Home Bancshares, Inc. (HOMB) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Home Bancshares, Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead.

Thank you, Gary. I am Donna Townsell, Director of Investor Relations, and our management team would like to thank you for joining our fourth quarter conference call. Reporting today will be Tracy French, our 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; Stephen Tipton, Chief Operating Officer; and our Chairman, John Allison. Before we dig into another record-setting quarter, I wanted to provide you with an update on Home's ESG efforts in the year of 2020. We have increased our focus on the pillars of ESG, and you will be able to read more about that in our upcoming proxy disclosures. We have increased our shareholder engagement through one-on-one calls as well as hosting a series of fireside chats, where we dug into the different segments of our loan portfolio. We have also implemented performance metrics for our named executive officers and our Chairman, that include both short-term and long-term incentives as well as peer comparisons. Our Chairman took over the role of President and CEO of the holding company, and he elected to take a reduction in his salary. We are also actively working on our second corporate social responsibility report. These are just some of the activities taking place at Home while simultaneously running a great bank. So our first report on the quarter today will come from Tracy French for Centennial Bank.

Thank you, Donna, and good afternoon to all. A year ago, we did not know what PPP was, and Johnny had not invented PPPP or what we know now as the 5 -- P5 in our calculation. Trust me, we all know in this company what that is. Our talented team of bankers continue to deliver great numbers as our group will share with you today some color following our announcement this morning. While some groups across this country can't seem to work together at all, this year, all bankers, accountants, associations with banks and regulators have shown what can happen when you respect and get on the same wagon no matter where you're headed. I've been in banking, let's just say, a while now. And I've seen a lot. This year is the most impressive in what I see people working together. It's a proud time to call yourself a banker in America as all banks have stepped up above and beyond to help our staff, our customers, our businesses this past year. Our regions, and I mean, all of our regions, wrapped up a great year for our company. Tip of the hat to all of ours that work within this company that have serviced and supported the customers this past year. I would like to compliment our Northeast Arkansas region for having a great year in Arkansas. And I also would like to mention the Central Florida region, who are having its best since joining our company. Our group here today will give more details on New York and Shore and the holding company in a bit, but I would like to share with you some Centennial Bank numbers with you. Well, I call it the old traditional, Johnny. ROA averaged over 2% for the quarter, with improvement each month. The efficiency ratio has stayed around 38%, which I think is still a little high for you, but we're getting there. Our FTE margin was 4.13% average for the quarter, with improvement each month. The old return on equity stayed right at 12% average for the quarter, with improvements each month. And the new Allison ratio or the P5NR had an average of 60.72% for the month and ended the year at 61.53%. I mentioned improvement each month, and that's what your Centennial Bank team has done this year and we will continue doing going forward. Thank you, Donna.

Thank you, Tracy. Another great year for the bank. Congratulations. Now we will turn to Brian Davis for a finance report.

Thanks, Donna. I'm pleased to report $148 million of net interest income and a 4% net interest margin for Q4 2020. Our fourth quarter net interest margin increased 8 basis points from Q3. Today, I would like to give you some color on the Q4 NIM. First, during the fourth quarter, we had $157 million of PPP loans forgiven. This forgiven has caused the acceleration of deferred fee income for the loans forgiven. And deferred fee income increased $3.1 million from Q3 to Q4. The acceleration was 8 basis points accretive to the NIM. Second, the COVID-19 crisis and the resulting governmental response has created a tremendous amount of excess liquidity in the market. As a result of excess liquidity, we had $102 million of additional interest-bearing cash in Q4 to Q3. The excess liquidity was 3 basis points dilutive to the NIM. Third, for Q4, we recognized $5.7 million of interest accretion from acquisitions versus $6.9 million of accretion for Q3. The $1.2 million reduction in accretion income was 3 basis points dilutive to the NIM. In conclusion, the 8 basis points increase for PPP loans, plus the 3 basis points decline for excess liquidity and the 3 basis points decline for less accretion income, results in a 2 basis points of noise when compared on linked quarters. With that said, our net interest margin is actually up 6 basis points on an apples-to-apples comparison. I'll conclude with the fee remarks on capital. Our goal at Home Bancshares is to be extremely well-capitalized. I'm pleased to report the following strong capital information: for Q4 2020, our Tier 1 capital was $1.7 billion; total risk-based capital was $2.1 billion; and risk-weighted assets were $12 billion. As a result, the leverage ratio was 10.8%, which is 116% above the well-capitalized benchmark of 5%. Common equity Tier 1 was 13.4%, which is 106% above the well-capitalized benchmark of 6.5%. Tier 1 capital was 14.0%, which is 75% above the well-capitalized benchmark of 8%. And the total risk-based capital was 17.8%, which is 78% above the well-capitalized benchmark of 10%. With that said, I'll turn the call back over to Donna. Donna?

Thank you, Brian. Those are impressive capital ratios for sure. Now for an update on our loan portfolio is Kevin Hester.

