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Home BancShares Inc
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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.
[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 K-10 filed with SEC in February 2022. [Operator Instructions] This conference is being recorded. [Operator Instructions] It is now my pleasure to turn the conference 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 while market swings and economic uncertainty, the third quarter was no exception. However, with a fortress balance sheet conditions at home remains strong and with a positive outlook. And to provide more color on that, I will turn the call over to our Chairman, John Allison.
Thanks, Donna, and 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 going to go higher for longer.
If you remember what I said the last time about Volker in the 70s, he took rates to 14% in the late '70s, but he didn't tell a snake before he pivoted. He pivoted under printer because people said we've got to turn it around. As a result, you had to come back in the 80s and take rates to 21% to cut the head off of site. 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. We have not killed the stake yet.
Another 150 to 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 4 years, and this administration is still trying to continue to inflationary. I said last quarter, they're either naive and confident or playing stupid or maybe they're brilliant, which I doubt, but time will tell. I will say there is no substitute experience. I heard Nancy Pelosi say that this morning, and I may take it out of my vocabulary because I always heard say there is no substitute for experience.
There is no one in this administration with any business experience cure. You cannot take a bunch of PhDs and got their expertise out of some book. The wall 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 fund rate, as I said the last 2 quarters because the puppet show is continuing on by Powell and his group.
This is really not a time to pay, and I think the world is not coming on end because of high rates. Remember, the average Fed funds we've talked about last time for the last 50 years, it's been 5.44. We've got a long fine with those high rates and the world in crack. 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 bank is to be premeditated and cautious with their moves and playing a little defense is not all bad. When you see banks bending 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 flying, just Tracy met with them and the one plane came in from Florida one came in from California, and I said why are you in Commonly, Arkansas and you see because our 5 big banks won't do this deal.
The good news is it wasn't a bad deal. We may be able to structure it and make a good deal of it. But obviously, there is some tightening going on outside with other bodies. The good news is home was prepared for the rate side of what has happened, as you see from these quarterly results. They're very good. We did this in spite the damage that was done to us by the unprofessional actions of the West Texas former employees. Here's the good news. We talked enough about the bad news. We hope we'd be at a $100 million run rate sometime in '23. But the good news is we had almost 110 for the third quarter. Actually, $108.7 profit. Our non-GAAP was 109.9%, last start and a record. Adjusted 9 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. Pretax income of $142 million or 55% of the net revenue, another record for the company. We ran a 1.81% ROA. NIM was for the third quarter was 4.05% versus the second quarter at 3.64%. That's up 41 basis points. And here's how that kicked. April was 3.35%, May was 3.57%, June was 3.71%, July was 3.83%, August was 3.98% and September was 4.08%. So that has clicked up so far. And hopefully, it will continue. ROTCE was not a record, but it was close at 20.93% and EPS was $0.53, adjusted non-GAAP was $54. After-tax net profit was 42.37% of net revenue. That's what I call P5 pretax pre-provision profit percentage of net revenue was $42.3 I don't know many industries or companies can pull down 42% of the net revenue in the profitable after-tax profit.
Asset quality remains excellent. Nonperforming assets were $0.27 Nonperforming loans to loans were $0.45. Charge-offs were $5.1 million as we charged off the final ports of a professional athlete loan. Already, we had already allocated 100% for it, but we have not charged it off until this quarter. We had hoped, 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. We expect a reserve allocation of somewhere between $10 million and $15 million to $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 billion or $289 million. Combined efficiency, I'm pretty proud of this. Combined efficiency dropped from $46.02 last quarter to $42.97 this quarter. That's a nice -- not a record done, but nice improvement. Continue maintaining strong capital ratios, and Stephen will talk more about those later. The tangible book value dropped to down from $9.92 to $9.82 during the quarter. We repurchased over 1 million shares of stock and we had ALCI. 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 it were down -- Stephen, you said they were down about $500 million, but they had -- the net was about $342 million.
Yes, balances were down $340 million. I think they had about $500 million in payoffs.
Well, Chris will tell you there's no wrong with the 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've 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 a chip, but it appears the company provides a little help and we have to get third parties to help us. So I think that was new to us and kind of we stumbled with that a little bit. And then the hurricane, the impact on loan closing, as of this day, we're up over $100 million that we -- that would have closed, we think had the Heriot.
