Home Bancshares (Conway, AR) - Earnings Call - Q1 2025

Executive Summary

• Record quarter: net income $115.2M and diluted EPS $0.58; adjusted EPS $0.56; total revenue $260.1M, with NIM up 5 bps q/q to 4.44% and ROA at 2.07%.
• Beat vs S&P Global consensus: revenue $260.1M vs $255.2M*, Primary EPS (normalized) $0.56 vs $0.54*, driven by higher net interest spread and lower deposit costs despite lower loan yields*.
• Asset quality improved notably post Q4 “Texas cleanup”: NPL/loans fell to 0.60% (0.67% in Q4), NPA/assets to 0.56% (0.63% in Q4); net recoveries were $4.1M in Q1 vs $53.4M net charge-offs in Q4.
• Community bank loan growth (+$291.5M) more than offset CCFG C&I runoff (-$103.9M), with deposits up ~$395M q/q; CET1 rose to 15.4% and TBVPS reached $13.15, both at/near records.
• Post-quarter catalyst: Board raised quarterly dividend to $0.20 (+2.6%) payable June 4, 2025; management also plans to pay off ~$140M sub debt before its step-up to 9.7% on July 1, lowering interest expense (and total risk-based capital by ~76 bps).

(Values marked with * are from S&P Global; see disclaimer in Estimates Context.)

What Went Well and What Went Wrong

What Went Well

• Margin and profitability: NIM expanded to 4.44% (4.39% in Q4; 4.28% in Q3), driving ROA to 2.07% and ROTCE to 18.39%; CEO called it “a record setting first quarter” and “near perfect quarter”.
• Funding mix/pricing: Cost on interest-bearing deposits fell to 2.67% (2.80% in Q4), and strong deposit growth (~$395M) supported liquidity; management expects further relief as ~$1.0B CDs roll in Q2–Q3.
• Credit normalization: After the Q4 cleanup, Q1 saw net recoveries of $4.1M, NPL/loans improved to 0.60% and coverage rose to 312% of NPLs; management expects additional recoveries (~$1.5M/quarter on a large relationship).

What Went Wrong

• Core loan yields drifted down to 7.38% from 7.49% in Q4 as rates declined, and net interest income FTE dipped to $217.2M from $219.5M in Q4 despite margin expansion.
• CCFG remained a headwind: portfolio down ~$104M, entirely in C&I; management effectively exited broadly syndicated loans and is selectively rebuilding structured facilities (C&I now <10% of CCFG).
• Competitive pressure and macro uncertainty: management flagged aggressive competitor deposit rates (up to ~4.5%), loan quotes in the 6% range, elevated Q2 payoffs, and tariff uncertainty potentially delaying projects.

Transcript

Operator (participant)

Ladies and gentlemen, welcome to the Home Bancshares First Quarter 2025 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued after the market closed yesterday. The company presenters will begin with prepared remarks and then entertain questions. Please note that if you would like to ask a question during the question and answer session, please press star then one on your touch phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements.

You will find this note on page three of their form 10-K filed with the SEC in February 2025. At this time, all participants are in a listen-only mode, and this conference is being recorded. If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations. Please go ahead.

Donna Townsell (Director of Investor Relations)

Thank you. Good afternoon and welcome to our first quarter conference call. With me for today's discussion is our Chairman, John Allison, Stephen Tipton, Chief Executive Officer of Centennial Bank, Kevin Hester, President and Chief Lending Officer, Brian Davis, our Chief Financial Officer, Chris Poulton, President of CCFG, and John Marshall, President of Shore Premier Finance. Opening remarks today will be from our Chairman, John Allison.

John Allison (Chairman)

Good afternoon. First, I want to pay tribute to a special friend of Home Bancshares' family and a director of our company. We've lost a good friend and a strong leader with the loss of Pat Hickman. Hickman was a wonderful asset to the Home Board of Directors. From a personal perspective, he was a man who walked in the same shoes that I've walked in while he was building Happy as I've been building Home Bancshares. He was a confidant. Pat lit up a room with his outgoing personality and was a good man of God and always wanted to pray for all of us on the board, and we probably needed it. Someone recently said, "I bet Pat if he goes through the pearly gates is telling God about his bank's new CD special." That's Pat Hickman that I remember.

We will miss you, my friend, and may God be with your wife, Nancy, and your wonderful family. Good day, everyone, and thank you for joining the start of 2025 with us. First quarter earnings are in, and as I said in the headline, home strength is no accident. Couple our strength with peer-leading performance metrics, and you get the results you get. It may be the best first quarter in the entire bank space. Our continued conservative philosophy of maintaining strong capital, excessive loan loss reserves, excellent liquidity, good asset quality, and strong operating efficiencies have led to an almost perfect quarter for the company. The good news is we delivered a near-perfect quarter while setting such new performance records. The bad news is it was delivered during uncertain economic times. Hopefully, this top-tier quarter does not get lost in the shuffle.

We continue to maintain the passion, the drive, and the discipline that allows our performance to separate us from the pack by being one of the most profitable institutions in the world. It is our goal to reward our owners and make them proud to be shareholders of Home Bancshares. It's really nice to have the large Texas cleanup behind us, or basically in the rearview mirror, pretty much done. Plus, it appears we've reached a tentative resolution to the Texas lawsuit we filed a couple of years ago. That may go away along with millions of dollars of expenses that are incurred on a quarterly basis that could disappear in the second quarter. Couple that with strong loan growth, stable margins, and it feels like home may have finally broken out on the earnings side. Management has to ride herd every day during these volatile times.

