Home Bancshares, Inc. (Conway, AR) (NYSE:HOMB) Q2 2024 Earnings Call Transcript

Home Bancshares, Inc. (Conway, AR) (NYSE:HOMB) Q2 2024 Earnings Call Transcript July 18, 2024

Operator: Greetings, ladies and gentlemen. Welcome to the Home BancShares, Inc. Second Quarter 2024 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, then entertain questions. [Operator Instructions] The Company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2024. At this time, all participants are in listen-only mode and this conference call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Donna Townsell: Thank you. Good afternoon, and welcome to our second 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; Tracy French, Chairman of Centennial Bank; Chris Poulton, President of CCFG; and John Marshall, President of Shore Premier Finance. To open our discussion on the quarter today, we will begin with some remarks from our Chairman, John Allison.

John Allison: Thank you, Donna. Welcome to the 18th year as a public company and the 26th year for us as a financial institution. This conference call is number 72 for those of you that have been with us since the beginning of year, and I still look forward to presenting our quarterly results. I’m certainly more comfortable today than I was June of ’06, when we first reported our quarterly numbers. I could not sleep that night. I was so nervous, I had my notes around, but I just had worn them out. We just returned from a two-week trip went with Stephens telling our story all over the country. If you remember those times, not many IPOs were getting done. As a matter of fact, the Company scheduled in front of us had pulled out and the one behind us had pulled out.

I was laughed at, yelled at and even called a one-trick pony by Dallas firm. We traveled for two weeks and raised about $50 million, and I was not sure we’re going to get it done. One of the best — one of the investment banking firms that was in our syndicate sold the retail arm and dropped out of the bank space just prior to the offering day. It was a terrible time, terrible time to bring an IPO. However, we met many wonderful people and some are still major shareholders of our company from $2 billion to $23 billion, what a ride. So, let’s go with the report. So far, so good for ’24. As we said in the first quarter, nice start to ’24 and Home’s top-tier performance continues through the second quarter. Last quarter, I said to improve profitability.

We simply need to reduce expenses and increase revenue. Easier said than done. So, here’s what happened. On the expense side, we improved our efficiency ratio from 44.43% last quarter to an adjusted ratio of 42.59% for the second quarter of ’24. Add to that, a strong profitable loan growth in both first and second quarters allowed us to continue on with what is a great start to ’24 in spite of the economic environment. Loans grew in the second quarter by nearly $270 million, while margin was strong — was a strong 4.27%, up 14 basis points from the first quarter ’24. Non-interest expense for the first quarter of ’24 was $111,496,000 and the same quarter last year, expenses were $116,282,000. We made marked improvements of over $5 million after adjusting for and you’ll hear this repeat it several times today.

We had not — I guess we got another letter of invoice from the Fed for $2,260,000 for an additional payment for the FDIC insurance fund. I think we’re done with that now. After pulling out the FDIC insurance bond of $2,260,000 actual expenses for the quarter was $110,925,000, a slight improvement from the first quarter of $571,000 but from the first quarter, $5.3 million better. That’s $20 million a year in savings if we can continue to do that. Diluted earnings per share were reported at $101,530,000 or $0.51 a share at sporting an ROA of 1.79. When adjusted for the additional $2,260 million for the FDIC insurance fund, the Company actually earned $103,916,000 or $0.52 a share, and that supports an ROA of 1.83. Adjusted earnings for the second quarter actually beat the adjusted earnings for the second quarter of ’23, ’24 beat ’23 of adjusted earnings.

I’m pleased with that. Having a balance sheet that supports superior profitability during this high interest rate environment that runs almost side by side with 2023 is very pleasing to our management team. With analysts projecting all bank earnings to be down 5% to 10% this year. Being able to run a top-tier ROA allows Home’s management to be able to pull lots of handles for our shareholders including dividends and stock repurchases. Quarterly dividends of $36 million or annual dividends of $144 million plus we repurchased $1.4 million for $32.5 million during the second quarter, and we repurchased $1,026,000 for $24 million during the first quarter. For a total of $56.5 million and almost 2.5 million shares. It was actually 2,426,000 shares.

That’s a 1% reduction in shares outstanding in the first six months of the year. As I said, there’s an advantage to be able to run a 180 ROI because there’s lots of panels that can be pulled to benefit our shareholders. That brings the total outstanding average number of shares for future quarters to below 200 million. Over the past several years, we have repurchased many millions of shares and retire the stock and still improved our tangible common equity in the last 12 months by $1.21 a share or 11.1%. We always try to do what’s in the best interest of the shareholders. Some Wall Street talk is all reasonable banks are in trouble and may blow up. I want to assure the investment community that home is not one of those bad banks we’re talking about.

