop for a little bit and catch their breath and watch and observe and see what impact that has. Let me say this to you.
We had a big customer, o ne of our largest construction customers, a friend of Tracy's from way back, came in, and interestingly enough, he wanted to talk about his projects for the next 12-24 months, and half his projects were retail and did not work. They would not work. The numbers did not work. He said, "We're gonna scrap those or put them in the drawer because those projects don't work." He said that the costs were so much higher on the retail space that the retail customer can't pay that kind of rent. He backed up. He thinks things might settle down and get better in the future, and he'll come back to those projects.
You like to see guys out getting estimated costs on projects 12-24 months in the future and see if they work. That's a good customer. He's a good customer of ours for many years and a large customer. That's the first sign I really saw of that happening to a guy like him. I see some people coming in with some deals that don't make a lot of sense right now, but they're trying to squeeze all kinds of. They're just gonna have to put equity in the deals right now. I mean, there's just opportunity out there, but they're gonna have to put lots of cash equity in these deals to get financing, as Chris will tell you and as I'm saying.
I think that's the future is that you're gonna be able to pick your spots. You'll be able to pick your loans and pick your securities right. You're gonna be able to make some money for a period of time here, I believe.
Yeah. Makes sense. Okay. Just lastly, what are the M&A conversations going that you may or may not be having? I know you mentioned maybe a larger transaction this quarter that you had some conversations on. I guess, what do you think, you know, in this rate environment and the related marks is the likelihood of you doing a deal in the next six months, 12 months, something like that? Would you rather do a larger deal or a smaller deal if they were, you know, both on the table?
Oh, I really like the larger deal. I'm just not ready to pull the trigger on a deal that size. I mean, I like the people. They're good people. I like them a lot. I just don't think I'm ready to do that at this point. I think you'll see us active on the M&A side. If we find the right partner in the right market, and I mean, I talked to this bidder on a bank. I like the guy a lot. I think he knows his business. I think he runs a good management team, but they all have to get off of that 2x tangible book. It's just the same thing and it didn't do anything for us. I liked his management.
He would have been a nice individual to bring in on the management side. I might still do it. I think we like each other. We'll see where that goes. We just pulled off of one recently that we were invited to bid on. The reason we pulled off was because of the culture, the anticipated culture of the bank as compared to our culture. We didn't think that our culture would mix well with that culture, and we decided not to go forward with that transaction. Other than that, you know, my friends at Stephens got me some stuff they want to show me, and I'm sure Scott Clark's got some stuff he wants to show me, so you know, everybody's got a deal to look at.
Absolutely. Absolutely.
I think you'll see us do a deal in the next six months.
You guys are—
I think we'll do a deal in the next six months.
Got it. Well, you're doing something right over there. No one's sending any planes to come pick me up, or no one from California is flying to see me, so sounds like you're in a good spot.
Well, I was just gonna mention to you, I was gonna send a plane over during duck season to pick you up, but you'd come hunt with me.
Sounds great. There you go.
Okay. Thanks, Stephen.
Thank you, guys. Appreciate it.
Thank you. Our next question comes from Brett Rabatin with Hovde Group. Your line is open.
Hey, guys. Good afternoon.
Good afternoon. How are you, Brett?
I'm doing good. Wanted to first ask Johnny, you know, you've been 100% right on rates and, you know, in the past year, you've been talking about the Fed's gonna have to do more, and you've been aggressive with that, and that's proven to be true. I'm curious if you think about the outlook from here, if maybe you think now is the time to batten down the hatches, so to speak, and maybe tighten more than folks have on credit standards. Was also just curious if you think about, you know, 2023, one of the hard things is if rates are 200 basis points higher, you know, what does that do to demand? Just curious on your thoughts on each.
Well, I think you can see the 200 basis points. You know, the story I tell about Volcker in the seventies, and he didn't fix it. He almost fixed it. He slowed it down enough, but the pressure came from everybody to pivot, and Powell is gonna get that same pressure. It's just a matter of whether he pivots too soon or not. I don't think it's time to pivot. You know, when you think about this, again, I go back to the average of 5.44% for the last 50 years. It's not the end of the world. We can continue to exist here. We just have to adjust.