That requires constant watching with a laser focus both internally and externally and be prepared to shift either to direct the company in an offensively or a defensively direction. The bottom line is, as my wife said, regardless, protect the chuck wagon. That's certainly the most conservative approach. As I said last quarter, these banks don't run themselves. I'll talk a little bit about the highlights and why they're important to our company, but most of the numbers speak for themselves. Stephen will make a few comments about margin, and Kevin will make a few comments about loan, and Chris Poulton will talk about CCFG. Let's go to the numbers. Earnings was a beat. Earnings showed $115.2 million, a record $0.58 per share. That represents a significant breakout in quarterly earnings that has been fixed around $100 million over the past several quarters.

Reported core earnings of that was $111.9 million. That's $0.56 a share. I want to bring to your attention that the expense of the Texas lawsuit was in this quarter, and that was $2 million after tax. Hopefully, that will be non-reoccurring in the second quarter. Without the expense, the core would have been $114.57 million a share. Our gain from our equity investment was backed out of the income for core purposes because it's not guaranteed reoccurring. However, management believes our equity investments have certainly been profitable and put us in a position to reap the benefits that otherwise would have been a missed opportunity. That's the business man in me always reaching for a little extra. Revenue, Home was a beat on revenue. We were able to grow revenue faster than interest expense, $260.1 million in revenue.

We edged out the fourth quarter of 2024 by $700,000 and the first quarter of 2024 by $13.1 million. With rates down, we are pleased to continue our plan to top our billion-dollar run rate that we did in 2024. Margin, strong improvement on a late quarter, up 4.44 from 4.39 in the fourth quarter and 4.13 in the first quarter. Net interest spread improved 11 basis points from December 2024 at 3.58-3.69 for the first quarter of 2025. Nice improvement while yield on loans expectedly dropped on a late quarter basis to 7.38 from 7.49. Loans, strong loan quarter with our community footprint increasing $291.5 million while CCFG declined $103 million for net loan growth for the quarter of $187.6 million. At March 31, we were at a record level on loans at $14,950,000,000 and were $14,960,000,000 at December 31, 2024.

If I'm not mistaken, we've gone over, ticked over, I don't know that it'll hold, but we've ticked over $15 billion so far this month. Deposits, strong deposits with an increase of over $395 million for Q1. The increase took us to $17.5 billion from $17.1 billion at the end of the year, which led to a decrease in loan deposit ratio to 85.24%. That's in spite of the strong loan growth. The rate on interest bearing deposits decreased to 2.67% from 2.80% at year-end. I said last quarter, I think the strength of our company being able to pay out all uninsured deposits has served us well. There's always a flight to safety in uncertain times. Home is enjoying the deserving reputation of being able to pay out all depositors in the flight to safety. There is no place like home.

Pre-tax net income for the quarter was $56.58 million. I don't know how you fuss with those numbers when you bring 56.58% of your revenue to the pre-tax bottom line. Asset quality non-performing loans improved to 0.60% from 0.67%, while non-performing assets improved to 0.56% and 0.63%. Reserve coverage grew to 312% from, at the end of the year, 278%, and non-performing dropped $13 million. As of March 31, 2025, non-performing loans were $89.6 million and non-performing assets were $129.4 million versus December 31, where non-performing was $98.9 million and non-performing assets was $142.4 million. Capital ratios continue to build. CET1 at 15.4%, leverage at 13.3%, and total risk-based at 19.1%. Tangible book value increased to $13.15 from $11.79 a year ago, up $1.36. Book value hit a new record, surpassing the $4 billion mark for the first time in our company history.

Return on tangible common equity for the quarter was a strong 18.39%. We continue to buy back stock. We have a 10B5 filed during our quiet period, but had no idea of the opportunity to buy back stock at these prices, and the purchases have been limited by our filing. We purchased over a million shares, right at a million shares, I think on the nose for the quarter, and we'll remain active in the second quarter. This too shall pass, and I think we'll be proud of having been active at these levels. In conclusion, Home's powerful balance sheet coupled with repetitive strong earnings, that's now showing a possible breakout because of strong margins, conservative growth, good loan quality, massive capital, hands-on management, expense control, and don't forget our discipline, drive, and determination that has led us to peer-leading performances.

It feels good to be one of the best, and we love to win. We picked this up on the somebody wrote something about it, says that Home strength is not an accident. We've kind of picked that up, and we're going to use that in some ad campaigns. It was quite a quarter done. I want to thank all the team at Home Bancshares for a great effort and what I consider a perfect quarter. I know you're proud of yourself of the numbers as well, and I'm going to turn it back to you and let you have it.

Donna Townsell (Director of Investor Relations)

Thank you, Johnny. Congratulations on a fantastic quarter. Our next report today will come from Stephen Tipton.

Stephen Tipton (CEO)

Thanks, Donna. We talked last quarter. We mentioned that we would be pleased if the margin could remain fairly stable. I'm very proud to report that the core margin continued to expand in Q1. For the quarter, excluding event income, the net interest margin was 4.42% versus 4.36% in Q4, or an increase of six basis points. March ended slightly lower than the quarterly average, primarily due to the continued build of liquidity from the increase in deposits.

This liquidity will allow us to continue to work on negotiated deposit pricing in an effort to bring those costs down. We are excited about the deposit growth we saw in the quarter at nearly $400 million, highlighted by strong growth from all of the Florida regions and an increase in overall core non-interest-bearing balances. Congrats to all of our bankers as 2025 looks to be off to a great start. I'll turn it back over to you, Donna.

Donna Townsell (Director of Investor Relations)

Thank you, Stephen. Next, we will hear from Kevin Hester on the lending portfolio.