Due to the mistakes most banks made, many of the banks all the way out is to sell. They can’t earn the way out. They can’t earn enough money to earn their way out of trouble. So, they sell at some reduced price or they bring in additional capital, but the dilution to the shareholders is extremely painful as we’ve seen in some deals recently where the dilution was as much as 50% shocking. They probably would have been better off to sell to a good bank and write their bank stock up. Your Home has a Worcester capital and continues to build month by month and quarter by quarter, having the ability to earn more than $100 million quarterly, while maintaining almost $300 million of loan loss reserve couple that with a huge capital account and stable margins, and I now present to you Home BancShares.

We truly are a reasonable bank and many regional banks are in trouble. So, it’s our goal to separate ourselves from the pack, while maintaining a fortress balance sheet and continuing to be a top-tier performer, while remaining patient because patient capital is smart capital. I don’t think the bank crisis is over. We’ve just been kicking the can down the road. Not much has changed for a lot of these banks, except more of the same. They have improved the loan-to-deposit ratio slightly maybe by either allowing securities to roll off and/or loans to roll off or they chased high-priced CDs to improve their loan-to-deposit ratio. But either way, the odds of a quick fix is not likely. They may be able to improve their earnings slightly but not enough to earn themselves out of the problem quick enough.

Another dark cloud to me is coming to show up in February and March of ’25. That’s when the end of the bank saving Fed program called Bank Term Funding Program, or BTFP expires and the problem banks have to pay the money back on the securities that the program allowed the Fed to loan the face value of the securities that was much higher than the amount the market value was. How are banks going to make up the shortfall instead of rates going down, there is a chance that CD rates may go higher. That would not be positive politically for the Biden administration. Odds are against it. But in reality, it’s certainly a possibility. If bank liquidity is in question and a bank has to have liquidity or fail, they’ll pay whatever they have to pay for the money.

That’s exactly what happened to the savings and loans in the ’80s. I don’t think there’s been sufficient time between the inception of the Fed lending program in March ’25 when the program ends. That’s why I call it kicking the can down the road. Many banks have negative tangible common equity and many have less than 3%. I hope I’m wrong, but it could be a blood bath if the Fed does not extend. Stay tuned. We’re back carefully looking for an acquisition that makes sense for our shareholders. We’re also looking to March ’25 because we think there will be opportunities that arise as the BTFP comes to an end. I’m sure one thing that banks will not be able to do, and that is to borrow $100 on something that’s worth $50 like securities have turned into.

Bingo, that’s the problem force the bank to recognize loss on securities. If they have to sell the securities and couple that with and not being able to earn themselves out of the problem. This could get very serious and many of them may be interested in talking to good banks. At Home, we provide safety, security for our deposits and customers and shareholders. I just have a couple of additional comments here. It’s nice to see the bank stocks running and everybody get a little kick in the back stock just got several random things here. We sold our building that housed GoldStar Trust in Canyon Texas for a nice profit, and the GoldStar team moved into our large Amarillo facility. We also leased an additional 60,000 square feet in our headquarters building.

You remember, that’s a 240,000 square foot to sell kind of was an albatross around our neck. But as GoldStar has moved in, and now we’ve leased 60,000 square feet and maybe you have an opportunity to lease more. So, it looks like we’re turning a 240,000 square foot albatross into maybe a profit center over time. In conclusion, as I said earlier, the first two quarters were a very nice start to ’24, with over $200 million in income and revenue of over $500 million and improving earnings per share that brings 40% — that means we’re bringing 40%, a tick over 40% of the revenue to the after-tax bottom line, good job for everyone. I had the privilege of visiting with Arkansas State University, Head Football Coach, Butch Jones, Tracy and I did, and sharing stories with each other about respective businesses and electing with a quote that I — that I’ve seen come true so often, and let me share it with you.

If you lower your standards, you’ll lose the winners. If you raise your standards, you lose losers. He had many more quotes of I’ll share those over the years, but that one just stuck on with me. Patients strategy, conservative management, unwavering discipline, good efficiency, hard work, smart investments, strong capital, defensive reserve allocation, good asset quality, strong liquidity have led our company to be one of the strongest banks in the nation. And as I’ve said, we’ve been thrown in the regional bank basket, but all banks are not created equal. We’ll continue to try to separate ourselves from the pack and in closing, as I said, there is no place like Home. Donna?

Donna Townsell: Thank you, Johnny. Congratulations on a great quarter, and thank you for sharing all that information with us. Our next report today comes from Stephen Tipton.