Thanks, Donna. I'm happy to say that 2020 is in the books, easily the oddest year of my banking career, but I'm very proud of all that we have accomplished despite the global pandemic. It seems like years ago, but rounds 1 and 2 of PPP were a big success for Centennial Bank. Again, I want to thank the over 400 employees that contributed to this truly monumental effort. We closed over 8,500 loans, totaling over $850 million, and helped to save likely tens of thousands of jobs. We purposely began the forgiveness process slowly in September, yet we have submitted over $410 million or 48% of our round 1 and 2 PPP loans to the SBA for forgiveness. The response from SBA has been strong, with over $285 million forgiven, and we are seeing a forgiveness rate that currently exceeds 99.5%. The December stimulus act provides yet a simpler forgiveness process for loans under $150,000, which we will implement very soon, and that should provide us the impetus to complete this round of forgiveness in a timely manner. PPP 3.0 kicked off on Tuesday. It's a bit early to estimate how many loans that we will do. But we can definitely tell that the interest from our customers is very strong. It's targeted at the businesses that were the most affected, and it will come at a crucial time as the pandemic drags on. We finished 2020 on a strong note in the area of loan deferrals as well, reducing them to only $330 million or 3% of loans at December 31. Hospitality remains the hardest-hit segment of the portfolio, and it consists of over 50% of the loans that remain on deferral. The vast majority of our deferrals were able to follow what I considered to be our Plan A, which was paying all deferred interest up-to-date and entering into a 1- to 2-year interest-only modification, then converting back to regular P&I for 1 to 2 years. They also include financial reviews no less frequently than quarterly and a moratorium on distributions while they're on interest-only. However, the brightest light in 2020 may be mortgage, where we floated with $1 billion in loans closed, falling only $4 million short at the end of the year and posted the highest net income ever at over $22 million. They have set a very high bar for themselves, but I believe that they're poised for another year of success in 2021. Finally, I'm very pleased to share very strong asset quality numbers with you today. Nonperforming loans are 66 basis points, only up 16 basis points pre-COVID and 3 basis points on a linked-quarter basis. Nonperforming assets are even better at 48 basis points, only up 5 basis points pre-COVID and 1 basis point on a linked-quarter basis. The allowance coverage of nonperforming loans is strong at 331%, and early-stage past dues remained low at 0.62%, which is very close to where we were pre-COVID. We are committed to remaining disciplined in pricing and underwriting given the reasonably low number of quality projects and unprecedented levels of liquidity in the system. I believe that Oliver Cromwell's quote, "Trust in God and keep your powder dry," is an appropriate one for today's uncertain times. On that, Donna, I'll turn it back over to you.

Thank you, Kevin. Hearing how many customers we helped with PPP loans is just very satisfying. And I agree with your quote. Next is Chris Poulton with our CCFG division.

Thank you, Donna. Like many, I'm happy to put Q4 and 2020 behind us since I hope to begin the hard but far more enjoyable work preparing for an emerging recovery in 2021. Before I discuss that topic, I'll share a few highlights from this past quarter and year. For the most of the year, we directed activities to harvesting the portfolio, with specific focus on portfolio composition and pricing. As a result of those efforts, our returns and margins increased throughout the year, while assets declined. Loans were down approximately $150 million in Q4 and about $65 million for the full year. Our commercial real estate portfolio was flat to slightly up, while we continue to reduce exposure to certain C&I credits. Throughout the year, we remained active in the commercial real estate market. New originations volume was just over $700 million for the year, which is approximately 30% down from what we would generally expect in a normal year. We estimate the transaction volumes in the overall market were off by about 25% to 50%, depending on the product type and geography. We did see a slight acceleration in activity in the fourth quarter, which is carrying over into the first quarter as projects that were on hold slowly began to work their way through the pipeline. Relatedly, payoffs were down from prior years, but slightly outpaced originations this year. Payoffs accelerated in Q4 as we took the opportunity to move a few credits out of the portfolio towards year-end. The benefit of focusing on portfolio composition, while continuing to be moderately active in the market, is that we're positioned to benefit from a recovery when that occurs. While still early, the shape of the recovery is beginning to come into focus. Recovery may be uneven and will likely be nonlinear, but having continued to lend through the cycle prepares us for the coming quarters and year. In particular, our 2 newest offices, Texas and Florida, are and should benefit from the acceleration in jobs and inward population migration in these 2 expanding markets. Both Texas and Florida will continue to be a priority area for us in the coming quarters and year. Throughout 2020, I stated that we had built CCFG for just this sort of market, a platform built for durability and all weather. Thus far, our results have proven this out. While I remain hopeful that we're closer to a recovery, we will remain our same, cautious and opportunistic selves as we explore the coming post-COVID environment. Donna, I'll turn the call back to you.

Thank you. And now, John Marshall will update us on the boating world.

Thank you, Donna, and good afternoon. The performance of the boat business in the fourth quarter certainly didn't disappoint and provided a punctuation for a full year of unusual COVID-tinged activity. We received 369 retail applications in the quarter, down just a bit compared to 510 in the third quarter, when the boat-buying surge was at its peak. That resulted in funding $44 million in new retail loans, down from $90 million in the third quarter. Our credit standards and asset quality remained high despite the COVID frenzy in the year. Average FICO score in the quarter was 776, and average loan-to-value for originated loans was 66%. Our challenge remains prepayment speeds. Early payoffs totaled $52 million in the quarter, up from $46 million in the third quarter, totaled $144 million for the year. At the same time, we were able to add 6 months to the average duration of our retail loans in 2020 compared to 2019, so as the COVID economy stabilizes, this should help reduce early payoffs and stretch the lives of these interest-earning assets. As COVID closed both factories around the globe, depleted North American inventories could not be replenished. Our floor plan line utilization at year-end was 31%, far below the historical average of approximately 60%. This represents $80 million of potential fundings. Shipments are beginning to resume as manufacturers are able to find space on freighters. But domestic dealer euphoria has caused factories to skeptically review the 2021 order logs. Certainly, the U.S. political and economic environment has also introduced uncertainty. Factories are accepting aggressive orders for more optimistic dealers, but also demanding more significant nonrefundable deposits to cover potential cancellation. An encouraging sign for sure was positive net inventory fundings in the month of December. So we closed out with an increase of $3.8 million. This was the first month of net fundings versus net payoffs since April, could point to a commercial lending rebound in 2021. The potential for scaling our business through acquisition and rapid growth was realized as our ROA improved to 2.8% in the fourth quarter compared to 2.7% prior quarter, 1.3% in the prior year, prior to our acquisition of our largest competitor. We continue to be a lean organization. Shore's efficiency was 16% in the fourth quarter compared to 22% in the fourth quarter of 2019. And we delivered $29 million to the bank's bottom line, full year 2020. NIM improved by 4 basis points in the month of December, by 18 basis points quarter-over-quarter. The integration of LH-Finance acquired in the first quarter has also improved our NIM during the course of the year, from 2.57% to 3.96%. Just I'll close with a few milestones for the year. We received 1,627 retail loan applications for the full year, nearly double the 982 received in 2019, resulted in a record funding of $227 million in retail loans compared to $145 million in 2019. When we joined Centennial Bank in 2018, our goal was to rebuild from scratch our commercial lending platform. In 2020, we eclipsed the $100 million mark in organic nonacquired floor plan commitments and enjoyed diversified partnerships of 50 dealers across North America, 15 manufacturers worldwide. While our combined portfolio contracted $25 billion for the full year, I'm optimistic that rebounding commercial inventories will catapult us back to growth in 2021. And so with that optimistic outlook, I turn it back to you, Donna.