Kevin Hester (President and Chief Lending Officer)

Thanks, Donna. As Johnny mentioned, all asset quality metrics improved in the first quarter with no new material concerns noted. Anticipated recoveries from the fourth quarter cleanup were in process with nearly $7 million recovered from the fourth quarter charges. Ninety days ago, I indicated that I expected total recoveries on the cleanup to exceed $30 million over time, and I still believe that is the case. As expected, NPAs were reduced in the first quarter, and I anticipate further reduction in Q2. All of that and solid loan growth driven by the community bank markets. As Johnny said, an almost perfect quarter. Donna, back to you.

Donna Townsell (Director of Investor Relations)

Thank you, Kevin. Chris Poulton will provide an update on CCFG.

Chris Poulton (President)

Thank you, Donna. This quarter, we celebrate our 10th anniversary at Home Bancshares. For those that may be looking to mark the anniversary, I'll tell you that the traditional gift is aluminum or tin. I'll be honest with you, I was a little disappointed when I discovered that. Over the past 10 years, CCFG has funded over $15 billion of loans and has grown the portfolio to over $1.7 billion, representing a cumulative average growth rate of over 10%. We think of that as a pretty good start. I'll talk today specifically about our commercial and industrial loan book. It was noted earlier that the CCFG portfolio declined approximately $100 million in the first quarter. This decline, as well as last quarter's decline, occurred exclusively in the C&I portfolio. Historically, we've had two types of credits in our commercial portfolio.

The first, single credit broadly syndicated and middle market loans, and the second, structured facilities secured by portfolios of middle market corporate loans. As of this quarter, we've effectively exited the single credit broadly syndicated and middle market loans. At its peak, this portfolio was over $200 million, and today it stands at less than $10 million with just four credits remaining. In addition, over the past year, we exited at maturity or refinance several structured facilities as we rotated out of prior facilities and chose to take a pause on new commitments pending the election and potential rate volatility and tariff impacts. Going forward, as we search for an equilibrium point in the C&I book, we expect to add back to the structured portfolio. Historically, C&I has represented approximately 20% of the total portfolio. Today, it stands at less than 10%.

Over this prior year, we've created capacity to selectively add back to this book. Meanwhile, our commercial real estate book, which represents the core of our loan book, was stable to up over the quarter and up about 5% over the past year. The new loan pipeline remains active. Over the past 12 months, we originated just over $1 billion in new loans, and I would expect to meet or exceed that total in 2025. These past 10 years have been the most rewarding of my career, and I wanted just to take a moment to thank everyone that has supported the growth of this business over the years. I'm pleased we've been able to build a foundation for continued growth and success, hopefully in the years ahead. Donna, I'll hand the call back to you.

Donna Townsell (Director of Investor Relations)

Thank you, Chris, and congratulations on your 10-year anniversary. It's been a pleasure.

Chris Poulton (President)

Thank you.

Donna Townsell (Director of Investor Relations)

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

John Allison (Chairman)

I just want to say that I think we're going to do something, send Chris a roll of tenfold or something.

Donna Townsell (Director of Investor Relations)

No, don't spoil the surprise.

John Allison (Chairman)

We'll get a big roll, Chris, that you'll appreciate.

Chris Poulton (President)

Yeah, I appreciate that.

John Allison (Chairman)

I didn't realize it was 10, so anyway, thank you. I don't have anything else. The numbers speak for themselves. We're going to go straight to Q&A. Let everybody ask what they want to ask. Great quarter, though. Great job for everyone. Bye, everyone. Thanks.

Operator (participant)

Thank you. If you would like to ask a question, you can do so by pressing star followed by one on your touchscreen keypad. If you change your mind and would like to remove yourself from the list, you can do so by pressing star, then two. We will pause here briefly whilst questions are registered. The first question we have comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose (Managing Director)

Hey, good afternoon, guys. Thanks for taking my questions. Really solid quarter, kind of all around. I wanted to get a sense from you guys. Obviously, this quarter's growth was strong, just in general, what you're hearing from your customers. I think an increasing number of banks are just citing some tepidness from borrowers. I specifically wanted to ask about the boat lending and if there's been any drop-off in demand there and maybe just where pipelines are. Just a general color on what you're hearing and seeing from your borrowers, just given some of the uncertainty out there. Thanks.

Kevin Hester (President and Chief Lending Officer)

Hey, Michael, this is Kevin.

John Allison (Chairman)

Michael, this is John.

Kevin Hester (President and Chief Lending Officer)

Go ahead, John. Talk about short and I'll talk in general.

John Allison (Chairman)

Yeah, no, just because Michael had mentioned the boat loan specifically. Michael, what we have seen, I guess, in the first quarter is elevated volume compared to one Q of 2024. A large part of that, because one of our European manufacturers, a significant relationship of ours, has been offering to subsidize the pricing. That has tended to elevate the production volume, and that has largely masked, I guess, some of the uncertainty around the tariffs. Kevin, do you want to speak in general?

Kevin Hester (President and Chief Lending Officer)

Yeah, Michael, from a community bank footprint, I think what you stated is what we're hearing from a lot of people too. I mean, there's some uncertainty, obviously, over what's happened in the last month, and that may keep some projects that maybe are kind of in the development stage and the planning stage. It may slow some of those down. I mean, still a lot of good things happening in our core markets. I am hopeful that that will be short-term, but still a lot of activity and a lot of good things happening.