Anyway, we're fairly close. We're not too upset about that. We repurchased $24.3 million of Home Bancshares that was $1,032,732. That's a lot of stock. We bought about $1 million, I think last quarter, Brian, that about right, $1 million this quarter.
That's correct.
Our holding company has about $55 million of bank stock and bank securities investments yielded about $6.5 million, and 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. So we'll continue to hold lease securities. They'll go up and down, as you know, the 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. We that's number one. Number two, we have, as I said, fair market loss on the securities of $2.6 million. And number three, if I read correctly, Brian, we had a $1.1 million recovery on historic losses that were written off from a prior acquisition.
And that was a prior acquisition, you're correct.
So going forward, loan demand is staying strong. Investment yields are very attractive. So we'll continue to pick our spots on high-yielding investments. And on the M&A side, the only thing we've really done is I met with the CEO of about a $1 billion bank for lunch and directs earlier this month. We had a preliminary discussions about possibly doing something together, but just how much you wanted, 2x book. That's all ways of story, and that didn't work. However, I liked him and I don't think he likes us, or who knows where that will go. And that's about it from me. Tracy, have you got any comments that you want to make for the quarter you happy or are you unhappy or what do 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. So it's good to see that 2% ROA out there on the bank side, we'll get that pretty quick on that aspect. You mentioned the hurricane or locations turned out to be safe and sound, back open already. So 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.
I don't know if we're getting the curve ball frown at us or a knuckle ball or may get hit by the pitch, I don't know. But our deal here, John, just hit double. We're just going to hit doubles and keep on around the basis and doing the right thing and taking what's thrown at us. And I do also want to say the Texas operation has turned the corner tremendously. The changes that have been made have just turned out to be great people. And the leadership there has done a good job of bringing in the right folks and 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 been a challenging quarter. It's been busy and rates up and down, not down up, up, up and it is -- for our shareholders, it is one busy place. I'm telling you it's very -- I don't know if we're accomplishing, but we're certainly busy. Everybody's got their heads full with everything they're doing. So Donna, over to that, I let you have it go.
Okay. It 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 In. And I'm sure many of you are curious about the lending portfolio in those markets. So Kevin Hester is here to provide you an update.
Thanks, Donna, and good afternoon everyone. I know everyone is anxious to hear about how Hurricane and 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 of those affected by the storm. We have about $1.6 billion in loans in the 20-plus 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 we 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 nonperforming loans and nonperforming assets, down 6 basis points and 2 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 disruptive. 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 have our -- the way it runs our Pine Island branch. She was cut off from the Mainland and she was taking her deposits and money back and forth by both pretty remarkable. They've got the bridge in temporary bridge in now and see -- it's pretty good stuff. We have got a branch management goes the call.
That's amazing. And the early reports that you have, Kevin, from customers are reassuring to. So hopefully, they're all going to make it through better than we would imagine. So 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 4 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.
So many of you have heard me say this before, as 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 refinanced to the permanent market at significantly higher dollars versus our outstanding loan amount. This quarter, CCFG originated just over $300 million in new loan commitments, bringing our 2022 total to well over $1 billion. As we approach year-end, we're working towards closing out our existing loan pipeline. And 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. And 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 helped 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 $1 billion 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. 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 3 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 Sevens and even a few 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 in the past 3 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 at around $500 million, while the community bank footprint 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%, a leverage ratio of 10.39%. And as Johnny mentioned, a strong TCE ratio of tangible common equity to total assets of 9.24% as of September 30, 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. And Donna, with that, I'll turn it back over to you.
Thank you, Stephen. Johnny and Tracy before we go to Q&A, do you guys have any additional comments?
I'm good.
I'm good. I think it was 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 Texas has worked out pretty well for us in spite of what we got hit with out there in West Texas, but it's been -- we've overcome that. It cost us some money, but we're biting that battle. So other than that, I couldn't ask for much better. Things are going very well for us. So that's it Donna, if we want to if you're ready to go to Q&A. Operator, we'll turn it back over to you.