Now, add to that inflation and material costs on all of these multi-families or office or whatever you're building, that adds a lot to the factor too. Multifamily still works. I'm not sure retail works anymore, but multifamily still works if you watch your P's and Q's and get in the right area. The scary part is you're seeing, as Chris Poulton will tell you, he never uses forecasted higher rents above the market. You know, if the market's $1.50 And you say we're gonna get $2, that's a stretch because the cost you're using that. You have to be careful.
It may work, you may get $2, but you're much better off pricing it at $1.50 if that's the market and see if that works rather than think you're gonna get $2. I think we're gonna see business okay. I think there'll be some projects slow down. I mean, like I told about our construction guy in Orlando, he's half his projects don't work. If they don't work, you know, he's smart enough. He's a smart enough guy to get out front, and that's the kind of trustworthy we have. Kevin, you got any comment on the loan side?
Well, I was just commenting. You asked about tightening underwriting, and we've, you know, been historically pretty conservative anyway, and we err on the side of more cash in deals. You know, rates go up, that's just gonna mean that more cash gets into deals. We see ourselves as that this is a good time. Volatility certainly works in Chris's business. It works for us in the community bank footprint too. We're excited with the opportunities we're looking at, and we'll underwrite them appropriately for the rate, you know, the rate environment we're in. Johnny doesn't, but we all believe that we're not close to the end of this rate cycle yet. There's more. It's probably higher for longer. It makes more sense to me. We understand that, and that's how we'll underwrite it.
That's great color. Johnny, you did mention one little category that you grew this quarter. Multifamily is still working. You know, I assume that's one loan category you'd still like to add to. What loan categories look good to you at this point, and which ones are a little bit more scary to you as construction and land development? Is that something maybe you might de-emphasize going forward to some extent?
Well, you know, you can get all the hotel loans you want right now. I mean, you can get more than we have available cash to do. It's just picking the right hotel loans. We're not afraid of hotel loans. I mean, we like the space. You just got to get the proper capital stack in there to make yourself feel comfortable, because we're not sure what if we do hit a recession, how much it slows the economy down. You're just better off getting extra equity in a deal at this point in time. That's kind of it. If we've done anything, we've kind of asked our people to get a little additional equity in a trade. You know, I don't want to do any office. As I told you, my guy from Orlando said retail doesn't work. I'm not sure about office. I guess it's more multifamily.
Multifamily and industrial. Industrial's been really hot. We've you know been kind of out of the play because it has been so hot now that you know people are getting a little skittish in some areas. Some of those opportunities are coming to us. It. You know again the volatility brings us into things that you know sometimes when things are really great we're priced out of. And both in Chris's business and for us and the community bank footprint as well.
You know, interestingly, some of our biggest customers, we have picked up in times like this, when other people are not lending and we're continuing to lend into the markets. I can name a handful of customers that we picked up in really difficult times like this. I'm looking for the opportunities there to pick up some of these really good customers and build long-term relationships with them because I think this is a good time to do that. Because a lot of people don't have any money, they're loaned out, and they're having to borrow money, having to borrow Fed funds. I think it's a good opportunity for us. We're [crosstalk]
We've already seen it. We've already seen it this week in our loan committees. We had one yesterday that Davy had that very [crosstalk]
Yeah, big, big credit. Yeah.
Very similar.
That's right. Our Jonesboro operation, Davy Carter, brought a really great credit in yesterday with a great customer that we never would have gotten a look at except for some disruption out there in the marketplace. Longtime family, very wealthy organization. Even though it gets a little tough once in a while, but you know how conservative we are. We underwrite properly, we do the right thing, and keep ourselves reserved properly in case there's a problem, and we'll try to continue to do that in the future.
That's great color. I'm kind of surprised the stock's not doing that well today. It feels like the market wants to punish the banks that have already burned through all of their liquidity, so it's a little bit unusual, but congrats on the quarter anyway.
Well, thanks. I don't know why we're down. If they got us down $1.25, I don't know why we're down. We don't deserve to be down. There's no reason for Home BancShares stock to be down. It's on 4.99%. That on the best earnings and liquidity, we're in great shape and lots of reserves. I don't know anybody that's got as strong a fortress balance sheet as we do, but it is what it is. They just don't like banks today.