Michael Rose (Managing Director)

Very helpful. Maybe if I could just pivot to the kind of the puts and takes on the margin for Stephen. How much pull forward or repricing opportunity is there on the deposit or liability side? It is good to see loan yields still holding in there well above 7%. Obviously, down Q on Q. Can you just give us an update on kind of where new production yields are and then maybe how we should think about the margin here in the near term? Obviously, if the growth continues to come through, that would be a helper. Thanks.

Stephen Tipton (CEO)

Sure. Hey, Michael. Several questions there. I guess production in Q1 was a little over $800 million. Weighted average coupon was 7.75%. Still hanging in there fine, north of prime. On the deposit side, just here recently, over the last couple of weeks, have kind of tried to reignite a little effort on negotiated checking, savings, those kinds of things. A lot of that's going to obviously depend on competition. I had a call earlier this week with our presidents, and you're still hearing banks offering 4.5%. We have to compete there and protect the franchise, and we'll do that. There's probably some opportunity on checking and savings to try to clip a little off here and there, depending on what happens with the Fed. On the CD portfolio, we've got $600 million maturing this quarter. We've got about $400 million next quarter.

Out of a billion eight that we have, I think 85% or more matures within 12 months. We are pretty short on the CD portfolio, and we should see 10, 15, 20 basis points potentially come down as those come through. I think margin overall, I think same message as we have for quite some time now, would be pleased to see it kind of hold in the range that it's in. Cash in March was up with the deposit build, and that weighs on the metric itself, but that's come back in a little bit here lately just with tax payments going out over the last couple of weeks.

Michael Rose (Managing Director)

Very helpful. Maybe just finally, last one for me. Johnny, I think you mentioned this in the outset, but the credit cleanup around Happy being just about done. You had a net recovery this quarter. Anything that you're seeing out there, both in your core markets and also in Texas, that gives you any sort of pause? Are there any industries or verticals that you're putting a little bit more eyes on at this point, just given the tariff uncertainty? Thanks.

Kevin Hester (President and Chief Lending Officer)

Hey, Michael, this is Kevin again. Not from a general sense. I mean, we ask that question in every presentation. We're asking our lenders about that individually because it affects even within an industry people differently. I mean, we're just dealing with that from a one-off individual perspective, but certainly talking about that in every size of the deal.

Michael Rose (Managing Director)

Okay, great.

Kevin Hester (President and Chief Lending Officer)

Really early yet to know. I mean, you haven't really seen where they're going to land and what's going to get hit and what's not. It is a little early. We're having the discussions, but there's no definitive answers.

John Allison (Chairman)

That's pretty well put. Thank you, Michael.

Michael Rose (Managing Director)

Yeah, it's difficult. Yeah, thanks, guys. Chris, congrats on 10 years. I got a Slurpee coupon coming your way. Thanks, guys. Appreciate that.

Operator (participant)

Thank you. We have the next question from Catherine Mealor with KBW. Please go ahead when you're ready.

Catherine Mealor (Analyst)

Thanks. Good afternoon.

John Allison (Chairman)

Good afternoon, Catherine.

Catherine Mealor (Analyst)

Johnny, you mentioned about expenses that there were still about $2 million in elevated legal expenses that had to do with the Texas lawsuit, and that would hopefully not be recurring next quarter. Do you think excluding that, we actually see expenses come down from this level, or that just kind of pays for natural growth over the next couple of quarters?

John Allison (Chairman)

1, 11 is our number, and you pull the $2 million out of expenses this quarter, and you'll be at 1, 10, 9. So you're right at 1, 11. Our management team is working hard to keep that. I'm not going to—I didn't fuss at them this quarter because we had to elevate it. Legal expenses, we were in the middle of depositions on that lawsuit. It went on all month long. Anyway, maybe it appears that there's a resolution that's come to that, and maybe everybody will continue. Everybody hasn't signed off, but we're working towards that. The 111 is a good number. I think that's the number we had last year, and we're still operating with it this year. I'm pretty pleased with Stephen's management of the expense side. Don't count any coming down any farther than that.

Catherine Mealor (Analyst)

Yeah. No, it's been really good expense control. Maybe my follow-up on the margin was just on loan yields. Can you just kind of give us a sense as to where new loan production's coming on? We talked a lot this quarter about competition being a little bit more intense this quarter. Just kind of curious how we should think about the pace of loan yields over the next couple of quarters.

Stephen Tipton (CEO)

Hey, Catherine, this is Stephen. I'll make the comment there and let Kevin add anything he wants to. Just in general, I think mentioned earlier, coupon in Q1 production was at 7.75. That's 7.60 or so kind of from the community bank group. So a little north of prime and then mid-eights for Chris's portfolio. We're hearing from our lenders competition is quoting some things in the sixes, and we may have to deal with that at some point. As y'all know, we're disciplined in our approach and think we can kind of hold the line where we're at. Kevin?

Kevin Hester (President and Chief Lending Officer)

No, that's good. I would agree with that.

Catherine Mealor (Analyst)

Okay, great. Maybe just on the margin, if we are in an environment where we start to see rate cuts, and maybe Johnny, I'd love your view on if you think we're going to get them or not. Just as we get into an environment potentially where we see more rate cuts this year, can you just remind us on the sensitivity to the margin and how you think the direction of your margin will go with those cuts? Thanks.

Stephen Tipton (CEO)

Yeah. From an outcome standpoint, I think we show about 6% decline in a down 100 scenario. I think Johnny and Tracy have said for a long time our view just on the outcome model and it being a snapshot in time. We have three—I think we have three rate cuts built into our 2025 budget and actually showed a little expansion throughout the year in what our budget produced. Again, I think a lot of that factors on competition and what we have to do to protect the franchise. Overall, I think in this 440-ish range where we're at today would be pleased.