[Operator Instructions] The first comes from Matt Olney with Stephens Inc.
Thanks for your commentary, always colorful. And John, you ever think that maybe Nancy Pelosi has been listened to your Home Bank conference calls and stealing some of your quotes.
She and her husband are buddies.
She wouldn't get too much of a kick down with I'm referring for.
Well, I want to hit on some questions and thoughts on the third quarter results. But first, I came across a press release that Home Bank had a few minutes ago, and it sounds like there was a lawsuit settlement with service first and some former employees of yours. And if I'm reading this ride, it looks like you'll be receiving $15 million in the settlement. Any more in a few years since we've talked about this. I can't recall all the puts and takes around it.
Well, it's been a long. I wish service first the best. There was the right way to do something on the wrong way to do it. And as evidence, we thought they did it the wrong way they thought they did it in the right way. But it's such a fine line really is to finalize and we're just glad to have it behind us. Kevin has been with it the whole way. Kevin, you got to comment on it.
Well, you said it. It's been a long, long road. We're -- it's almost 7 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 John, it's gone over and we'll get our money in a few days, and we got it resolved.
And as far as the results and the outlook here, loan growth, you gave us some good commentary on that. You mentioned some challenges in 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 do you think some of those things will kind of ease up to produce some loan growth here?
We're actually up -- we just didn't get them all closed. We're actually up $162 million as of today. 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 is creating some problems. So I'm not going to call the name of the loan company, but it has created problems throughout the system. And I guess the jury is still out on. 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.
So we had the loan -- we could have had the loan demand, the hurricanes slowed it down and the loan system slowed it down. And -- but we're -- I'm proud to say we're up $162 million. I hope that holds and continues on.
And anything specific from Chris Poulton, I know Chris called out some higher paydowns 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. No, I think we continue to see good and I think we're still up for the year, right? I think the last 2 quarters, we kind of said, look, we front-run some of these pay downs. I probably would have normally expected to have one of those in the first quarter, 1 in the second quarter, maybe 2 in the third quarter type of things. We are seeing secondary market and take out markets are a little choppy. I think what ultimately happened on these 4 in particular is at least on 3 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 happen to once. I think they probably made the right choice.
2 of those, in particular, they were taking large cash outs in the reify and that may have been -- this best quarter may have been the last time they could do that. And we're seeing conditions tighten, especially on takeout financing with cash out, et cetera. So I mean we always -- we like to have pay downs. I mentioned that a lot. These were projects that we help 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.
Yes. Okay. Makes sense.
It scares you a little bit, we're seeing people come flying in here more sold than we've seen in a while, people we don't know, which what ties to what Chris is saying, where they've been getting their money, they can't get it and or they're not long in that asset class. Anyway, it's been -- it's interesting watched it. And I think in my comments are said we've had got they flew in one plant for California on 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. So anyway, it's interesting watching this, and this is a good time for Chris he does very well in volatile times, and I guess this is volatile time for us. So whether we'll do any of those or not, it is interesting, but 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. And I'm thinking, wow, what's going something changed, and I guess that's it. So interesting times, Matt.
Yes. It sounds like it, definitely. Well, I guess switching gears over to the -- on the fee side, fees were especially strong this quarter. I know those can be volatile at 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 were 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.
Yes, sorry, sorry, on which piece?
Your fees for the quarter were up about $1.3 million is probably.
Yes. That's always -- yes, sorry about that. Yes, I understand. Just a push start, sorry. Yes, that's always tied to. Will we get pay downs, we also collect fees. And so big pay down quarter is always a big fee quarter.
Yes. Good than that.
Our next question comes from Stephen Scouten with Piper Sandler.
I guess, I was kind of curious what your plans are and thoughts around continued liquidity deployment and kind of what you saw on new yields in the quarter, both in loans and securities, what you're able to obtain?
Well, we saw some -- we're seeing 7s and 8s on the loan side. We're seeing some 7 -- 6 and 7s on the study side, -- we're just kind of picking our spots when we see an opportunity as our children who runs that area for us, said there was kind of an outbalance deal of the day and sometimes that happens and there's some opportunities to pick up some 73-plized securities and they did. And so we're just kind of picking our spots. Brian's got a comment on there. Stephen, either one of you all got a comment on that?