Thank you, John, and congratulations on a great year. Now Stephen Tipton will provide us an update on deposits and other operational information.

Thank you, Donna. I will give color on deposit activity, repricing efforts and trends and a few additional details on the balance sheet. On the deposit side, what a year we had in 2020. Total deposits ended the year up 13% or $1.45 billion. Most importantly, our noninterest-bearing account balances increased nearly $900 million or 38% from the year-end 2019. While the increase is certainly attributable to the government's response to the pandemic, we believe the growth is also a result of the business development efforts of our bankers and the resiliency of our customer base and geographic footprint. On a linked-quarter basis, total deposits declined $212 million as we allowed a total of $471 million in higher-cost time deposits to roll off. The shift to digital banking continues as transaction volume for mobile, treasury management and debit card transactions trends higher. This has allowed our bankers to focus on supporting our customers, both in branch, in person and virtually. And we continue to review our product set and look for opportunities to generate the income at Home. Switching to funding costs. Interest-bearing deposits averaged 44 basis points in Q4, down 10 basis points on a linked-quarter basis, and exited the quarter in December at 41 basis points. Total deposit costs were 33 basis points in Q4 and are down to 30 basis points in the month of December. And we continue to monitor liquidity levels and look for opportunities to lower rates in line with the market. Switching to loans. We saw total production of over $725 million in the fourth quarter, with nearly $500 million coming from the community bank footprint. Payoff volume appears to be a record at $886 million, with over $300 million from CCFG and feel this to be a sign of strength in the capital and secondary markets. In Brian Davis' remarks, he discussed the comparison of the NIM to Q3. For additional color, on a linked-quarter basis, excluding accretion and the impact from PPP loans, we are proud to see that net interest income increased by over $400,000 despite the decline in average loan balances. Focusing on the proper risk-adjusted return on loans and managing interest rates on deposits, our presidents and bankers have done a fantastic job in defending the net interest margin in 2020. And with that, I'll turn it back over to you, Donna.

Thank you, Stephen. These have all been impressive reports on another amazing quarter for Home. Congratulations to all. And now our final report comes to you from our Chairman, John Allison.

Thank you all for attending Home Bancshares' Fourth Quarter and Year-End Conference Call today. We didn't bring out the slurpees or the kazoos, is that what it was, Kevin, kazoos? Or we didn't have any marching bands, but we should have had all 3 today after the quarter that we have had. And as you can see by the numbers produced in the fourth quarter, that we certainly raised the bar to a new level. The company was almost perfect, hitting over 7.5 out of 8 services and exceeded our expectations for revenue, profit, efficiency, margin, PPNR and EPS. The only downside was loans were down about $460 million. That's $155 million of PPP, about $150 million of -- from New York and about $150 million from legacy. Actually, our attitude is probably not that this was the time to be aggressive on the commercial loan side. Really, there's really nothing wrong with sitting tight while this blows over. I would like to thank our long-term bank investors that have endured the unfavorable -- unfavorability for banks over the past several years and want you to know that we felt the pain with you. In spite of all that, that has happened in the last 3 years, Home has continued to perform with best-in-class metrics, earning around $300 million adjusted income per year. 2018 was $310 million, 2019 was about $290 million, and 2020 was $305 million, if you adjust for CECL. Speaking of CECL, it appears that some people are taking the mathematical calculation and treating it as a piggy bank. I think the jury is still out on this program. We will continue to evaluate, and we'll continue to evaluate over time. I think that we're slightly over-reserved, but I would rather be in that position and have a cushion than be under-reserved, that nearly all banks were before the program started. I prefer to maintain reserves of 2-plus percent over the next 5 or 10 years and let this program see if it can prove itself out. It's my experience that 2% has worked over the past 30 years. That's a number I prefer in good times and bad. Positioning the company with many potential profit handles has proven to be the right course of action for this company because where there's something bad, there's something good. You just have to find it. The bad was the pandemic causing a number of loans, projects to be canceled or postponed as a result of uncertain times. The good was, Stephen, the good was 2 sources of income that have shown rock star status for our shareholders. Many of our sources' income, particularly new construction and C&I credits, slowed considerably, not that a slowdown really concerned us because sometimes, it's better to back up and take a look at what you have and get your arms around it before you do something else. We did that through a series of fireside chats. And what we said then is the same as what we would say now. I would love to take credit for anticipating a health pandemic, but we know that's not true. When I look at the good side of our 2020 performance, we have to credit marine finance business and our home mortgage business because both were much, much stronger than ever anticipated. Recreational vehicles, ATVs, bicycles, marine and home purchases boomed, and we had 2 of those opportunities in our statement. And what a run it has been and are still having every month. The decision to enter the marine business has been a great business decision. John and his team are producing record levels of origination. Earlier, we purchased an additional platform as platform #2, similar in size, and once added to our existing platform, we have doubled our size, while at the same time, improving efficiency and increasing our yields. Not only did we purchase a competitor, we eliminated one of our biggest competitors. We entertained exiting the home mortgage business after Jamie Dimon said banks cannot be profitable doing home mortgages. However, we found out just the opposite. Our profitability has gone up over 300% last year alone. I'm glad we stayed with the business. I think it was a good decision. You take approximately $11 million of quality loans already on the books yielding over 5%, adding a few equity investments that paid off handsomely for us in 2020, adding $900 million of PPP loans, plus never give up on charge-offs that resulted in a few nice recoveries for 2020, and you add in our rock stars of marine and mortgage and bingo, it creates adjusted income for 2020 without CECL of $305 million for the year or $1.85, $1.85 a share. I guess it's better to be lucky than smart sometimes. Let's go to the performance. Revenue was $181.9 million. That's an all-time record. PPNR was 100 -- I don't know. I've talked to one of our friends in St. Louis, who works in St. Louis, and he said we shouldn't use record, record, record. So I think I will go back and say that $181.9 million is the best ever. How is that? Is that good? PPNR was $107.7 million. And I read a research report this morning that went out and someone was bragging on somebody's PPNR and said that their pretax pre-provision PPNR was 2.2%. Well, I'm proud to tell you that Home Bancshares was 2.61%. Also, net profit was $81.8 million; return on assets, 1.97%; and our first $0.50 quarter ever, first time in the company's history to earn $0.50 during the quarter. And return on tangible common equity of 20.96%, just a hair under 21%, and as you heard on the margin, at 4%, and that's increasing. Plus P5NR, Tracy gave you the bank a while ago. Well, this is the bank, and the holding company came in at 59.16%. So we brought down 59.16% to the shoebox. I think that's pretty good. And another interesting factor that I want to share with you is if you take the revenue of $181.9 million and divide that into the after-tax net profit of $81.9 million, you come out with 44.96%. Think about that. 44-point -- or 40 -- call it, 45% of the revenue fell to the bottom line after-tax. A great job by all. The company continues to go. With profitability of about $300 million in the last 3 years, our management team has decided it's time for us to acquire some additional assets. When we get approximately $300 million and a 1.97% ROA 3 years in a row, that's about all the juice you can get. It's time for us to make an acquisition and take those new assets and turn them into a 1.97% ROA producer. We will be active in Florida to capture the consolidation savings and huge demographic shifts that Florida is enjoying. We believe, with no state income taxes, a business-friendly environment and warm weather, that the Florida franchise will continue to be the most valuable franchise in the U.S. We are also open to other locations, but it's hard to compete with the attributes of Florida. With the strong earnings power, great asset quality, long-term proven management team and the more-than-adequate reserves, I think it's time to become more aggressive in the M&A if we can find the right opportunity. With about $16.5 million of PPP profit left to harvest in the field and a new PPP program already in motion, this will give a nice check to the continued extra profitability for the year. Not to get overoptimistic, but yesterday's Executive Loan Committee, we approved over $100 million loans -- $100 million in loans at good rates. Thank you again for your support. As the volume of vaccines begins to flood the market, I think by June, we'll be looking at the crisis in the rearview mirror and back to business as usual. And I'm certainly ready for that, some good old times again, and hope to see all of you soon. Thank you. I think we're ready for Gary now.