Catherine Mealor (Analyst)

Okay. Great. Thank you. Great quarter.

Stephen Tipton (CEO)

Thank you.

John Allison (Chairman)

Thanks, Catherine.

Operator (participant)

Thank you. We have Jon Arfstrom with RBC now.

Jon Arfstrom (Consumer Finance Equity Research)

Thanks. Good afternoon.

John Allison (Chairman)

Hi, John.

Jon Arfstrom (Consumer Finance Equity Research)

Hear me all right? Hey there. Johnny, what are you thinking on the buyback and capital preferences from here? You still prefer kind of looking around for M&A, or do you think at this point you'd rather be buying back stock?

John Allison (Chairman)

Oh, if we found the right deal, we'd do one. We have a payoff coming up. Looks like Brian, you'll talk about what we have coming up.

Brian Davis (CFO)

Sure. We probably will pay off some subdebt. It's subdebt that we acquired from Happy. It'll be about $140 million. It's currently about 5.5%. Unfortunately, it pops to 9.7% on July 1. Our plan is to try to get board approval later this afternoon to pay that off on July 31. That'll lower our risk-based capital ratios about 76 basis points once we do that.

John Allison (Chairman)

Yeah. It adjusts to about 9.5, so we're not going to pay that. We'll pay it off. We got the cash paid off. We'll just pay it off.

Brian Davis (CFO)

Yeah. We've got almost $582 million in cash at the holding company. We're good there. We're strong on capital, so I'm good with paying it down. Paying it down.

John Allison (Chairman)

It is getting—the capital count is getting large. I think Jamie Dimon said it best. There's nothing wrong with having good liquidity and lots of capital in these kind of uncertain times. I like our position. I like the fact we can pay out all the insured depositors. I like having a war chest of capital. We don't know what's going to happen. We don't know where this is going. I understand what he's trying to do. I don't know if it works. Anyway, we're going to all be in this for a little bit until it gets resolved one way or the other. I just want to be in good shape and come out the other side and ready to play, so.

Jon Arfstrom (Consumer Finance Equity Research)

Okay. Okay. Fair enough. Pay down debt and maybe pick away at the buyback is the near-term message. Is that fair?

John Allison (Chairman)

Yeah. We'll continue to buy. I wish we had—we've always filed this 10B5. We've picked up about $480,000 shares in this 10B5. About a million last quarter and this quarter. We've picked up about $450,000, $480,000 shares. I assume we'll probably buy another—if they stay down here, we'll continue to buy. We'll just continue to sack it up. I didn't think we'd get another buy at the apple here, but we're getting a pretty nice buy at the apple. I think we'll just keep buying for a while.

Jon Arfstrom (Consumer Finance Equity Research)

Okay. Okay. Good. Chris Poulton, on your comments, are you essentially calling the bottom? Are you saying that you mentioned a couple of runoff categories that it feels like you've exhausted that? Are you essentially saying your portfolio could be at a bottom in terms of size?

Chris Poulton (President)

I think that's pretty fair. I'd like it to be. As I said, 100% of the decline in our portfolio has been on the C&I side. We control that, right? We can come in and we can come out of that. Wanted to leave a little dry powder coming into this year on commercial because we kind of felt like there weren't great opportunities in the second half of last year on the commercial side. We thought there'd probably be more. We just made our first commitment this month this year.

We waited until now, and we made a new commitment on a facility. Yeah, I'd like to believe that. We'll have some payoffs in the CRE book, but I think the pipeline's strong enough to fill that back up. I'd like to be a little bigger than we are right now. We're down about what?17 or so. We continue to think two is a good number, and I think we'll get back there. It's just not a race to get back there.

Jon Arfstrom (Consumer Finance Equity Research)

Yeah. Okay. Okay. Good. Kevin, just on core growth, core loan growth in the community bank footprint, is there anything you'd call out that's particularly strong at this point?

Kevin Hester (President and Chief Lending Officer)

Certainly our Southeast Florida group, our metro groups. There's just a lot of good stuff happening in Florida and even in the Dallas metros. I think I'd probably call those out. Two-queue payoffs look pretty high, so that's going to be a little bit of a headwind as we go through the quarter. Not saying we can't overcome it. It is early in the quarter, and the pipeline doesn't show some stuff that I'm sure will come through. Payoffs definitely are a little bit higher.

Jon Arfstrom (Consumer Finance Equity Research)

Yeah. Okay. Okay. Fair enough. Just one comment on 10 and aluminum. I see John Marshall does not have any foreclosed assets, but it's about $5 million in non-performers. So Johnny, maybe there's an Alumacraft in there for Poulton?

Kevin Hester (President and Chief Lending Officer)

Thanks, John. That's helpful.

Jon Arfstrom (Consumer Finance Equity Research)

All right. That's all I had. I've been waiting.

John Allison (Chairman)

Oh, that's funny. Thank you.

Operator (participant)

Thank you. We now have Brett Rabatin with Hovde Group.

Brett Rabatin (Equity Research)

Hey. Good afternoon, everyone. Wanted to start back on the recoveries. I think, Johnny, you mentioned you still expect the cleanup to have $30 million of recoveries over time. Can you talk a little bit about that? You obviously had some this quarter. Can you talk about the timing of that? Just thinking about, do you think you can substantiate a 2% reserve if you end up back there? Any thoughts on your provisioning needs net of the recoveries you're expecting?