No, you get on the loans. I don't have the securities yield, handy, but it's like you said, that Bank Rate House has found good opportunities here over the last couple of months. He has the authority to go buy. And if he sees an opportunity to go back, and that's what he did a while back when we found that a security at 7 plus -- so he picked that up. So he's on top of his game and we're deploying -- we're going to sit for a little bit here on the deployment side, I think we got another 75 basis points on another 75.
I think we've got another 150 basis points before the end of the year. So we're just taking on the Fed fund side and ask Brian Greathouse to if he finds an opportunity to go ahead and exercise that opportunity. I think that's the best way to play it right now. I don't want to -- I'm not sure where this is going. They're trying to get everybody starts talking about pivot, pivot, 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. And I mean we operate like this forever. This is people -- young people think this is thoughtful, but it's not awful. It's just a change. We just have to adjust to where we are at 4%. We're not the 544 not to the 50-year average, yes. So anyway, I think we're going to be fine, overall, it's going to be an adjustment period, but those that have done do good asset quality and they've done proper loans and those who have not spent all their money, those inspect their money don't have a tough time. But those who have liquidity that the ability to deploy liquidity and pick their spots. I think they're going to do very well as evidenced by the increase in margin you saw at home. Did I answer your question, Stephen?
Yes. Absolutely. Absolutely. We also kind of conversely, how should we think about the balance sheet moving forward? I know there was maybe about a $1 billion reduction in deposits this quarter. 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?
Once Chris, once Chris cranks up that big deposit machine in New York from we're trying to keep our deposits. But there -- I mean we all $50,000 on a deal here today, I think, so I put it in a quarter or some kind of deal. So I mean, these banks that are out of money are really stretching out there right now. I don't good. Our margin was over 4%. I'm tier that. That was our goal of ours to get back on with 4 and we got the 5% or 4.8% for the quarter.
I think we'll continue to improve there on the margin side, hopefully. We don't get even at on the deposit cost. But it's a battle out there right now. But so far, so good. We still got good liquidity. And we'll -- that's one reason I'm going to sit back a little bit and display the fan for market for a little bit and let Brown Gray house pick their spots. I think that makes sense because I don't know we'll 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 kit. 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 cetera watch and observe and see what impact that has. Let me say this to you, we had a big customer that our -- one of our largest construction customers that friend of Tracy's from way back came in. And interestingly enough, he wanted to talk about his projects for the next 12 to 24 months. And half's projects were retail and did not work. They would not work.
The numbers did not work. So he said we're going to scrap those or put them in the door, because those projects don't work. You said that the costs were so much higher on the retail space. He said the retail customer that reset can't pay that kind of rent. So you back that he thanks, Steve, thank things might sell them and get better in the future. He'll come back to those projects. But you like to see the guys out getting estimated costs on projects 12 or 24 months in the future and see if they work.
So that's -- he's a good customer. He's been a good customer for many years and a large customer. But that's the first sign I really saw back 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 get -- trying to squeeze all kinds of they just don't have to put equity in the deals right now. I mean there's just opportunity out there, but they're going to have to put lots of cash equity in these deals to get financing, as Chris will tell you, as I'm saying. So I think that's the future is that you're going to be able to pick your spots, you'll be pick your loans and pick your securities rates. So -- but you just -- you will be able to make some money for a period of time here, I believe.
Yes. Makes sense. Okay. And then just lastly, what are you seeing or what do you -- how 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've had some conversations on. I guess what do you think in this rate environment and the related marks is the likelihood of you doing the deal in the next 6 months, 12 months, something like that? And when would you rather do a larger deal or a smaller deal if they were both on the table?
I don't really like the larger deal. I'm just not ready to pull the trigger on want to deal with that size. I mean I like the people. They're good people. I like them a lot. I just don't -- I don't think I'm ready to do that at this point side we found the right partner in the right market. And I mean I talked to this billion bank. I like the guy a lot. I think he knows his business.
I think it runs a good management team, but they all have to get off of that 2%, 2x tangible book. It's just the same thing. And it didn't do anything for us. I like this management. He would have been a nice individual bringing over the management side. I still do it. I think we like each other to see where that goes. But we just pulled off of one recently that we were invited to bid on -- and the reason we pull off was because of the culture that anticipated culture of the bank as compared to our culture.