[Operator Instructions]. Our first question is from Jon Arfstrom with RBC Capital Markets.

I just want to -- the last comment, Johnny, you made on the Loan Committee approving $100 million in loans and then, Kevin, some of your comments on loan growth, what's really going on there? Is it just -- are you seeing increases in activity? Is it just low-quality activity? And when you kind of sit through and you think about what Chris said as well, how do you guys think about loan balance trajectory for the year?

Well, I will make a comment, and we'll let Kevin talk and Chris on what he sees also because that's the people that really see that every day. We have not been -- I think in '05, '06, '07 and '08, I said I don't give a [indiscernible] if I ever see another loan. They kind of built that way this time, that sometimes, it's good just to catch your breath. And we did the deep dive into all our loan book. I -- there's a little activity going on out there now, but there's not much. So somebody who is getting loan growth has got to be stealing from somebody else because there's really not a lot of construction or development going on. So -- and there are steps -- some of the banks are stepping up a little bit, which pleases us. We got about a $15 million credit going out of the bank, that there's probably a loss then, probably a good-sized loss then. No other bank committed to it, and they're doing it and be closing out of here in a couple of weeks. So this is a good time to back up and sit tight and pick your battles and pick your loans that you want to pick. And in the meantime, clean up and push out. And I think Chris can comment on what he's done. We pushed out a few loans here that were on the marginal side. And we've had more focus on that. I think that puts us with lots of dry powder and ready to move forward in the future. I mean if there's not a lot out there to get, then what happens. Somebody's got to buy, steal a loan from somebody else, and what does that mean. That means low rates. And my comment on low rates is I don't think the Fed is going to be able to hold it where it is. I mean we're up 21% on the 10-year -- 21.9% on the 10-year this year alone. I think we're -- inflation is running much higher than 2% right at the present time, and I think the only way they're going to stop it is raise rates. So those that are doing long-term fixed rates at low rates will pay for it in the future, I think. And in the meantime, I don't know if, Kevin, you want to roll into that?

Yes. I mean you were going to let Chris talk about it. I don't really have anything specifically to add. You said everything that I would say from the footprint perspective.

I just asked Chris a question in the last day or 2. Chris, you want to comment?

Yes, sir. Hi, it's Chris. Hey, Jon. Yes, I would say a couple of things. One is transaction volumes nationally were down. Anywhere, depending on who you talk to, 25%, 30% is a good, safe bet over the course of the year. So the fact that we were down a little in volume makes sense because I think, as Johnny said, if you were up in volume and everybody else was down in volume, you were taking it from somebody. The second is, Johnny mentioned, we moved some credits out. We shrank in the fourth quarter largely because our payoffs were up. And some of that was expected because early on in the year, as we got into the -- understanding the shape of the recession and the pandemic, we went to some borrowers who had some credits, where it was clear they weren't probably going to be able to execute their planned strategy. And we gave them some time to find another home. Going to somebody in May and telling them they got to leave right then, that's not a very good way to handle it. It would put a lot of pressure on the system, put a lot of pressure on the borrower. But we were very clear with some of our clients that we probably weren't in it for the long haul with them since their plan was going to change. We gave them until the end of the year to come to an alternate arrangement. And it took until the end of the year for some of those to come to an alternate arrangement. And so I think about 40% of our payoffs for the year occurred in the fourth quarter, many as a result of that. We talked about harvesting. Part of that is -- part of harvesting is crop rotation. So we rotate some loans out, create some opportunity for us to refill in what we think are better times. We did see an acceleration in activity in the fourth quarter that is rolling over into the first quarter for us. I like where we are on our pipeline. We talked in previous quarters where we liked where we were in the pipeline, but we thought it would take some time. We're seeing those loans come through now, and we're seeing those loans close now. There is a lag between signing up a deal, closing a deal and funding a deal. And so we'll continue to see a little bit of that lag, but we've been talking about the fact we will lean into a recovery here that we expect. That's definitely being aggressive, but I think we will lean into the recovery. And we'll leverage our footprint in Dallas and Florida to take advantage of those 2 markets, which are exceptional markets.