Stephen Tipton: Thanks, Donna. As Johnny mentioned, Home BancShares and Centennial Bank had another great quarter, highlighted by continued loan and deposit growth and expanding net interest margin and solid expense control. I’ll start my comments with the net interest margin, as Johnny has already touched on already. The reported NIM expanded by 14 basis points in Q2 to 4.27%, all while continuing to maintain healthy excess balance, cash balances that we discussed in detail on the first quarter earnings call. Excluding event income noted in the press release, the net interest margin was 4.23% for the quarter, an increase of 12 basis points from Q1 and exited the quarter in June at 4.27%. The yield on loans, excluding event income, improved 15 basis points to 7.49% in Q2 and outpaced the increase in total deposit costs by 10 basis points.

During the quarter, total deposit costs increased 5 basis points to 2.27% and exited the quarter at 2.30%. Our bankers have done an extraordinary job managing this interest rate environment and the seemingly endless advertising across our footprint for high-rate CD and money market accounts. The pace of the increase in interest-bearing deposit costs has been cut in half each of the past two quarters. We continue to negotiate pricing with core customers as we have been, but are encouraged to see the pace of increases on the deposit side continue to moderate. On asset repricing, we have over $550 million in loans maturing in the second half of this year at a weighted average rate of 5.99%. And over the next 18 months, a little over $2 billion maturing with a weighted average rate of 6.5%.

Switching to liquidity and funding. Deposits continue to be a key focus. Now with three consecutive quarters of deposit growth behind us despite what is typically a seasonally tough quarter with tax payments and municipal outflows. Our presidents and lending staff are analyzing customer balance sheets and mining for additional opportunities on the deposit side. Total deposits increased $90 million for the quarter. The deposit mix movement was similar to prior quarters as CDs continue to be in focus for the consumer. Non-interest-bearing balances continue to be fairly stable and account for 24% of total deposits. Alternative funding sources remain extremely strong with broker deposits still only comprising 2.2% of total liabilities and the loan-to-deposit ratio still stands well below historical levels at 87% as of June 30.

On the asset side, in period loan balances increased $268 million, highlighted by over $200 million in growth from the community bank regions along with solid growth from CCFG and Shore Premier. On loan originations, we saw volume of $1.19 billion in Q2, with a little less than half of that funded at quarter end. Yields on originations remained strong with an average coupon of 9.20% in Q2. Payoff volume was slightly lower from Q1 at a total of $508 million although we expect that to increase in the back half of 2024, particularly from CCFG. Closing with the previously mentioned strength of our company, all capital ratios remain extremely strong with a tangible common equity ratio of 11.23%, a leverage ratio of 12.3% and a total risk-based capital ratio of 18%.

Couple that with the reserve coverage of 2% on loans at over 340% coverage on non-performing loans, we are in a strong position to capitalize on future opportunities. I want to thank all of our Centennial and Happy State bankers for their dedication and efforts in the first half of this year to produce such impressive results. And with that, Donna, I’ll turn it back over to you.

Donna Townsell: Thank you, Stephen. And now, Kevin Hester will provide some color on the lending portfolio.

Kevin Hester: Thanks, Donna, and good afternoon, everyone. As Johnny mentioned, our ending loan balances grew by nearly $270 million in the second quarter making it the fourth consecutive quarter of loan growth for Home. While loan growth is not the first or even the second most important aspect of our strategy, it is impactful when it occurs, especially when we can string several quarters together like we have recently. Our consistent conservative approach to credit, paired with our forward-looking management during the rising interest rate cycle have combined to facilitate this growth. We also benefit from a large portion of our banking activities occurring in the great economies of Florida and Texas. This was not by accident and is an often-overlooked reason for our success.

Asset quality remains a strength for Home as well. Two occurrences are in play here, one continuing and one new. The continuing trend is that the majority of any new asset quality issues are tending to be from the acquired Happy portfolio. This is not totally unexpected given that, as we said before, we knew that their leverage was higher and that they had relatively higher levels of asset quality issues than our legacy portfolio. Notably though, we also experienced a significant level of their problem assets identified during early due diligence were resolved before closing. As a current example of this trend, we foreclosed on an incomplete multifamily project north of Dallas in the second quarter, increasing OREO by approximately $11 million.

While poorly underwritten and originated at 80% loan to cost by the leader of the defectors on his way out the door just before acquisition, we still anticipate a reasonable outcome. We are less than 90 days from completion with the original contractor who is also a customer and have two serious LOIs that would result in no worse than a small loss upon achieving the CEO. This outcome is due to the excellent work of our special assets group and is underlined by the continued growth and strength in the overall DFW metro geography. The new occurrence I mentioned appears to reflect the shift in regulatory tone, which resulted in different outcomes on a small number of previously reviewed relationships compared to the last review cycle. This includes the memory care facilities, which we have discussed in the past, which were placed on non-accrual this quarter.

