Home Bancshares, inc (NASDAQ:HOMB)
Q3 2021 Earnings Call
Oct 21, 2021, 2:00 p.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good afternoon, and welcome to the Home Bancshares, Inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead.
Donna J. Townsell — Senior Executive Vice President, Director of Investor Relations
Thank you, Gary. As he said, I’m Donna Townsell, Director of Investor Relations, and our management team would like to thank you for joining our third quarter conference call today. Reporting today will be our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, our Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; and Stephen Tipton, Chief Operating Officer.
And now, I am happy to turn the call over to our Chairman, John Allison, for our first report on the quarter.
John W. Allison — President and Chief Executive Officer
Thank you, Donna. I’m going to turn my phone off. We want to hear emerald in the morning, right. That’s what I have on my phone. I’m being emerald in the morning. Good afternoon. Welcome to Home Bancshares Third Quarter Earnings Release and Conference Call. I have with me today most of Home’s Executive Committee, and they will be here to present as well as answer any questions that you might have. Home have another very productive and solid quarter with earnings of $75 million or $0.46 per share. During the first nine months of 2021, your company earned 245,664,000 or $1.49 a share. As we would have said in the past, that is a world record. Home is again marching toward our $300 million plus goal for the fourth year in a row. I can’t ask much more of that out of our people. If you pull out $3 billion in excess capital, the company is — which is virtually earning 0, the company is running right at a 2% ROA. Even though we’re running at 168 now, when we pull it out, it runs at two. We’ve talked about adding additional earning assets through M&A for several years, and I’m happy to welcome our new partners with Happy Bank, both shareholders and employees, to the Home Bancshares’ family. When I think about, if I could choose to operate in the two best states in the United States that are both business-friendly and tax-friendly and have the largest incoming demographic movement, it would be Florida and Texas. Panhandle to Panhandle, now, well, you can check those boxes, Florida check and Texas check. The Happy deal will continue to propel the future of Home and build long-term shareholder value of our combined companies, and we’re certainly more valuable together than we are apart. As I said on the deal announcement, if this deal didn’t work, none would.
The complexities of making a bank transaction triple accretive in today’s environment is not easy. If the acquiring bank is not patient and disciplined and badly wants a deal, that’s probably what they’re going to get, a bad deal. Doing a deal for the sake of doing a deal is not in our DNA. As Home’s single largest individual shareholder, I can assure you, if it works for me, it works for our shareholders and employees of both banks. This transaction checks those boxes. We’ll come back to the Happy deal later in the presentation. Let’s go with the highlights of Q3 and the first nine months of the year. As I said earlier, we earned $75 million or $0.46 and through the nine — that’s for the third quarter. In the nine months, earnings are $245.7 million or $1.49, and I said that’s a company record. Third quarter showed strong loan recovery. Even though we were down $64 million ex PPP for the quarter, September was up $55 million ex PPP. Unfunded commitments of loans and credit lines was up $250 million to $3 billion. This is a confirmation of our earlier statements that we said on our calls that we expected loan growth to pick up in the second half of the year. I don’t want to jinx our forecast, but it’s certainly nice to have the optimism for good quality loan growth, and I mean quality loan growth. Loan yield is at 5.64%. The excess deposits is putting pressure on our return on assets, created an embarrassing 1.68%. However, without the excess capital, Home is churning at a powerful 1.98%. Most companies would be proud of 1.68%, but that number is unacceptable at Home. We’ve got to push some money off-balance sheet.
We could have bought some low-yielding investments or we could have chased involve ourselves in the match to the race to the bottom on loan yields. We did none of that or very little of it. Patience and discipline was tough. We’re playing the loan game, and we’re not looking for a quarterly pop. And believe me, we could have played if we wanted to. Actually, as Jamie Dimon said, having excess liquidity could be your friend. With $20 billion in excess liquidity, it’s not all bad with rates appearing in an upward trend and optimism about loan growth for 2020 excess liquidity may be an asset. For the quarter, we maintained strong asset quality, strong ratios to nonperforming, and I think record loan past dues. Very strong capital ratio. And even with the bulging capital ratio, Home’s ROTCE was 17.39%. We beat our revenue and efficiency ratio of 42.29%. That’s OK, but not our best. Noninterest expense was up $8 million year-over-year and $4 million of that was basically a data processing system for our loan program. $1.1 million of that was merger expense and $1.3 million in other. On a linked quarter basis, we’re up $2.7 million, as I said, $1 million in merger and $1.3 million in other expenses. Back to Happy. Happy has a great senior leadership team led by their founder and backbone of the company, Pat Hickman. Pat will be joining the Home Bancshares board, and we’re looking forward to seeing him. The CEO of the company, it’s a great operator, Mikel Williamson, and we look forward to having him to have him head up the Happy Bank for us in Texas. Wherever we might go in that state, he will be the guy.
In addition to a very strong loan team and a very experienced president group throughout the entire network, don’t forget the quality of HR, investments, trust, marketing, BSA, CRA, ERM and compliance. They are all top drawer. It is our goal to keep as many of their people as we can. All of Happy’s people is even better than we thought. Many of their people are more impressive even than ours. Asset quality, however good, is not as clean as Home’s asset quality, but it’s certainly better than most we’ve seen. With yield on loans better than Home’s, which is highly unusual and the hardest part of the equation to achieve, we think getting Happy’s expense in line closer to Home’s is the challenge at hand. Demographic movement of people and companies are favoring Texas and Florida from Panhandle to Panhandle. With — after this acquisition completes, we’ll have 222 branches from Key West to Pensacola including Orlando, Miami, Fort Lauderdale, Tampa, Destin, Palm Beach and in Texas, to mention a few, Austin, Round Rock, Dallas-Fort Worth, San Antonio, Amarillo Lube, Tampa Plainview, Domus and, of course, Happy Texas, to mention a few Texas branches. We’re poised to continue the growth of our company as we have come from $24 million in 1999 to, when this transaction completes, to $24 billion in assets, that is providing it all those well. Let’s talk about deals in general. As we looked at these M&A deals over a period of time, they just haven’t worked. Just virtually none of them worked. Actually, there’s only been a few worked in the last 10 years, and I mean a handful outside of merger of equals, whatever the hell that means. I’m not sure what that is, but there’s been very few work. Why don’t they work? Most acquirers have not fixed themselves.
I mean they were poor performers before, and they go buy another poor performer, and they just make a bigger pile of poor performers. So I think my group thought I was going to say something else. But anyway, and the buyers pay too much for a deal. They pay too much and they dilute their own tangible book value, creating years of earnings to get back to just even. You’ve all heard the statement, 2-year earn back, 3-year earn back to…