Okay. Good. And Kevin, do you feel like we're seeing some recovery and some signs of life?

And I think it's going to be a little bit. I think you will see it as we go into the rest of the year and the vaccine gets further implemented. And when we get a little further along and outside of the pandemic, I think you will see, particularly in our Florida footprint, I think you'll see, just as Chris said, it's a great market, and the inflows are even better than they've been in the last several years, I believe. So I believe you will see it, but it will take a little while into this year, I believe.

The next question is from Will Curtiss with Hovde Group.

Maybe Brian or Stephen, I appreciate your kind of comments about the margin. I'm just curious how you're thinking about the margin, excluding the PPP and accretion. Any help that you can provide on kind of the core NIM, how that will trend in the near term, that would be helpful.

Hey, Will. This is Stephen. I'll take that. I mean I think around the table here, we think of it as stable from here. We've gotten deposit costs down 10 basis points each of the last couple of quarters. We're down to kind of fine-tuning some of that, but there's still opportunity there. The loan yield seems to have stabilized somewhat. So I think really, deposit costs potentially can offset what happens in the investment portfolio as we go from here.

Okay. And then I may have missed this, Kevin, in your remarks, but do you have an update on kind of the timing, forgiveness for the remaining portion of PPP, that's on the books right now?

Yes. So we've submitted half. We've been -- we received back about 1/3, if you take broad numbers. I kind of put everybody on hold a little bit with forgiveness as we were, one, approaching this second round or third round of PPP funding and because the December act or stimulus further simplified the $150 million and under. We just got that form yesterday from the SBA. Our provider has to have a little time to put it in a solution. So I'm still holding people off of forgiveness for a little bit here while we take care of that and PPP funding. So I would expect that you're probably submitting -- in addition, customers haven't told -- I mean, if they choose, they don't have to submit until sometime around October. So there are always some folks that kind of hold off closer to the end. So I suspect it's going to be kind of linear between here and third quarter. We'll keep submitting as customers are ready. Once we get this funding phase of the 3.0 done and the forms in the forgiveness part, we'll keep submitting. But it will be -- it will take second and third quarter to get there.

The next question is from Matt Olney with Stephens.

I want to start on credit. And it looks like the fourth quarter metrics look really good. Nonperforming was flat, net charge-offs immaterial. I'm curious if you guys have some updated thoughts around charge-offs in 2021. And we're hearing from other banks this week that are providing some commentary or some guidance on their charge-offs for the year. And for Home Bank, I'm showing that the consensus forecast is around 60 bps of charge-offs in 2021, which should be around $60 million for the year. Any commentary you can give us on that?

I'll give you a little commentary. At least some heads grow when we lose $60 million, let me tell you that. That's not going to happen. I don't know who has given us 63 basis points or whatever. I mean we don't -- what we said to you when we did our deep dive is exactly what we say to you now. We don't see any losses. I mean we don't see any losses that we expect. So I don't know where that 63 came from. Stephen and I were talking about it before. Kevin, Stephen, what do you all got to comment on that?

Well, I mean, I think if it's 63 basis points, you probably won't be talking to me in the second or third quarters because maybe somebody else is in the seat. But there's going to be some fallout as we come to the end of this, and we don't know exactly what it is. But we've got our deferred loans down to $300 million -- just a little over $300 million. And half of that's hotels that are really just needing the vaccine to be more widely accepted and get folks moving again. And outside of that, we really don't see the issues. So it's hard for me to see $60 million this year. I'm not ready to give you a number yet, but I just don't see that number.

Stephen, you work with the losses...

Yes. I mean I agree with what Kevin said. I mean it's -- things may pop up in the future that we don't see today, but trying to estimate 4 or 5x what we've seen on an annual basis in the last 5 years just seems unlikely.

We have been reaching in the next quarter to try to -- a loss that -- I mean, that our book has been so good. We've been stretching into the next quarter to see what we saw coming up, and we've been taking those hits and kind of getting in that front, really because we didn't have really anything to charge off. Chris, you got any comment on that?

No, sir. I'm with all you all. As far as the projected number, that wouldn't be on the radar screen today. We're still -- we have identified it, and we call it -- it is what it is whenever we look at them. And we'll specifically look at that, and there's not anything today. Again, we don't want to jinx us there but we're comfortable with our position.

Okay. Great. That's a great commentary. And then just, I guess, shifting over towards M&A and taking a step back, the stock has performed well and you've regained a nice premium multiple. Walk us through how you view M&A for Home Bank and just remind us of some of the more important parameters that you're focused on when it comes to your M&A program.