And 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, my friends at Stephens got me some stuff they want to show me, and I'm sure Scott Clark's got some stuff, even what you show me. So everybody's got a deal to look at. I think we'll do a deal in the next 6 months.
Got it. 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 has flown to see me. It sounds like you're in a good spot.
Well, I was just going to mention to you. I was going to send a plane over during duck season to pick you up, but you've come hot with me.
Sounds great. There you go.
Thanks Stephen.
Our next question comes from Brett Rabatin with Hovde Group.
Wanted to first ask Johnny, you've been 100% on rates. And in the past year, you've been talking about the Fed is going to 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 and was also just curious if you think about '23, one of the hard things is if rates are 200 basis points higher, what does that do to demand? So just curious on your thoughts on each.
Well, I think it's -- I think you can see the 200 basis points as the story I tell about Volker in the '70s and he didn't fix it almost is, he slowed it down enough, but the pressure came from everybody to pivot. And Pawel is going to 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. We you think about this. Again, I go back to the average of 544 for the last 50 years. We're not -- it's not the end of the world. We can continue to exist there. We just have to adjust.
Now add to that inflation and material costs all of these multifamily or office or whatever you're building, and that adds a lot to the factor too. So we're multifamily still works. I'm not sure retail works for multifamily still works if you watch your fees and cues and get in the right area. The score parties you're seeing, as Chris Poulton will tell you, he never uses forecasted higher rents above the market.
If the market is 1.5 and you say we're going to get 2, that's a stretch because the cost you're using that. So you have to be careful. It may work. You may get to, but you're much better off pricing it at 150, if that's the market and see if that works rather than didn't think you're going to get to. So I think I think we're going to see business okay. I think there'll be some projects slow down. I mean, like I told about our construction guy at Orlando, he have these projects don't work. So they don't work. It he's smart enough now to get upfront this customer. Kevin, you got to comment on the loan side?
Well, I would just comment you asked about tightening underwriting. And we've been historically pretty conservative anyway. And we are on the side of more cash in deals and rates go up, that's just going to mean that more cash gets into deals. So we see ourselves as that this is a good time. Volatility certainly works in Chris business. It works for us in the community-based footprint, too. So we're excited with the opportunities we're looking at, and we'll underwrite them appropriately for the for the rate -- the rate environment we're in, Johnny does, 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. So we understand that, and that's how we'll underwrite it.
That's great color. And then, John, you did mention 1 loan category that you grew this quarter, multifamily is still working. I assume that's 1 loan category you 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 is construction and land development? Is that something maybe you might deemphasize going forward to some extent?
Well, the hotel. All hotel once you built right now. I mean you 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. just got to get the proper capital stack in there to make yourself feel comfortable. We're not sure what -- if we're doing a recession, how much it slows -- how much it slows the economy down. So you're just better off getting extra equity in a deal at this point in time. That's kind -- if we've done anything we kind of ask our people get a little additional equity in a trade.
So I don't want to do any office, as I told you my guy from Belinda said, office doesn't work right or excuse me, retail didn't work. I'm not sure about office. I guess it's with family, multifamily and industrial, but industrial has been really hot. We've been kind of out of the play because it has been so hot now that people are getting a little skittish in some areas, some of those opportunities are coming to us. Again, the volatility brings us into things that sometimes when things are really great, we're priced out of. So and both in Chris' business and for us and the Community Bank footprint as well.
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. And I can name a handful of customers that we picked up in really difficult times like this. So 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 and the bar Fed funds, and they're -- I think it's a good opportunity for us so we.
We're already seeing it this week in our loan committees. We had one yesterday that Dave had.
That's right. Our Jonesboro operation, David 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. So a long time, family, very wealthy organization. So that -- this brings -- even though it gets a little tough on one, but you know how conservative we are, we unwrapped paper, 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 is not doing that well today. It feels like the market wants to punish banks that have already burned through their liquidity. So it's a little unusual, but congrats on the quarter anyway.