It seems that way. Congrats again. Thanks, Johnny.
Thanks, Brett. Appreciate you.
Thank you. Our next question comes from Brady Gailey with KBW. Please proceed.
Hey, thanks. Good afternoon, guys.
Hey, Brady.
The margin was up— I'm doing fine. The margin was up pretty nicely in the quarter, you know, a 40 basis point move quarter-over-quarter. You know, I think, you know, there's some other banks out there that are talking about, you know, NIM expansion not being that great going forward, just as maybe your deposit betas catch up. How do you think about, I mean, a big move in the margin this quarter, but how do you think about the margin going forward? Do you think there's still some notable upside, or does the increase start to, you know, decelerate in the quarters to come?
Well, I look at it every day, and right now I'm a little backwards for the month of about $300,000. I don't like that. We're gonna correct that around here if we can. I think there's going to be a little more pressure on the margin than there has been. But however, the model. I'll let Stephen talk to the model, what the model shows.
Yeah, I think we've mentioned it enough in the next up 100 basis points scenario, we show NII up about 4.5%. Yeah, I think we've talked in the past, that's, you know, assumes, I think 40% or so deposit beta on checking and savings and then 100% on CD. So I think all of this ties back to we've got asset yields moving in the right direction. I think we've done all the right things there. You know, we continue to. If I see right, we picked up a little bigger percentage of variable rate loans with some of the production this past quarter from Texas. So, we're doing all the right things there.
I think it's just a function of being able to control, you know, deposit costs on the way up while retaining, you know, everything that we want to retain. That's been top of mind with all of our presidents, you know, every day and every week over the last two or three months, really trying to kind of act like a 100% loan- to- deposit ratio bank today just to keep the deposits that we've got, and then we'll cultivate. You know, we were talking at loan committee yesterday. In some respects, it's been a couple years since we've really focused on the lending side to obtain, you know, deposits from these customers. We're refocusing some of those efforts in these loan committees and making sure that we get the deposit opportunities and relationships when we do the loans as well.
If you're asking if we're gonna be up 41 basis points this quarter, I don't think so, but I'd like to be up 20 basis points.
Yeah. Yeah. All right. My next question was on the expense base. I mean, y'all did a good job of holding quarterly expenses pretty flat, or actually down a little bit. So how do you. You know, a lot of banks are seeing a lot of inflation pressure and expenses going higher. I mean, is Home any different than that? You know, do you expect to see some more meaningful expense increases or, you know, maybe not with how efficiency-minded you guys are?
Yeah. Interestingly enough, Tracy called me up to his office yesterday about a $1.2 million increase for the next 12 months, about $100,000 a month. We were discussing it yesterday. Outside of that, I mean, we'll have some increases. But I don't think it's gonna. I saw where somebody said we were looking at 12% or 13% increase. We don't see that. We're not seeing those kind of numbers. I think we haven't really refined Texas yet on the efficiency side. It has not been refined. There's lots more room to get out of Texas over a period of time. Particularly on the facility side, we have lots of big facilities that we'll be working on.
Oh, I mean, as I told you, we got a 240,000 sq ft corporate office out there. But there's lots of little things that need to be done that we haven't even started doing on the Texas side yet that we operate the way we operate on the Arkansas side. Wouldn't you say, Tracy?
Yeah. I think that's fair. I think there's gonna be opportunities when you look at anything, you know, today of the size we are, just company-wide too. But, you know, the Texas, we've been focused on the acquisition and focusing on the merger and taking care of the customers at this stage of the game. A lot of good opportunities we'll be able to check into.
Okay. Got it. Thanks, guys.
Thank you.
Thank you. The next question comes from Brian Martin with Janney Montgomery Scott. Your line is open.
Hey, guys. How are you doing?
We're doing really good, except our stock's down. There's no reason for this stock to be down.
That's right.
I mean, when you report these kind of earnings, I don't. It's about as good as we can do, right?