Well, it's accretive, accretive, accretive, AAA. We're looking for AAA deals. We're looking for people that want to be part of Home Bancshares, in the history of Home Bancshares, and believe in what we believe in. We looked at one -- I mean, you got to pay the pipe for some time. We looked at one this week, a nice little operation, but their margin is 3%. And you can fix lots of things. You just can't fix -- it takes a while to fix the margin. You can't -- asset quality in the bank is good. It's in Florida. It makes sense. If we could get some consolidation savings out of it. But you just have to put a yield mark on it. This guy was the low-cost operator in the market. But that's a good one. There's 4 or 5 in the Florida market that makes some sense and maybe one outside of that. But the problem, when you get out -- we get outside of -- I mean, of Florida is we don't get the consolidation savings. That's the problem. We can -- we glean we're running one deal outside of Florida. We're running it at a 10% or 15% cost reduction because they're a pretty good bank. They run pretty good. We just don't get any savings out of that. Where Florida, we model it at 33%. And I think the least we've done is 50%. So we get lots -- it really adds to your bottom line. So my goal is to find the right trade, hopefully in Florida, that we can do that makes some sense, but it's -- they're bringing about 1 4 right now. That's about where banks are bringing, about 1 3, 1 4 . That's about the price. So hopefully somewhere, we can go a little higher net because of our stock. But we've got a limit to where we can go, and we're [indiscernible] sure we're not going to be the highest-price buyer in the marketplace. So we are looking, I can tell you, we are aggressively looking for the next opportunity for Home Bancshares.

The next question is from Michael Rose with Raymond James.

I just wanted to get an update on some of the at-risk exposures. There's been a lot of talk around the hotel portfolio over the past couple of quarters. Can you give us just an update on kind of where you stand with things?

Hey, Michael. This is Kevin. Like we said, we got the deferred loans down to a little over 300. About half of that or 175-ish, let's say, are hotels. So that's roughly 20% of the book in deferment, which is, in my mind, is not a bad number at this point of where we're at. I mean you're just beginning to come back into season in Florida, so you'll see those areas pick up. But since the last quarter, this would be the -- probably the weakest quarter for all of our markets in the hotel business, would be the fourth quarter. So I don't think I could expect to report anything earth-shattering to you since the last 90 days. I think everybody has been pretty much where they thought they would be. You'll begin to see the Florida markets pick up as we go into January, February, March and then certainly as you get into the summer, even in the Panhandle. So that's our hope, is that we're -- our expectation is that we're going to see the Florida markets pick up back to their -- kind of back to where they expected to be.

Okay. And then it sounds like you guys generally feel pretty good about credit at this point. But going back to your comments, Johnny, about keeping the reserve, above 2%. I mean is the plan really here just to grow into it at some point when growth picks up and expect low levels of provisions going forward, maybe not negative provisions, but do you really plan to keep that reserve under CECL, over 2%? I'm just wondering how you can actually do that.

I don't know. I just -- the problem is not proven. We don't know that it works. We may run a parallel system. But 2% reserve has worked. That has worked in good times and bad times. And I think we continue -- if our accountants will allow it, it's our plans. Let me back up and say this. If you see me lower it and bring in profits, they put a gun to my head because I'm just -- I'm adamant on not touching it. Why touch it? We've taken a hit. We've done that. We're running fine without it. Everything's good. And what would we miss? We'll just leave it alone. Just let it sit there and leave it alone. We got other things to pay attention to. There may be some that jump out of the woodworks on this? I mean somebody got us at 63 basis points. I mean maybe that could happen. I guess stranger things have happened. But if it does, we've got plenty of reserves to handle it. And I don't want to -- I mean, I'm seeing these people pull $2 million out or $2 billion out or $500 million out of the reserve, stick it into income. We could have done that. I mean we could have stuck in, I guess, I don't know how much, in the income this time, but we just didn't do that. And we're not going to do that. We've already taken the hit. We've done it. It's there. We can report what CECL would be, but maintain -- it's our call, it's our shareholders' money. It's not anybody else's call or anybody else's shareholders' money. It belongs to the investors and the shareholders of this company, and they're comfortable with our reserves. So I'm going to try to stay there. On another side, I appreciate you asking about ESG. You were the first analyst that came out and asked about ESG. We've been working diligently on ESG here in the company for the last year. They didn't like my say-on-pay last year. If you remember, Randy Sims retired in November, and they put me -- I took the role, I took the President, CEO and Chairman's role. So they took the bulk of my salary and said it wasn't fair, it wasn't right. But anyway, I just -- we worked hard on that. There's new metrics out for the Executive Committee, new metrics out for myself, that if we hit the numbers, they get -- people get paid. If they don't hit the numbers, they don't get paid. So anyway, I thought I would comment, you were the first one that asked about ESG.

I appreciate it. Just one last follow-up question. You guys still have some buyback authorization. I understand where the stock is, but you guys have also bought stock when your currency has been pretty valuable. How should we think about that going forward, especially if we don't see a transaction here in the next couple of quarters?

We'll continue to buy back stock. We're in the buyback business. I would like to use the money, hopefully, for an acquisition. We usually use a little cash in the acquisition. So we try to use as much cash as we can, so we don't issue as many shares. So I think that's probably it. Stephen, you got a comment on that?

No, I agree. We've got about 3.8 million shares left under the authorization, and cash balances continue to grow throughout the year. So I mean, there's obviously a 17-plus percent capital ratio. There's -- we've got several levers to pull there. You may see us -- you may see us do something with that shortly here.

The next question is from Brady Gailey with KBW.

I wanted to follow up on the topic of M&A. I mean Home is now $16 billion in assets. It's not like a little $200 million in an asset bank can really move the needle for you guys much anymore, unfortunately. Florida feels kind of rolled up already. I mean there's just not that many larger targets of size, especially ones that I think are for sale right now. So maybe just update us on kind of the size range as far as what ideally you would like -- how big you would like or small you would like your target to be.

Oh, probably in the $1 billion -- probably the first one, and we hadn't done one in a while, probably the first one somewhere in $1 billion, $2 billion, $3 billion, running somewhere in that market probably would be -- fit us better than -- and we do a small deal. If it's an infill for us, we'll do one. But as Kevin said, it's about as hard to do a big one. There's much work to do in a big one as a little one. So something in that range, it could help a little bit. It has to move the needle. If it doesn't move the needle efficiently, we're not going to do it for the sake of size. We're not interested in that. So -- and everybody thinks their baby is prettier than the other baby. So you just have to -- for the -- our first stepping out, the first time in several years, it's going to be -- hopefully, it will be a nice trade. It will be extremely accretive to the company, and the stock will go up. But there's one guy that had asked. They don't try to get to the last nickel of everything. You get the last nickel. You've got to make room for the investors to see what kind of transaction you made and see if it's got some upside in some -- they kept the stock move up.