They continue to pay as agreed. And while they are actually showing recent increases in occupancy, this hasn’t yet translated to positive cash flow. As for the numbers, NPLs and NPAs increased 3 basis points and 7 basis points, respectively, due to the memory care non-accrual and the addition to OREO, but criticized and classified loans dropped by $68 million. Early-stage past dues are still low at 0.60%. Overall, even with the noise around the occurrence as noted above, asset quality is strong and not something that keeps me awake at that. Donna, that’s all I have, and I’ll turn it back to you.

Donna Townsell: Thank you, Kevin. Johnny, before we go to Q&A, do you have any additional comments?

John Allison: Oh, really don’t. It was — it’s been a great first six months this year and very pleased with. I think everybody is pleased congratulations to everybody. Hard work pays off. And we’ll still continue to work to separate ourselves from the pack. So, with that, if nobody else has a comment, we’ll go to Q&A.

Q&A Session

Operator: [Operator Instructions] And our first question today is from the line of Stephen Scouten of Piper Sandler. Please go ahead. Your line is open.

Stephen Scouten: I guess, I’d love to start with loan growth. Really nice number there, especially in light of what we’re seeing for the industry as a whole, which I think is a bit weaker growth this quarter. So just kind of wondering what dynamics kind of led to that? I know Stephen said paydowns were a little lighter this quarter, but have you been able to pick off business from other folks stepping away from the market and getting a little more aggressive or just kind of good blocking and tackling?

Kevin Hester: Stephen, this is Kevin. So, I think it’s — you saw a good production from the Community Bank footprint. I think that’s — we talked about that last quarter that we were seeing some really good opportunities in our Canadian bank markets and that — I think that translated to some growth. Stephen did mention the lower paydowns. And I think you’re going to see that probably pick up a little bit, third quarter, maybe even fourth quarter, particularly for CCFG. But the pipeline has been good. It’s a little bit lighter right now than it was this time last quarter, I think, but still good. We have a lot of opportunities. We’re talking in our markets with. So, there could still be some good things happen that we don’t have particularly on the pipeline today.

Stephen Scouten: Okay. Sounds good. And then just kind of thinking around M&A, like you said, there have been some capital raises that are seemingly a little hard to understand. I kind of — I’m curious why those banks wouldn’t sell, maybe, John, to your commentary there. And for you guys, if the math still doesn’t work relative to where you’ve seen some of these trades go off and kind of how you think about that transpiring for you all?

John Allison: Well, I guess I can use you on what statement. You can’t fix stupid. So, they run their banks — a lot were in their banks in the ground and now they run them in the ground in in. It just — it makes absolutely no sense to me whatsoever. So, what I looked at was interested in and made a call and started bump that a little bit, but I didn’t want to get into the game. I stayed out of it. I don’t understand some of these people, the moves they made. They run it in the ground. They’re the ones that ran in the ground and then they are the ones that running on the ground again. I said that place, but it’s pretty amazing to me. I don’t — what they’ve done and how they go about it. So there — I mean good luck to them.

I don’t know if you dilute your shareholders 40% to 50%, that’s a major hit. And to overcome that is shocking. So, I don’t know. I really don’t have an answer. I don’t — they’ve actually make given up control of their companies to somebody else. And if we’re going to give up control of this one, it’s going to cause somebody to get in control of this one. So, I don’t think it was a very bright move. That’s what I just don’t believe that. And I think you’re an agreement with me that some of these moves were watching out there are not the best way to go about it. So, I mean, all banks to they’re going to rise and fall together. So if they merge with somebody like Home, then — and I think they’re missing two- or three-point run, well, Home is going to get to two, three point run.

That’s — it’s as broad as it is long, and I don’t understand why they don’t see that. If they think — maybe they think they’ve got a secret sauce and they’re going to outperform home in the rest of the top-performing banks in the country, I don’t believe they’re going to get that done. So I mean, they I won’t say it again, but they didn’t manage it in the first time very well, and they had managed for the second time. Anybody — Steve, you got a comment, Tracy, you can comment on that.

Stephen Scouten: And it just sounds like maybe for you guys, M&A is more of a potential 25 event, if you see turmoil shakes out first from the BCFP and so forth. And in February, March and then see where we go from there. And maybe at that point, we’ve had some rate cuts in the math a little bit more palatable. Is that the right way to think about it?

John Allison: I think that’s the way to think about it. I mean we’re interested and we’re looking a little bit. We’re just kicking the tires. What I’m afraid of is being tied up in a deal. You know we’ve got Worcester capital. We’re making good money and looks like income is improving. So we struggled a little bit last year but we had some had to wind or back in the second quarter of last year. We had some of our investments really kick in a lot of money. But core income wise, this was one of the best quarters in the corporation’s history, maybe number two, and it may be number one. So — and we earned last year’s income this time. So — and I see good things in the daily reports continuing. So, we get that daily report and I look at it every day.