Kevin Hester (President and Chief Lending Officer)

Hey, Brett, this is Kevin. I'll take the first part of that question. I'll let him talk about provision. A large, large portion of those recoveries are the monthly payments on the large charge-off that we took. We expect those to continue. Now, you could have an event somewhere down the road in a sale or something like that that could accelerate that. As of right now, that's $1,500,000 a quarter, and we expect that to continue for as long as they continue to pay it, which we expect to happen. That's the large part of the 30. Most of the other stuff, maybe one other piece, there's maybe one other piece that hasn't occurred yet that I'm hoping will happen second quarter. I think it probably can. Other than that, I mean, all of it has happened other than the monthly payments.

Brett Rabatin (Equity Research)

Okay. Any thoughts, Johnny? I know you've had a 2% reserve in the past, and your reserve is still way above almost everyone else. Do you want to grow that in some certain time, or do you think that that's kind of as high as you can get it, just given the dynamics?

John Allison (Chairman)

I'm not in a hurry, but I like 2%. I don't have to reiterate, but I'm going to. It has always worked. Good times, bad times, recession, financial crisis, interest rates, 2% always worked. It's just something I didn't expect loan growth to be this powerful the first quarter, and it was really good. You would have seen it go back up. The recoveries would have taken it back up. It just matched out pretty easy with the loans. I think we're at 186. We're still at 186. I'm not in a hurry to do that, but if I get a chance to go back to 2% at some point in time, I like the reserve. I think it's a smart thing to do. The conservative way to run this company is to err with too much reserve and too much capital.

You know how we do it. If we get a chance, we'll do it. If we don't, we'll leave it. Probably not going to let it drop. I'm probably not going to let it drop any from where it is. Hopefully, we continue to—we know we're continuing to get some recovery on a monthly basis. We'll build it. There's always a little charge-off here, a little charge-off there. I think we recovered $7 million last month. We charged off a couple million and ended up with $4.5 or $5 million, which was the $190 million in loan growth, what it was, about what it took.

Brett Rabatin (Equity Research)

Yeah. Okay. Just back on the M&A topic, I assume you're going to tell me that everyone's just kind of in a wait-and-see mode. If no one has to do something, they're just going to wait and see how the environment plays out before proceeding. I was just curious on your thoughts on the environment and what you're hearing from folks, and what do you think your outlook might be for M&A? I know it's hard to gauge with the uncertainty.

John Allison (Chairman)

We just saw Cadence get that deal done in 60 days. How long has it been since we saw a deal get done in 60 days? It's been the last Trump administration. It is a positive for banks. It certainly is a positive for banks. French Hill headed the Financial Services Committee, first banker in 100 years to head that. That's a plus for the banking industry. You got a real banker running financial services. I think that's a plus. I think Trump is going to deregulate as much as he can. I think it's our opportunity. It's a window. I don't know if it's perfect timing with all of the tariff stuff going on, but we're not on a trade right now, but we're not off a trade. We're open to what makes sense. We'll do a trade. I mean, I'm excited.

You think you can close a deal in 60 days? That really gets pretty exciting. From that perspective, I'm more inclined to do something. We're not really on something right now. We were on one last quarter and due to the Texas cleanup, having to get all that crap out of the bank, we didn't want to go forward with that. That one could come back at some point in time and may or may not come back at some point in time. We're open. I just spoke at Commerce Capital. They had a big event in Texas, and we spoke there in front of about 120 bankers. I told them our door was open if any of them were interested in coming to come on and we'll visit. We're not excluding the M&A deal.

When you run a 2% ROI, as we did for the quarter, we can't get much better than that, can we? You can't get much better than that. It is time to bring some assets in. We don't need to get stupid with the price. We need to buy it worth the money. I told the guys in Texas recently, this nice conference, I said, "Think about it. We all work about the same number of hours." I don't think they work as many as we do. Anyway, I said, "And you're doing a 1% or a 0.9?" I said, "We're doing a 2." Think about that. You want to sell your bank, what should I pay you for it? I pay you for what it's worth, right? Think through that. You can't come beating your chest.

I want two times booked because next year we're going to do 1.8. Wait till next year to sell it, right, if you're going to do that good next year. Just the conversation around was, "We're open, but it has to work for both parties. If we find the right trade, we'll certainly do it." Does that make you understand where I'm coming from?

Brett Rabatin (Equity Research)

Okay. Yeah. No, I think that makes great sense. Appreciate the call. Congrats on the quarter.

John Allison (Chairman)

Thank you.

Operator (participant)

Thank you. We have the next question from Matt Olney with Stephens, please go ahead when you're ready, Matt.

Yeah. Thanks, guys. Congrats on the quarter. Johnny, I want to just—yeah, just want to continue that last discussion you had on the M&A front. I'm curious if we are seeing faster approvals on deals. You mentioned up to 60 days on some of these deals. Does that allow you to do anything interesting on the M&A side? Some of your peers have talked about, "I feel more comfortable doing multiple deals in the same year." If that's the case, it could allow the bank to do perhaps some smaller deals that they wouldn't have considered in the past if you can do multiple smaller deals. Just curious how the change of faster approvals, how that would change your M&A strategy, if at all.

John Allison (Chairman)

It excites me to look at M&A and to be able to get—would we do two or three deals at one time? If one came, another came, another came, I guess we would. I do not think we would announce them all the same day. I would not mind doing a smaller deal. We are not adverse to doing a smaller deal at all. The last one we did was the Happy deal. And the train wreck we ran into there with that deal.

That is in the rearview mirror today. As you can see, the earnings have recovered. I mean, I would prefer to do maybe a—I would prefer to maybe do a smaller deal or a multiple smaller deal. It is just I am sure my people would prefer to do one larger deal because it is about as much work to do a smaller deal as to do a large deal.