Well, thanks. I don't know when we're -- if they go down $1.25, I don't want we're doing. We don't deserve and be down. There's no reason for Home Bancshares stock to be there. It's on 4.99% one of the best earnings and liquidity. We're in great shape. Lots of reserves on everybody's got a strong quarter balance sheet as we do. But it is what it is. They just don't like banks today so.
Our next question comes from Brady Gailey with KBW.
So the margin was up -- I'm doing fine. The margin was up pretty nicely in the quarter, a 40 basis point move linked quarter. I think there are some other banks out there that are talking about NIM expansion not being that great going forward, just as maybe your deposit betas catch up. So 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 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. So we're going to correct that around here if we can. So I think there's going to be a little more pressure on the margin than it has been. But however, the model -- I'll let Stephen talk to the model what the model sells.
Yes. I think mentioned in the next 100 basis point scenario, we show NII up about 4.5%. I think we've talked in the past, that assumes, I think, 40-or-so percent deposit beta on checking and savings and then $100 million on CDs. 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, and we continue to -- if I see right, we picked up a little bigger percentage of variable rate loans to 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 deposit costs on the way up, while retaining everything that we want to retain. And that's been front of mind with our top of mind with all of our presidents every day and every week over the last 2 or 3 months, it's really trying to kind of act like 100% loan-to-deposit ratio bank today just to keep the deposits that we've got. And then we'll cultivate -- we're talking at loan committee yesterday.
In some respects, it's been a couple of years since we've really focused on the lending side to obtain deposits from these customers. And so we're refocusing some of those efforts and 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 going to be up 41 basis points this quarter, I don't think so, but I'd like to be up 20.
Yes. All right. And then my next question was on the expense base. You all did a good job of holding quarterly expenses pretty flat or actually down a little bit. So how do you -- a lot of banks are seeing a lot of inflation pressure and expenses going higher? Is home any different than that? Do you expect to see some more meaningful expense increases or maybe not with how efficiency-minded you guys are?
Yes. Interestingly, enough Tracy come up is off or just about $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 go ahead -- we'll have some increases. We've -- but I don't think it's I saw where somebody said we're looking at 12% or 13% increase. I don't -- we don't see that. We're not seeing those kind of numbers -- and I think there's more -- we haven't really refined Texas yet on the efficiency side. It is 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. I mean as I told you've got a 240,000 square foot 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. Would you say Tracy?
Yes, I think that's fair. I think we -- I think there's going to be opportunities when you look at anything today on the size we are, just company-wide too. But 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. So a lot of good opportunities we'll be able to check into.
The next question comes from Brian Martin with Janney Montgomery Scott.
Hey guys. How are you doing?
We're doing really good except their stock's been a way for this stuff to be -- when you report northeast kind of earnings... It's about as good as we can do, right so.
The wins in the market. So well you guys are staying patient, we'll see with the stock trends. So maybe just a couple of follow-ups. Just on the expenses, I mean should we think about the expenses given the opportunities you have in Texas, you kind of outlined there, that the net expense number should trend lower in the next couple of quarters from the current level we're at, if you're, what, around $114 million today this quarter. Should we see them trend down? Is that your expectation? Or is that a kind of wrong? I know it may take some time as you kind of work through the Texas part, but is that the outlook? Or just how quickly would you expect to realize some of those benefits you kind of outlined?
Well, we got a little investigating work going on in Texas. We spent a couple of million 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 have found. So that could have pulled it down this quarter, a couple of million dollars, but 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 there's a lot of savings on 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 in the -- I mean in the Texas market as of right now. So we just we got enough -- we had enough going on did we try to see to... Going It's been a busy, busy place in Conway, Arkansas. And I know it's -- with all of the country everywhere everybody is working hard.
So, okay. So probably not trending down right immediately. The couple of million you talked about that was it something nonrecurring that just comes out so you do step down? Or is it just more just going to take some time to kind of work through what you're doing there?
Yes, that is -- that will be recurring for a little bit here as we continue to do our investigations.