I like what I’m seeing. I like what’s going on. Kevin has been able — his lending team has been able to provide lots of good loans to us over a period of time and continues to do that basically. We get lots of looks at lots of stuff. And just to — we could have done more, but the conservative nature of the Company is not good. So we — I don’t want to have my hands tied, Stephen, in the middle of a deal when real opportunities come up. And I don’t mean this disrespectful, but if they run their bank in the ground, the — I’m going to buy their problem, and it’s going to come on our book. And how long does that impact Home BancShares before we come out the other side? I guess you can do the marks and we can come out the other side pretty quick.

But I just don’t want to do anything to damage on Bancshares where we sit right now, making the kind of money we’re making and seeing the upside that we see. I think I told you that last year, the Home was sitting in the catbird seat, and we really, we’re sitting in a better position now than we were in the first quarter. And I think we’re going to be in a better position in the third quarter, third or second quarter. So, it just continues. As long as Kevin’s team and our retail people control the cost of the funds and Kevin brings the loans, team brings the loan people in. I think you’re going to see good numbers coming from home.

Stephen Scouten: Yes, absolutely. Great quarter. Shareholders should be happy, and I’m sure your wife is still happy too.

John Allison: Well, we’re going to look — let me explain something — we’re going to look at the dividend at the Board meeting Friday. Maybe I’m going to hug and kiss when I walk in.

Operator: Our next question today is from the line of Brett Rabatin of Hovde Group. Brett, please go ahead. Your line is open.

Brett Rabatin: Good afternoon, everyone. I wanted to start with — Johnny, I know your goal going into the year was, hey, let’s make $100 million a quarter and $400 million on the year and people were doubting whether you could do that or not. Given this quarter, I hate to raise the bar for you, but it feels like with some loan repricing in the back half of the year, slowing increases in your cost of funds, it would seem like maybe you might want to tweak that tweak that goal higher. Any thoughts on full year expectations and maybe how you’re thinking about that?

John Allison: Well, the big key here is $111 million in expenses quarterly, and we’ve been able to hold that. And I think we can continue to hold that. There are some things we won’t be able to control, but so far, so good on that side. I’m very proud of our team and how much expenses we’ve cut out. And Kevin, you’re right. I get it. I’m not going to stick my neck out here, but he has — his team has produced and our retail team is handling our cost of funds, and it’s flat — one of my directors said the other day, he said, “I see that spark back in your eye, Johnny, and I said, we’re back humming again. The Company is back humming again. So, I like to see us Home, and I feel good about that. I feel good about the Company. I feel good about what’s going on.

It’s just a matter if we can continue to get the good loans to come in over the third and fourth quarter, like we’ve been able to do the first and second quarter. Let me say we’re looking at some really good stuff. So, I’m optimistic. But I think Chris has about $300 million or so in paydowns coming in this quarter, but he’s continuing to wrap business, too, and we’re continuing to write business. But it’s good to see the legacy footprint step up as strong as it has in the last two quarters. And now Chris, just — I mean, Chris, Chris, he’s going to get pay off. He said there’s nothing wrong to be getting my money. So that’s Chris’ attitude, and I like his attitude. I get what you’re saying about the increased profitability. I’m not going to get too crazy out here right now.

But let me tell you one thing. When they told me at the first year, we were going to not make as much money as we did last year. I think you heard me. I said I can’t get my arms around that. That’s not how Johnny Allison things. So, you know that. I don’t think we’re going to have less income excuse my expression I call that BS. So — and we have — as you can see, it was a personal challenge to me, and we’ve done a great job so from our team has been really performed.

Brett Rabatin: Yes, definitely. The other thing was just you went through the asset quality stuff, guys. And I know the past six months, you’ve kind of been dealing with some cleanup, if you want to call it that, in the Texas markets. Are we essentially kind of through with that and whatever else comes from here would be something you haven’t seen yet? Or any color on the Texas cleanup from here and what might be left to do?

Kevin Hester: This is Kevin. I’m not going to say that we’re completely through. I think there could be one or two things that we’re going to continue to deal with it’s just tough when you’ve doubled interest expense or interest rates over a period of time, you got some folks that are just going to struggle through it. I don’t see anything that I think I went through the scenario that we added this quarter and to be able to work through that and come out with a very, very small loss on a situation like that, it’s a pretty good deal. And that’s kind of step we’re working through. It’s not big problems. It’s just distractions as things you got to work through and work out.