You'd have all your focus on one trade. I wouldn't be adverse to doing a couple of smaller deals at all. I'm looking. I'm ready to find something. I'm absolutely ready to find a trade that makes sense. I said a while ago, we're in a 2.05 or 6 for the month. I can't ask for any more than that. This team needs some new assets. They need some assets of somebody that's running a 1% ROI that wants to be a partner and come in and let us help them get it to a 2% ROI. I mean, that's our game, right? That's what we've done over the years, is buy a bank that doesn't perform near at the level that home performs and bring it to our level. That's really our strategy. We're looking for that opportunity.

Just because I sell it two times tangible book, I'm going to pay somebody two times tangible book. There's not but a handful of us that trade at two times tangible book. We trade there because of the continued quarter after quarter after quarter performance of the companies. That's why we trade there. People that are not there, they trade there for a reason. No disrespect. This is what it is.

Johnny, on the topic of just smaller banks, can you put any numbers behind that in terms of how small would you go versus how small is just too small, I guess, to consider?

Below 300 probably is too small. However, if it was sitting next door to Palm Beach or sitting next door to Miami and it was an in-market merger, we might look at something smaller than that. It depends on where it is. If it's out there by itself, we probably would be—we wouldn't be as aggressive on it. If it's in someplace where we operate today, we could be a little more aggressive on it. I mean, if the CEO—you've heard my story. The CEO wants to stay. We'd love to have the CEO. If he doesn't, particularly in Florida, we can just pour it in somebody's bucket because those guys understand us. They know what we're doing. They've been with us for years. You don't have to hold those guys in Florida's hands. They just go get it. That's what's happening in Texas too.

Arkansas is that way. Texas is that way. Chris runs his own deal in New York, as you know. I do not have to hold these guys' hands. If we get an opportunity in a market, even if it is $150 million, it is next door. It might make a lot of sense if it is accretive. It could be somewhat accretive to us. I mean, you can do a billion-dollar deal and it adds two cents a share, or you can do a $150 million deal next door and it may add two cents a share.

It depends on how much it adds to the EPS. We are in the business of making money for our shareholders, and we are going to make money for our shareholders. Most of these people sitting around this table right now are big shareholders in this company. They're as aggressive as I am about looking for the next deal.

All right, guys. Thanks for the commentary. Congrats on the quarter.

Hey, thanks, Matt. Appreciate it.

Operator (participant)

Thank you. We have Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten (Managing Director and Senior Research Analyst)

Good afternoon, guys. I don't know if you let Tracy hang around for one last quarter, but I hope you guys are chewing some nasty cigars in his honor, maybe, if he's not there.

John Allison (Chairman)

He's got one piece. He's sitting at the end of the table, one in his mouth right now.

Stephen Scouten (Managing Director and Senior Research Analyst)

There you go. You guys all should have one just to honor him on what I think is maybe his last name he's called. It's been a great run. I guess maybe one last question on the M&A front. What do you think we need to kind of get the ball rolling on a deal flow perspective? I mean, do we still need lower rates? Is it marks on or interest rate marks that are keeping deals from getting done? Do we just need higher stock prices? I mean, I think most of us thought we'd have seen a lot more deals in this administration by now. I'm just wondering what you think we need to see to kind of get the ball rolling a little bit more.

John Allison (Chairman)

I saw Kevin say he said when you said lower, that'll improve some people. That'll make them want to come out. It's about as broad as it is long when you think about it. We're just a tick below two times tangible book. We're right at two times tangible book. And we were at 2.5 or 2.6. It's all relative. Somebody said, "Well, I'm all the way like to get 1.6 or 1.7." Well, when they get 1.6, I'm probably back to 2.5 or 2.6. So it kind of floats back and forth. Just educating the sellers, to me, more than anything else, is what we need to do. As you heard me say, these people that got themselves in trouble with their securities book, it's hard to make a deal with those people because the mark is so deep into their book. But it's all relative, right?

It's based on what we pay for them today and how long it takes for them to heal up. Maybe they don't heal up for a couple of years. Maybe they don't sell for a couple of years. It all floats about the same. I mean, when Trump went in, we got the Trump bump and huge raise of all bank, raise the level of all bank stocks. The tariffs come in and they're going back down. We're about where we were prior to the Trump bump. I think it's just a matter of educating the seller because if the seller is willing to make a deal at a 0.9, then he benefits from that. It's accretive to the company. He gets to ride our stock. He gets to ride a really good quality stock that pays a dividend every quarter. It's just an education process to me.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah. Yeah. That math you just talked about on the exchange ratio seems to be lost a lot of the time. There seems to be maybe some pride in just the absolute number at announcement, which, to your point, doesn't really make any sense. That's helpful, Johnny. I guess you said something interesting. Obviously, even in your press release, right, banking boils down to revenue and expenses, right? And y'all's expenses are about as low as it seems like you can get them. You're talking about needing more assets to build revenues. Apart from M&A, are there any other levers you feel like you can pull to kind of peak up revenue levels more so than they are? Are there any other lines of business or anything else that's on the radar to grow revenues disproportionately?

John Allison (Chairman)

I wish I could tell you the answer to that was yes. We are going to keep on keeping on until we find somebody that wants to do a trade with us. We are just going to keep on doing what we are doing. I expect the next quarter to look a lot like this quarter. Actually, the run rate as of today was $1.3 million higher through the same day last quarter. We are $1.3 million higher this quarter than we were same day last quarter already. I expect us to look a lot like we did last quarter. We had a sale. Happy had an investment that they sold. I did not even know we had it. It made millions of dollars. You will see that coming in. We had one other deal that was pretty good.