That's right. Yeah. The whims of the market. While you guys are staying patient, we'll see where the stock trends. Maybe just a couple follow-ups. Just on the expenses, I mean, should we think about the expenses, you know, given the opportunities you have in Texas that, you know, you kind of outlined there, that you know, the net expense numbers should trend lower in the next couple quarters from the current level we're at if you're, what, around $114 million today this quarter? Should we see them, you know, trend down? Is that your expectation, or is that kind of wrong? You know, I know it may take some time as you kind of work through the Texas part, but is that the outlook? Just how quickly would you expect to realize some of those benefits you kind of outlined?
Well, we got a little investigative work going on in Texas. We spent a couple million of dollars, and we'll probably spend a little more over a period of time as we look into some situations that have arisen that we've found. That could have pulled it down this quarter a couple million of dollars. We don't want to talk much about that right now, except the fact that we're working on some stuff out there. Other than that, we just need to fine-tune it. Texas people don't waste money, but just a lot of savings, little things that we did many over the years here that Donna and her team created, and our branch managers came with more and more and more.
We just haven't instituted any of that in the really, I mean, in the Texas market as of right now. We had enough going on, didn't we, Tracy, to—
Plenty going on.
Yeah. Plenty going on. It's been a busy place in Conway, Arkansas. I know with all over the country, everywhere. Everybody's working hard .
Okay. Probably not trending down right, you know, immediately. The couple million you talked about, that wasn't something non-recurring that just comes out, so you do step down, or is it just more gonna take some time to kinda work through what you're doing there?
Yeah. That's that is. That will be recurring for a little bit here as we continue to do our investigations.
Gotcha. Okay. Then maybe just one on the margin, back to the margin for a minute. Your comments about getting half of the pickup you saw this quarter, Johnny, in the fourth quarter. Just maybe one more for Steve. Just as the Fed, if the Fed does begin to pause or pivot, as you get later in this year, if you get your two increases at year-end, how does the margin behave, you know, once you get to that, you know, that end? I mean, it should be, think about the margin maybe peaking in the first or second quarter next year, and then maybe it stabilizes or drops. Is that how you guys are thinking about it?
You know, keeping in mind, you know, I guess the liquidity is obviously, you know, a wild card depending on how you deploy that. Is that, you know, how we should kind of be thinking about it today?
Hey, Brian, this is Stephen. I don't know if, quite frankly, if we're out, you know, that far in front of it. I mean, I think we're focused, you know, keenly today on stabilizing the deposit base. You know, out in the future, we certainly as payoffs continue to turn through, those can be, you know, reinvested at some of these higher loan rates that we're doing. Same on the investment side as cash flows come in. Yeah, I think it's our expectation belief today that we're gonna see some continued rate increases and are focused on, you know, positioning the balance sheet to take advantage of that.
Gotcha. Okay. All right. Maybe just two last questions was just more housekeeping. I think, Brian, you mentioned, there was some higher fees from Chris in the quarter. Was there anything in the other line item on the fee income side? I think the other fees were up another couple million bucks. Was that just kind of a core maybe from the Happy deal, or was there anything unusual there? It didn't sound like it if you didn't call it out, so I just wanted to confirm that.
Well, it's up $1.8 million. We did have an item. It was related to a fair value adjustment on our equity investments of $3.3 million. If you remember, last quarter, we had some pretty large recoveries from acquisitions that had been previously charged off. We're kind of down $1.3 million on that for this quarter.
Yeah.
That's pretty much the change that you're looking at there.
Okay. That's what I figured. I just wanted to confirm that. The last one was just maybe for Chris, the payoffs you saw this quarter. Typically, fourth quarter is a, you know, heavier payoff quarter. Given what we saw this quarter, Chris, is it you know, I guess, say, your expectations. You still see more payoffs coming in 4Q. I know you talked about originations being, you know, solid for 2023, or at least the outlook there, but just the payoffs in 4Q. Are you still expecting more to occur or kind of an elevated level in 4Q?
I don't think we're gonna see an elevated level, at least what we're looking at now. We'll probably head back to a normal run rate. There's a couple things that are out there that are a little more bridgey that they're kind of binary, right? I mean, they'll pay us off at the end of the year, or they'll extend for another year type of thing. Won't know that till December. I mean, I'm up right now. I expect our balance to stay up through November. You know, we have a December surprise every once in a while and something pay down. Right now, I'm forecasting sort of flat to up overall, which would put us at kind of a normalized, you know, payoffs.