Got you. Okay. And then maybe just one on the back to the margin for a minute. Your comments about getting half of the pickup you saw this quarter, Johnny, in the fourth quarter, but just maybe one more for Stephen. Just as -- if the Fed does begin to pause or pivot as you get later in this year, if you get your 2 increases at year-end, how does the margin behave once you get to that end? I mean should we think about the margin may be 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, keeping in mind, I guess, the liquidity is obviously a wildcard depending on how you deploy that. But is that how we should kind of be thinking about it today?
Hey Brian, this is Stephen. I don't know quite frankly, if we're out that far in front of it. I mean I think we're focused keenly today on stabilizing the deposit base out in the future, we certainly, as payoffs continue to churn through, those can be reinvested at some of these higher loan rates that we're doing the same on the investment side as cash flows come in. But yes, I think it's our expectation to believe today that we're going to see some continued rate increases and are focused on positioning the balance sheet to take advantage of that.
Got you. Okay. All right. And then maybe just 2 last questions. I was just more housekeeping. I think Brian, you mentioned there were 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 of million bucks. -- there was that just kind of a core maybe from the happy deal? Or is there -- was there anything unusual there? It didn't sound like if you didn't call it out. So I just want to confirm that.
Well, it's up $1.8 million, and we did have an item that was related to a fair value adjustment on our equity investments of $3.3 million. And if you remember last quarter, we had some pretty large recoveries on from acquisitions that have been previously charged off. And so we're kind of down $1.3 million on that for this quarter. So that's pretty much the change that you're looking at there.
Okay. That's a big just want to confirm that. And then the last one was just on maybe for Chris was just the payoffs you saw this quarter, typically, fourth quarter is a heavier payoff quarter, given what we saw this quarter, Chris, is it -- I guess is your expectation you still see more payoffs coming in 4Q? I know you talked about originations being solid for '23 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 going to see an elevated level, at least what we're looking at now. We'll probably see our -- we'll probably head back to a normal run rate. There are a couple -- I mean, there's a couple of things that are out there that are a little more bridge that they're kind of binary, right? I mean, they'll pay us off at the end of the year or they'll extend off another year type of thing. So I won't know that until December. I'm up right now, I expect our balance to stay up through November. And then we have a December surprise, every once a while and something pay down. Right now, I'm forecasting sort of flat to up overall, which would put us at a kind of a normalized payoffs. We don't have a lot of these large loans left either.
We do most of our stuff is $50 million and less. And we have a few larger ones every once in a while the pop, but it's not our bread and butter business either. So it's hard to say, fourth quarter, 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, no, 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 had gotten a little worried.
Yes. Okay. No, that's helpful. And last one was just, Johnny, you talked about the, I guess, maybe, Kevin, you talked about the hurricane reserve provision. The timing of that, I guess, is your expectation that the fourth quarter event? And then just outside of that, just kind of how we think about the reserve going forward, given credit and then just how good credit is today along with just kind of the counter balance or this kind of macro environment?
I may have been overestimated what kind of reserve we have to have based on what I'm hearing, it may be better than I anticipated.
Yes. I mean in my comments, we said we feel like $40 million to $50 million is the most that we could see on deferment that's only it's like fourth of what Irma was and less than Michael and Michael was up in the Panhandle. So I mean, at this point, I don't see it as a big event for us. But obviously, it's still early, too. So we'll continue to track that and be able to report it as we go.
Okay. And then just outside of the hurricane, just the -- how to think about the reserve as we go forward, I think where you're sitting at today, a little bit over 2%, just is that kind of a line in the sand where you'd like to stay? Is that your outlook today?
Well, yes, I mean, think about it. You had the worst financial crisis. You had the pandemic, you've had a hurricane. I mean, it would look like up and down, up and down, up and down, if you play with it. And reserve has worked. It's always worked for us. I don't know if to see some works or not, but we're running parallel systems right now, and we're keeping up with that. But what I do know is that 2% reserves work 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. It's not enough because we don't know what's going to hit us next, right? We never know that something is going to hit us. We just don't know what it is.
Our final question comes from Jon Arfstrom with RBC Capital Markets.
Can you just add on I know it's call has gone a little long, but can you give us a quick update on Shore Premier. And I don't know if it's a hurricane-related update, but just how did the business do this quarter and how you're thinking about that?