John Allison: We saw another multifamily project, stick its head up, and we’re working on that project, too. We I haven’t seen that one. I saw the first one. And I believe you’ll be pleased. I believe we’re going to be able to work that one out pretty well. It’s a new construction. The other one was an older apartment unit that was refurbed and I’m not sure about that one. But maybe a loss and may not be a loss in it, but we’ll analyze that. That would just kind of came up on us in the last short period of time. So, we weren’t — we were not — that was not on our radar stream. But it is what it is, and that we do a pretty good job of managing our credits around here and we don’t get in a hurry as we didn’t get in a hurry on this multifamily unit out of north of Dallas.

We just didn’t get hurt. When they finish it, they finish it. And if we got to keep it and lease it up, we’ll do that. We don’t — however, we’ve got three or four people very interested in that project with virtually no loss. So, I’m pretty optimistic about that. We take problem credits very onerously around here, and we won’t know who made it and why they made the credit and why they made the loan and did they — is it a danger to our loan loss to service and in fact, the loan loss reserve. So, is a serious, serious when you get a situation like we find a loan that you’ve never been made and we found some of those. But we worked through a bunch of them already, and Kevin’s team does a great job. So, I don’t expect — let me say this, he said nothing keeps me up at night at $300 million reserves gives me a good night sleep, so I can promise you that.

Brett Rabatin: Yes, I bet. If I could sneak in one last one, just back on the loan growth topic. Given this quarter and last quarter, just kind of looking at the trend you mentioned the payoff, would it be fair to say that you guys can grow mid-single digit single digit this year? Or any color on the pipeline relative to where it was prior to 2Q?

Kevin Hester: You talk about the rest of the year? Are you asking for the rest of the year?

Brett Rabatin: Right.

Kevin Hester: I think mid-single digits is going to be — it’s going to be a little tough with the pay downs that seeing maybe lower single digits. And it will depend — it will just depend on originations because I mean we see we see the pay downs coming. So, it will all depend on what originations come in, they can find. A lot of stuff we’re doing is construction. And so, the thing that’s going to get booked in the third quarter is not going to fund until probably first quarter next year is when it will start funding as they work through their equity. So it would depend on some things that fund on the front end.

Tracy French: We’re working on some stuff that funds pretty quick. I was just going to say on the Texas asset quality, a lot of that smaller things. It’s a lot of it, but it’s small things and most of those, if I look back were on banks that happy state acquired. So, it wasn’t a lot of credits that they made. So that part, it just takes a little bit of effort on that. And I go back here on the loan growth, it’s still we’re seeing good opportunities. Just still and that’s South Florida is really seeing some good opportunities. North Florida and Arkansas staying steady and Central Texas is certainly getting some opportunity. I think John and I are going out to meet a new customer they brought in just last week on that aspect. In my final thing to you, Brett, was thanks for raising them all.

Operator: Our next question today is from the line of Jon Arfstrom of RBC. Please go ahead, Jon. Your line is open.

Jon Arfstrom: Thanks. Good afternoon. Can you talk a little bit more about the deposit gathering strategy? You referenced a couple of times the retail bank and their successes. Just kind of what’s the strategy there? And how are you growing deposits?

John Allison: Well, actually, we’ve been run — I’ll let Stephen talk about, but let me start out. We’ve never run a CD ahead. We’re going to strength ahead that because we’re seeing 6% and 550s and 570s, and you can boron cheaper that as a bank. So, my point is there’s so many of these banks in trouble that they’re having to get the money and particularly make it works because when they have to pay back this Fed program in February, March, I don’t know where the world is going to get the money because the Federal Home Loan Bank is not going to own the $1 on something that’s worth $0.50. So, I’m not sure where that goes. We’ve just taken a path of taking one customer at a time and the ads that are run by Home BancShares is that we can pay out all uninsured depositors.

And I’m very proud of that. We’re not going to get ourselves in a position that we can’t do that. So that makes that I think that’s extremely important to on. We’re making a lot of money, but it may be one of the safest financial institutions in the country because of the deposit base that we have. So, our people and on the retail level, know these customers, they’re not — it’s not hot money. They know it’s Mary’s and Fred’s money, and they’re talking to them, and they understand and we preach it we’re not going to be the highest rate in town. We’re not broken. So many of these banks are in trouble and they’re having to pay up for money. And we’re not doing it in. It happens right here in our market, and we’re not doing it. They know that their money is safe at Home BancShares.

So, they can — we can pay every uninsured depositor. And I think Stephen and Tracy took a path to file back to just one to one.

Stephen Tipton: Yes, just going to say. I mean it’s working existing relationships that we have both on the deposit and the loan side. We had a municipal relationship up in North Arkansas here recently that took some additional deposits in. We actually were able to reprice rate down somewhat as well. And then we have an association banking division that we’ve had for some time now and visiting with our president there over the last couple of weeks, there’s — I think there’s a path to some pretty significant growth over the next year, 1.5 years as some of the other bigger banks shy away from some portion of that business. So, and then like I mentioned on the loan side, it’s just we’ve got an opportunity as we work through new loan opportunities and see borrowers that have liquidity at other institutions to capitalize on that at the time that we’re making the loan.