We don't have a lot of these large loans left either, right? You know, we do most of our stuff's $50 million and less, and we have a few larger ones every once in a while that pop. But you know, it's not our bread and butter business either. So you know, it's hard to say. Fourth quarter, you know, historically sometimes is quite high for us, but I think we have a pretty good handle on it this time. Something will surprise me, I'm sure. But in general, nah, I mean, I think this was. These were the loans we were looking, that we were expecting to pay off. And quite frankly, at some point, if they hadn't paid off, I'd have gotten a little worried.
Yeah. Okay. No, that's helpful. Last one was just, or I guess maybe, Kevin, you talked about the hurricane reserve or provision. The timing of that, I guess, is your expectation that's a fourth quarter event. Then just outside of that, just kind of how we think about the reserve going forward, given credit and then just, you know, how good credit is today, along with just kind of the counterbalance of just kind of the macro environment.
I may have overestimated what kind of reserve we have to have. Based on what I'm hearing, it may be better than I anticipated.
Yeah. I mean, in my comments, we said we feel like $40 million-$50 million is the most that we could see on deferment. That's only like a fourth of what Irma was and less than Michael, and Michael was up in the Panhandle. I mean, at this point, I don't see it as a big event for us. You know, obviously it's still early too, so we'll continue to track that and be able to report it as we go.
Okay. Just outside of the hurricane, just how to think about the reserve, you know, as we go forward. I think, you know, where you're sitting at today, a little bit over 2%. You know, just is that kind of a line in the sand where you'd like to stay? Is that, you know, your outlook today?
Well, yeah. I mean, think about it. You've had the worst financial crisis, you've had the pandemic, you've had a hurricane. I mean, it would have looked like a up and down, up and down, up and down if you played with it. You know, 2% reserve has worked. It's always worked for us. I don't know if the CECL works or not, but we're running parallel systems right now, and we're keeping up with that. You know, what I do know is that 2% reserves worked, and in this volatile time, I think we certainly need to maintain. Anybody that's running 1% or less, they certainly don't have enough reserve. I don't care how good their asset quality is, it's not enough because we don't know what's going to hit us next, right? We never know. Something's going to hit us. We just don't know what it is.
Yeah. Okay, perfect. Thank you guys for taking the questions in late quarter.
Thank you. Appreciate it.
Thank you. Our final question comes from Jon Arfstrom with RBC Capital Markets. Please proceed.
Close enough. Good afternoon, everyone.
Hey, Jon.
Hey, can you just, I know this call's gone a little long, but can you give us a quick update on Shore Premier? I don't know if it's hurricane-related update, but just, you know, how did the business do this quarter and, you know, how are you thinking about that?
Well, I will. I'll turn it over. John's on the phone, and you can hear from the horse's mouth. We'll let John tell you what he's seeing for the quarter. John, you wanna take it?
Yeah. This horse is ready to speak. Jon, thank you for the question. As far as the hurricane, my folks tell me that so far we've only had one yacht that was totally destroyed, and the risk to us is that we got 100% payoff of that loan. We haven't had anybody file for any of the deferrals, the deferment program that Kevin Hester was talking about. As I was talking to Mr. Allison earlier this week, third quarter was a good quarter for us. We had nearly $100 million that we pushed out the door. Mr. Allison, I think the number was actually $90 million, so I'm stretching that just a bit. We had about $55 million in repays and prepays, so $35 million net growth, which is good for us.
As I was telling Mr. Allison, importantly, the component to that was $12 million on the retail side of our business. The pendulum seems to be gradually coming back to us on the commercial side of the business. Of that net $35 million in growth, the bulk of it, $23 million of that was commercial inventories. We're happy to see that. The outlook is positive. We're starting to see some slowing of applications, but as you would expect in this current environment of limited supply, we're seeing the average application is going up, 'cause inventory values are going up. I think they've risen year-over-year by about $100,000. Asset quality is holding strong, and our outlook is positive.
As we're entering this the boat show season, we're expecting there perhaps to be a seasonal rebound in that application volume. So far the business has not been negatively impacted by the macroeconomic headwinds.