Well, I will -- I'll turn it over John is on the phone, and you can hear from the horse's mouth. So we'll let John for the quarter. John, do you want to take it?
Yes, the store is ready to speak. So John, thank you for the question. As far as the hurricane, my folks tell me that so far, we've only had 1 not that was totally destroyed. And the risk to us is that we got a 100% payoff of that loan. We haven't had anybody filed for any of the pearls the deferment from that Kevin Hester was talking about. And 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, is trial.
So I think the number was actually $90 million. So I'm stretching that just a bit. We had about $55 million in repays and pre-fees. So $35 million net growth, which is good for us. But as I was telling Mr. Allison, importantly, the component of that was $12 million on the retail side of our business, but the pendulum seems to be gradually coming back to us on the commercial side of the business.
So of that net $35 million in growth, the bulk of it, $23 million of that was commercial inventories. So we're happy to see that. But 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 because the inventory values are going up. And so I think they've risen year-over-year by about $100,000. But asset quality is holding strong. And so our outlook is positive. But as we're entering this the boat show season, we're expecting there perhaps to be a seasonal rebound in that application volume. But so far, the business has not been negative by the macroeconomic headwinds.
Okay. All right. That's good to know. Thanks John. Just last one for Jon. You talked, you've talked on several calls prior 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 how do you think those banks are doing?
Well, they've got to be set that they put so much money in low rate real estate loans and securities. I mean you'll see them looking what's the local newspaper for some of these ads and what I'm seeing is they've just run out of money. They spend all their money put it as I've called that over the years, I couldn't believe in. And happy did the same thing to the happy group did the same thing. I took out cash and put it into securities, why we were not doing that, but we didn't own them at that time.
And since 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 in the bond book that everybody is.
But I mean, that impacts the bank significantly impacts the value of the company. And then you look at their loan book, and they got a bunch of 2s and 3s on their loan book in this market. And by the time you get through marking that to market. I don't know how back really do an M&A deal right now. You've got the fees that are attached to it and the cost of doing one, it's just tough to do. They just -- it's really, really tough to do. Thank goodness we didn't do that. I don't really be lucky smart. We just got lucky and didn't do it and held our line, and I think we may look for a panel back, I think we made the right call.
Thank you. There are no further questions at this time. So I will now pass it back to John Allison.
Thank you. I'm going to go to Tracy Fritz for any closing remarks that Tracy might have.
I think the group did a good job of governor with 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 process, we talked about some of the challenges that are out there. But I don't know if Michael Williamson's listening on the phone but I'm won't say they're doing pretty good if he is and his team that may be listening, but they really do an outstanding from what we've seen so far.
You talked about the loan growth. I mean, we're seeing activities there come through for us or the first 2, 3 months that they were with as we were working on the merger and conversion challenges and everybody was dealing with customers and so forth. So that part turned out extremely well. And internally, we do -- we rank them and allow at our Board meeting to report to the Board just like Johnny does here today. And thank for the first month, Monday, Texas will go first on the meeting, and that's thanks to Robert and his metro team that picked up the ball and run extremely well.
But overall, for the banks, John, I mean, when I 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. So I think we have a lot of good Yes, our -- and so I think we have a lot of good momentum. And I think Scott, Michael and Robert put together the teams out there that's survived and we've got some really bright bankers that's going to probably be taking my job someday that we see today. So very pleased with it outside all the chaos that you've mentioned out there and kudos to the rest of the Florida operation, which we know what they've done down in Florida North Florida and Arkansas. Seems pretty good. If the world doesn't throw us 2 billion 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 teamed up the last quarter telling you that how good last quarter would have been had we not had the onetime $107 million expense last quarter, but we didn't have it this quarter and the proofs of equipment.
So we're pretty pleased. I'd like to get it -- I have another number in mind as we hit one goal, I changed to another goal would create another go to go higher and we got set out a deal a couple of weeks ago and I said. Here's how do we get to this number? Here's how I think we can get to this one. He said, do you ever quit pushing? And I said, no, not yet. Anyway, we just keep, you told me I had to the end of the year to get there. Amazing how that changed there for 63 days, Tony. Anyway, I thought you all for today we first take, Donna I think we're done.
This concludes the Home Bancshares, Inc. Third Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.