Jon Arfstrom: Okay. Good. And then yes. And I guess it ties a little bit in dust tie into the margin. I guess you had a great margin quarter, and I asked you about this last quarter and you delivered on it. But how do you feel about margin sustainability and maybe the margin trajectory from here?

John Allison: Well, I don’t expect margin to go down. They’re all across of the table here, but I don’t expect margin to go down. I expect margins, my thoughts. We are expanded a little bit in my opinion. They are falling on the table by the way. And that’s just my thought. We — why should it change unless we want to change, right, unless we want to change the rates we’re charging unless we decide to make a change. And at some point, in time, we’ll do that. We’ll — at some point in time in the future, we’ll have a lower rate, and we’ll go pick up a bunch of business with a prepayment penalty on it. That’s a thought that we’ve talked about around. We haven’t done it. We haven’t made that move. But, at some point in time, we might look at that.

There won’t be a time to do that. But facing what we’re facing, Jon, with February, March and the Fed program coming to an end, you have to think about that. Some of these people, that’s why you’re seeing 6s on some of these CDs out here now or over six because they’re trying to get that money in where they can get the money to pay off the Fed and they’re just digging a bigger hole. But maybe some of that will come around on the M&A side, and we can make a trade or two so.

Operator: Our next question today is from the line of Catherine Mealor of KBW. Catherine, please go ahead. Your line is open.

Catherine Mealor: I just had a follow-up on the margin question. Just if we look at loan yields, Stephen, you gave some information on fixed rate repricing in the back half of the year, but we saw a really big increase in loan yield this quarter. So was all of that kind of natural, is there anything kind of onetime within that that may have driven that? And what kind of — maybe what kind of pace of increase in loan yields would be fair to expect over the next couple of quarters?

Stephen Tipton: We did have — we had one relationship in the quarter that repriced. It was probably $175 million or so that we repriced 300 basis points or so, give or take. So that was — I’ve kind of been out there for the last year or so that we knew was coming. So that provided a little bit of a little bit of lift this quarter. But yes, I mean we — if I look across on a monthly basis, over the last four months or so, we’ve seen the core loan yield ex of income up 6, 7 basis points a month pretty consistently and even into parts of last year, kind of the same thing. So, loans that pay off or coming off in a lower yield as the new originations come on, they’re either funding out in the future at nine plus, give or take. So, I think we should continue to, to Johnny’s point. I mean I think it’s really relative to what happens on the deposit cost side, but I think we can continue to outpace the increases there with the loan yields.

Catherine Mealor: Great. And then just on balances for average earning assets, what would be your expectations for — I guess, would you continue to expect modest rundown in the securities portfolio? And then also on just the liquidity levels, which remain really high. What are your plans assume plans are to kind of keep that elevated for the rest of this year in until you would say at the BTFP early next year, but just kind of curious on excess liquidity balances?

Stephen Tipton: Yes, that’s the plan today. We’re sitting on $900 plus million in cash or so today. And with the BTFP program ending in March, we plan to carry this level of cash through to that point to retire it. And on the securities portfolio, we’ve really kind of been in mode of letting it run down some and use this to either fund loans or kind of replace a deposit loss potentially or that we had in the past. There’ll be a point where for pledging purposes and things we’ll need to be mindful of that, but it probably still has some room to come in.

John Allison: But we’re looking please. If we see something, Catherine, we’ll step up. If we see something that makes some sense for us, we’ll buy security. We look at — I mean we’re looking at different securities have bought much. So, but we — we looked at one today, I send him one today to look at. I don’t know what the rates are going to come out on Citizen Group doing a deal, good bank might buy some of that if the rigs right. I don’t know he’s looking at it and heard back from me.

Catherine Mealor: Okay. Great. But still modest. Is there a size or kind of percentage of average earning assets you wouldn’t want that to go below?

Brett Rabatin: Size or what?

Catherine Mealor: Of the bond book?

Brian Davis: Bond portfolio. I mean we — right now, we’re just planning on letting it kind of run down. We may make some CRA purchases here and there, but pledging.

John Allison: Yes, CRA pledging. Outside that we want run day unless — I mean, we’ll pick one of once in a while, we’ll find something gets out of balance and we get good rates on it. We’re getting a reset on some of that right now. We had about — I don’t know we got out of balance back a couple of years ago, and I think we bought it back $150 million worth of securities doubling triple its and they’ve — it’s reset time, so they’re going to go down a little bit on us. So, some of that, we kept and some of that we went — took the cash.

Operator: Our next question today is from the line of Matt Olney of Stephens. Please go ahead. Your line is now open.