Okay. All right. That's good to know. Thanks, John. Just last one for you, Johnny.
Yeah. Thank you.
You talked on several calls prior to rates going up about some of the fixed rate commercial real estate loans that were being made in some of your markets. Have you seen any of those banks struggle or have problems or come to talk to you about acquiring them or, you know, how do you think those banks are doing? Thanks.
Well, they gotta be shit that they put so much money in low-rate real estate loans and securities. Like, I mean, you'll see 'em. Look, watch the local newspaper for Sunday's ads, you know? That's what I'm seeing, is they've just run out of money. They spent all their money, put it, as I've called that over the years. I couldn't believe it. Happy did the same thing too. The Happy group did the same thing. They took extra cash and put it into securities and why we were not doing that, but we didn't own them at that time. Since then, a lot of people have done that. I haven't heard the squealing yet, but I'm confident we'll hear the squealing.
I think from an M&A perspective, it really makes it tough to do a deal with someone if they're AOCI. You look at their bond book, and they're down, upside down on the bond book like everybody is. But I mean, that impacts the value, significantly impacts the value of the company. Then you look at their loan book, and they got a bunch of twos and threes on their loan book in this market, and by the time you get through marking that to market, you know, I don't know how a bank really do an M&A deal right now. You got the fees that are attached to it and the cost of doing one. It's just tough to do. They're just really, really tough to do. Thank goodness we didn't do that. I'd rather be lucky than smart.
We just got lucky and didn't do it and held our line, and I think we made. I'm not looking for a pat on the back, but I think we made the right call.
Yep. Seems that way. Okay. Thanks. I appreciate all the help.
Thank you, Jon. Appreciate it.
Thank you. There are no further questions at this time, so I will now pass it back to John Allison.
Thank you. I'm gonna go to Tracy French for any closing remarks that Tracy might have.
Well, I think the group did a good job of covering all the questions. They didn't hear much on the Texas deal, so I thought I'd give you a little short summary of that, how that process. I know we talked about some of the challenges that are out there, but I don't know if Mikel Williamson's listening on the phone, but I'm gonna just say they're doing pretty good, if he is, and his team that may be listening, that they're really doing outstanding from what we've seen so far. You know, you talked about the loan growth. I mean, we're seeing the activities there come through for us, where the first two, three months that they was with us, we was working on the merger and conversion challenges, and everybody was dealing with customers and so forth.
That part's turned out extremely well. Internally, we rank them and allow them at our board meeting to report to the board just like Johnny does here today. I think for the first month, Monday, Texas will go first, you know, on the meeting, and that's thanks to Robert and his metro team that has picked up the ball and run extremely well. Overall, for the banks, Johnny, I mean, when we look at all the states, it's the first time Arkansas, Florida, Texas, and New York operation has all been above the 2% range in a long time.
I think we have a lot of good momentum, and I think, Scott and Mikel and Robert have put together their teams out there that survived, and we've got some really bright bankers that's gonna probably be taking my job someday that works there today. Very pleased with it outside all the chaos that you've mentioned out there. Kudos to the rest of the Florida operation, which we know what they've done down in Florida and North Florida and Arkansas. We're sitting pretty good if the world doesn't throw us too big of curve balls that hits us in the back.
Thank you for that. Anybody else got any comments? Well, I think it was a great quarter. I'm very pleased with the quarter. I couldn't have asked for much more from this group. We teed it up last quarter telling you that how good last quarter would've been had we not had the one-time $107 million expense last quarter, but we didn't have it this quarter, and the proof's in the pudding, so we're pretty pleased. I'd like to get it, you know, I have another number in mind as we hit one goal, I change to another goal.
We create another goal. We go higher. What we got, I sent out a deal a couple weeks ago, and I said, "Here's how we get to this number? Here's how I think we can get to this number." They said, "Do you ever quit pushing?" I said, "No, not yet." Anyway, we just keep. You told me I had until the end of the year to get there. That's amazing how that changed after 63 days, Johnny. Anyway, I thank you all for attending tonight. We appreciate the support. Donna, I think we're done. Tracy, some things just never change.
This concludes the Home BancShares, Inc Third Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your line.