Yes. And Johnny, I know you've considered the idea of an MOE in the past. Is that still on the table? Or is that really not very likely for you guys going forward?

We never could figure out what the E was. We could never figure out what the E meant. We didn't -- there is no such thing as a merger of equals. I mean there are some people trying to put some banks together, but somebody is buying somebody else and somebody is in charge. So I don't think we have -- I don't know how well those work. We kind of worked on it at a little bit, I guess, but probably not -- we're probably not -- we looked at some of those. We're probably not ready to do an MOE. I was on one the other day. It was a good size, when he talks about MOE and I said, it won't be an MOE, this will be an acquisition. We'll be buying you -- that -- I mean, in reality, that happens, right? And if somebody's got to own somebody, somebody's got to use their stock, somebody has got to be in charge.

All right. And then finally for me, I mean, you have all given some good color on what happened in 2020 related to loans. I mean bigger picture, do you think you'll be able to grow loan balances in 2021?

I think -- I don't -- maybe in the last half. I really don't think -- I don't think you're going to see a lot of big moves in the first half of this year. I think we'll be able to grow in the second half. We're getting our fair share. We've always gotten our fair share, and we don't chase it. It depends on -- I mean, if the market is selling and they're doing low-rate, long-term fixed up at high leverage, we won't get any of it. But I mean, just like right now, I talked about loan earlier today, it's going out of the bank. Another bank has approved it. And there's a loss in that loan. And they're just as happy to get it, and we're happy before we get it.

And Brady, the only color I can give is Chris gave excellent for the national credits that he works, in the community bank credits. I mean it's -- our community bank loans, like subdivisions and construction loans, they've done really well this past year. It's just been good and steady. They certainly have sold their homes and not held them long. And if you build a house and you've sold it real quick, a lot of them are -- have a waiting list on lots. So that's more of a steady. It's not where they're growing the loans, but they're replacing them. And the production side of it has been good. And I think it's fair that, Kevin and Johnny and myself and some are -- we're communicating with customers that are great, solid entrepreneurial customers in the past that we've had, and they probably have been sitting quietly also for the last 6 months, and they're beginning to want to reach out and talk and come talk to us about their plan and what they want to do in '21. When will that happen, time will tell. And so maybe there's a spark there, but even our great customer base that we have, they've all been pretty smart on not jumping out here with the unknowns that we've dealt with.

I just think it is a little scary to be growing a loan book in this market when people are not doing a lot of the projects, I guess, you have to go back and say, where did -- where are they getting that loan? And what -- how did they price it? And if I'm right on inflation, these people that are doing these 3% and 2.5% loans are going, we're just not going to do that. We just absolutely will not do that. We're not going to sell our future today. Just like the bank I was looking at in Florida the other day, they just don't have any margin. They just try to buy the market and they don't have any margin, and now they're trying to sell it. And the return sucks, and it's pretty obvious why it sucks. So we're not going to get into that game. We have never done that. We've never started it. There's no need to start it now. We have no intention of doing that. I mean we can do it, don't get me wrong. We can crank up that press and we can crank up a bunch of loans at long-term fixed rate, cheap prices. But why would you do that? Why would you sell your future? Someday, we'll sell this company. And I don't want somebody walking in telling me that, well, your margin sucks. Our margin doesn't, and we work hard on it every day. Tracy says I don't say good morning to him. I say what's the margin today. So anyway, we work hard at margin. Stephen's on it. He's working on the cost of funds every day in the bank. So we're not -- we don't work and run the company as well as we run it to give it away.

The next question is from Stephen Scouten with Piper Sandler.

I'm curious on the liquidity side with loan growth trends. Sounding like, at least for 1Q, they're probably not going to pick up materially. What do you do with some of this excess liquidity? Are there -- you rethinking about paying down any borrowings, increase in securities? What's kind of the thought process there with $1.2 billion in cash?

Brian, you want to take...

I can take a little of that. We really don't have any borrowings we can pay down. We have $400 million at the Federal Home Loan Bank. But unfortunately, they have a significant prepayment penalty that would be punitive for us to do that. We have talked about increasing the investment book. And we have done that to the tune of about $400 million over the course of the year. But we're not really excited about locking in a lot of the investments at this low-rate environment. As Mr. Allison has indicated, he believes that inflation is coming. So we did do about $400 million of that this year. But we're not eager to lock up the additional $1 billion that we have at the Fed. I never thought I would be in a position where we had over $1 billion at the Fed every day in 2021 so far. So I hear you, but we're just trying to be cautious with it and not lock ourselves into something that we regret later in life.

And I mean, the investment portfolio, you're yielding 1/4, 1/2. I can't get excited about that. We can do some loans at 2% if we want to, but we're not going to do that. So it -- this too shall pass at some point in time. And there's not a lot to do with it. We have bought some trust preferreds...

With subordinated debt.

Subordinated debt, I'm sorry. We bought some subordinated debt in the banks that we know. So we've done a little of that. And we bought some stock in a bank that went down on us, but the dividend is good. We still got it. So it's a tough comp. I don't know if this liquidity is going to stay at this level. You got to believe people were very conservative in the first PPP. And if they remain conservative in the second PPP, then there's going to be -- the world is going to be awash in cash, right? And all of the bags are full. And what happens at that point in time is that that's where your inflation starts popping out and people start chasing asset classes. And that's my fear. That's when we got the 10-year up at 21%, it's just scary. That commodity is running up. It's just it -- all the signs, the bets are, I think, a tough scenario. The bet on the dollar is to go down. It's the highest it's been in 10 years. However, gold is not acting the way you would think it with that. I guess, Bitcoin, is the new game. We're not ready to buy Bitcoins yet. So...