Oh, looks like we may have settled the Texas lawsuit. Looks like that is settled. I'm not sure when those proceeds will come in, but they possibly could come in next quarter. As bad as I hate to say it, we have a—I wish we didn't have it—was a life insurance policy for Mr. Pat Hickman. I'd much rather have had him than the money. Got that coming in. We got a good start on next quarter. The run rate's up a million three through today. That tells you kind of what I'm thinking. I'm pretty happy. We just need to find somebody that wants to partner and stay with us if they want to or go to the house if they want to. We're ready.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah. No, that makes a lot of sense. I appreciate the call. Everything else kind of I had has already been asked. Fantastic quarter yet again. Appreciate the time.

John Allison (Chairman)

Thanks, Stephen. Thank you. We appreciate you a lot. You have a great reputation as an analyst. Do a good job.

Operator (participant)

Thank you. We have another question on the line from Brian Martin with Janney Montgomery. Please go ahead when you are ready.

Brian Martin (VP and Research Analyst)

Hey, guys.

John Allison (Chairman)

Hey, Brian. Good to have you.

Brian Martin (VP and Research Analyst)

Yeah, maybe just one for Kevin. Just Kevin, in terms of the NPA resolution, I think last quarter you kind of talked about directly where you thought the NPAs could trend to here as you kind of worked through the credits. Can you just kind of remind us where that—where you think the NPAs will kind of shake out here over the next couple of quarters as you kind of work through some of these credits?

Kevin Hester (President and Chief Lending Officer)

Yeah. There's still probably another 12 or so that I'm hopeful to move this quarter. From there, it takes the credits, the NPAs that we have on the Florida memory care credits. It takes those to move. Those are improving. One of the three, actually, is cash flowing. It's now cash flowed for two months on what would be P&I payments. One of the other two is really close. You're probably six months. You got to have six months of that sort of activity before you can move it out. I think in best case, one of those is probably a third quarter, third to fourth quarter activity. From the $12 million I said early, it takes that to get anything else out of any size because everything else from there on is pretty small.

Brian Martin (VP and Research Analyst)

Okay. The memory care one that could go later in the year, third or fourth quarter, how big is that one?

Kevin Hester (President and Chief Lending Officer)

The one of the three is about six. The second one that's close is eight or nine-ish, somewhere in there.

Brian Martin (VP and Research Analyst)

Okay. So you could still see a good chunk. Both those could go in the second half of the year or later in the year if that's possible?

Kevin Hester (President and Chief Lending Officer)

Possible, yes. Possible if the current trends continue.

Brian Martin (VP and Research Analyst)

Okay. Gotcha. I do not know if you mentioned it, Kevin, if I missed it in your opening remarks, just kind of the loan pipeline, community bank pipeline today. Did you give some color on that of how you are feeling about that as you are given the uncertainty that is out there and just how you are looking to throw it? I know you mentioned some payoffs.

Kevin Hester (President and Chief Lending Officer)

Yeah. I mean, I think the pipeline itself, the production pipeline is pretty good. I would not say that it is as strong as it was the last half of this quarter that just ended. I think the challenge is going to be the payoffs, the elevation of payoffs second quarter if those do come through. That is a headwind. Not saying we cannot get there, but it is going to take some things happening that are not on the pipeline yet. We are talking about some stuff that could hit there, but we will just have to see how that plays out.

Brian Martin (VP and Research Analyst)

Gotcha.

John Allison (Chairman)

I think just, Brian, I think his tariff deal has kind of shook everybody up a little bit. We'll see where that goes. I think it's got everybody's attention a little bit.

Brian Martin (VP and Research Analyst)

Yeah. I think you get another quarter down the road, it's maybe a little bit more clarity. You'll feel better about how the pipeline's feeling or shaping up. Maybe just the last one for Stephen, just back to the margin for just a minute. Stephen, I think you said—I don't know if you said where you exited the quarter. I think there was some liquidity that came in. Can you just remind us where you exited the month and just kind of what your starting point is for the margin as we go into second quarter? Just as you relate to that, Stephen, just the pressure point as far as it sounds like maybe I'm understanding it right. The risk to the margin moving lower is the competition at this point. Is that what you would count as kind of the greatest risk to maintaining the margin?

Stephen Tipton (CEO)

Yeah. Hey, Brian. Yes, I would agree with that last statement. We'll see how rational everybody is over the next quarter and the second half of the year. It sounds like it's still pretty aggressive on both sides of the balance sheet. As mentioned, the margin excluding event income for the quarter was 4.42. Same number there for March was 4.38. That had $200 million or $300 million more in average cash balances in March than we had in February. That's driving that number down some. Like I said, in that 4.4 range, plus or minus a couple, is where we feel like we can operate.

Brian Martin (VP and Research Analyst)

Gotcha. Okay. I think that's all for me. Congrats on a great start to 2025. We'll look forward to seeing a similar quarter in 2Q.

Stephen Tipton (CEO)

Thank you, Brian.

John Allison (Chairman)

Yeah. Thank you. I think kind of wrapping up now, Donna, if that's all right. It was a great quarter. I expect this quarter to be as good or better than last quarter. I don't see any reason y'all have asked. Donna, and I've run into y'all at many conferences. You said, "What do you want to happen?" I said, "Nothing. We just want to leave it like it is." We got the Home Bancshares is what we call humming right now. And it's humming about as good as it's ever hummed. So we're pretty pleased on this end. We'll talk to you in 90 days and hopefully have as good or better news and maybe a deal by then. Thank you very much for your support.

Operator (participant)

Thank you all for joining Home Bancshares conference call. Today's call has now concluded. Thank you for your participation, and you may now disconnect.