I would say that's a good point. So I guess, maybe one other question for Brian, would be just on the expense side, it looks like maybe salaries jumped about $1.5 million and other noninterest expense jumped about $1.5 million. Was there anything unusual there? Or is this kind of a good expense run rate as we head into next year?

I'll give you a little color on that. One thing that did happen in Q3 as we were truing up some of our stock awards expense and we wound up with about a negative $940,000 in Q3, so there was kind of an anomaly in Q3. As far as what's in Q4 on the salary employee benefits, that is probably a pretty good run rate. There is one item in noninterest expense, down in other expense, one of the things that we did this quarter was that we bought into a tax credit. And so it's profitable overall, but it's got a real funky accounting in it, in that we got a tax credit at a discount and we picked up a positive $250,000 in income tax expense. But the negative of it was we had a couple of hundred thousand in expense for the tax credit and it goes in other expense. There's not a net where you just have a net of $50 million. So taxes are improved by about $250 million, and other expenses, negative about $200 million. And then we had about $200,000 and probably a couple of other things that probably nonreoccurring in there on top of that, just kind of little miscellaneous things.

Got it. Perfect. Okay. And then maybe last question for me is, Johnny, you guys showed good pretax provision growth this quarter. Do you think that could be sustainable through 2021? And then do we start talking about home at $2 again here?

Well, yes, we want to top that. We never give up. We never give up around here on anything, Home at $2 is -- kind of ran out on us a little bit. And then we had CECL pop in at one target. So we're actually going to adjust in earnings here. I mean like I showed us at $220 million, we actually made $305 million for the year with CECL that we took out. And I guess, if we put it back in the income, I guess, we'll make the $300 million in time, like I said.

The next question is from Brian Martin with Janney Montgomery.

Just a couple of things for me. I guess just number one, maybe for Kevin, just on the asset quality, just kind of the criticized and classified level, can you -- I guess, what were the -- I guess, it sounds like the trends would have been better this quarter. But just kind of wondering if you can give some color on what you're seeing there this quarter.

Yes. Classified has gone up $30 million or $40 million, I think, is the number. I don't have it in front of me, but I think that's the number. Criticized has gone up more than that because we've moved -- a lot of the deferred credits had landed in that criticized class category for now as we kind of go through the next quarter or so and see how they match plan. If you remember, in my -- in the comments earlier, our plan for those deferred loans, Plan A was to get deferred interest paid. And that -- and we did that almost -- in almost 100% of the circumstances. We had very, very little where we're carrying some interest going forward. So to be able to start into this longer-term modification with the interest fully paid, we felt, was a real positive. And so a lot of those moved down into the criticized category for a while, while we monitor those both monthly and quarterly, dependent on size.

Got you. Okay. And would you -- and Kevin, would you think it's peaked at this point, the criticized level? Those removed this quarter and the rest of the portfolio, it sounds like that could be the case. Maybe this is an inflection point in 4Q.

Yes, we're close, maybe another quarter because we're going to have -- there are going to be a few other people, I think, that we see struggle a little bit as they see what stimulus they're going to get and what's left as far as help goes. So I wouldn't say that we're -- we may not be quite there yet, but I think we're pretty close.

Got you. Okay. And then, I think, Johnny, you mentioned it earlier, but I guess, for whomever, just on the PPP, if that primarily runs out or at least the first rounds here run out here in the next couple of quarters, what are the remaining fees, the unearned fees to be collected yet? So just so we can have that in the model.

$16.5 million.

Okay. $16.5 million.

$16.5 million.

Okay. And do you guys -- how has been the -- how have the applications been thus far with the new program? I mean do you anticipate being anywhere near what you guys did before? Any color on that thus far?

We're 18 hours in, and we've taken nearly -- we've sent nearly 3,000 applications to our -- to mostly almost all round 1 and 2 customers, and we're about 1,000 coming back that have been returned, and that's 100 -- over $100 million so far. And that's probably a -- I looked at that before we came -- before I came in here, and that's probably staying on now...

That was pretty quick. It's -- they're jumping on that amazingly fast. That was a great program that the government did. And hopefully, it saves lots of small businesses, gives them an opportunity to survive.

Yes. Okay. And then just the last one, maybe just for Stephen. On the margin, Stephen, I guess it sounded, like last quarter, there was some more likelihood that the margin -- the core margin, kind of ex PPP, ex accretion, maybe had some more of a downward bias than more stability. So just kind of wondering the puts and takes or maybe just something that's really changed it. Or did -- maybe I just had it wrong as far as your outlook for kind of that margin or the core margin going forward.

Yes. I mean I think deposit costs came down like we anticipated they might, I think really more just the stability of the overall loan yield, the core loan yield there over the course of the quarter, the last, really, 4 months or so. I think we've talked about kind of the 5 15 range is really where it's landed. So I think that was really maybe a little bit of a surprise. Renewal rates have been good. And then, obviously, yield on production has been solid, too.

Okay. Yes. What are the new yields on production today that -- relative to the existing yield?

Yes, the coupon in Q4, I think, was 5 10, if memory serves me right. And then that doesn't account for origination fee income that will amortize in over the term of the loan. So we're hanging in that -- in that area where the core yield is.

Not where we were. When the book yield is about 5 10, 5 15...

Yes, sir.

That's good. We're hanging in.

This concludes our question-and-answer session. I would like to turn the conference back over to John Allison for any closing remarks.

Thank you, and thank you for your attendance today. It was a fun quarter. I'm glad to have 2020 behind us. Hopefully, we'll all see each other soon somewhere at some conference, maybe in June, July or August. We get -- everybody gets their vaccines, and I think we're going to have the pent-up demand that's out there. I think you're going to see some good business coming down the road. I don't think it's really going to happen that strong in the first quarter. I would say that we just approved a large apartment complex at Loan Committee this week for a pretty aggressive individual that does good building. So anyway, so far, so good, and we'll talk to you in 90 days.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.