Matt Olney: I wanted to follow up on Jon and Catherine’s question on the margin. We were to kind of walk through the margin into next year and we were to see some lower interest rates. I’m curious kind of what you think the banks, the reaction would be to lower rates. And looking at the entity and disclosures, it looks like the bank is still asset sensitive, but I know these are just models. So just kind of looking for some color on what the margin could look like at the fact were cut a few times next year?

Stephen Tipton: Matt, it’s Stephen. Yes. I think from a modeling standpoint, I think we show down 4% or 5% and a down 100 rate scenario. That’s what the model shows. I mean the conversations we’ve had around here just are around how aggressive we can be from a deposit beta standpoint. We’ve got call it, $5 billion, give or take, in variable rate loans that adjust within a quarter’s time, but we’ve got $11-plus billion in interest-bearing checking and savings and $1.7 billion in CDs that will reprice over time. So I think some of that’s a function of how aggressive we can get, what happens if the market and how other banks may follow potentially on the deposit pricing out there, what ads and those type of things that we’re able to with, but I was talking about one of our regional presidents this morning, and he was looking at his maturing CD portfolio over the next couple of months and I think he has some room even right now absent any rate increase yet to be able to lower some of those seats as they come through.

So, I think it predicates a lot on that. And then we’ve got a decent size book of index deposits, municipal deposits that are tied to generally tied to the 13-week T-bill that will move when it’s there’s some conviction around interest rates.

John Allison: Having said we’re going to try to maintain margin or increase it. Get me a but with, Matt. I’ll.

Matt Olney: I believe it. I wouldn’t doubt it. I guess just changing gears going back to the stock repurchase program. You mentioned it was active in 2Q and now the stock goes quite a bit above kind of those average levels in 2Q. Curious kind of what the appetite is that these current levels of the buyback. And given the M&A thoughts you mentioned before about some kind of a fertile market in the next year, should we assume that capital levels just continue to build here in the back half of the year?

John Allison: Yes, I think that’s correct. But we never get out of — we’re always in the market about stock. Maybe some blocks that come around. But we’re always in the market to buy stock. And I recognize Brian Davis says that’s diluted to us, and he said, you always say you’re not going to dilute and then you dilute yourself by buying stock with. I think we’ll probably — I think our Board will probably look at a dividend increase tomorrow. And hopefully, that — I think it’s time for that. We have people asked us last time, why didn’t we do that? And I were just a little nervous about what this year was going to be. I mean it’s been kind of everything has been a little squirrely around the economy, but it appears to be settling down somewhat, particularly for us, things have settled down, and we got a run rate out here that’s really running good.

So, I think we’re going to be all right for a while. And when they start moving rates up and down, someone said, what do you want to happen as far as I can certainly leave things just like they are. Just don’t mess with anything because it’s very nice to see what we’re doing. And when you look at that daily report, and it continues to improve over the same day last month, you just get a smile on your face.

Operator: Our next question today is from the line of Brian Martin of Janney Montgomery. Please go ahead. Your line is now open.

Brian Martin: Say, just maybe one question on the expenses. It sounds like they’re a pretty good level. But Johnny, you mentioned some potential, maybe, I don’t want to say pressure, but some things out of your control. I mean, I guess, the expenses given what you’ve done I guess the outlook is maybe there’s kind of sustainable around this level? Are there other things to think about as far as that drifting a bit higher?

John Allison: Well, we made a pretty good cut here we still are not where we were before that. We run a right of 42 this month adjusted what you adjust for that 2 million all adjustment or [indiscernible]. That’s pretty good. Can we improve that? We can, if we have to. I think we need to hang in this 111 is my number. So hopefully, we can hang into that into that 111. If we see it going up over that, we’ll try to make corrections.

Brian Martin: Got you. That’s helpful. And then.

John Allison: Yes. When I’m sitting at home and I’ve just got my notepad and I’m running plan with my numbers, 111 is my number.

Brian Martin: Got you. Okay. in the — I guess if you — the payoffs, it sounds like is it — you talked about CFG having some payoffs in the second half? I guess there’s a third quarter? Is it just really $300 million, is that kind of what you think in the second half of the year? Or is that the third quarter type of number?

Kevin Hester: Brian, this is Kevin. I’m going to let Chris cover that, if that’s okay.

Brian Martin: Yes, Sure.

Chris Poulton: That’s kind of my number for the third quarter. I mean, some of that might slip to the fourth quarter. We already had a little bit of that this month and such. So, I think that’s a third quarter number. Again, some might flip through the fourth quarter, and then they’ll have a little bit more in the fourth quarter. We didn’t have a lot so far this year because we didn’t have a lot scheduled to. But I think Johnny mentioned earlier, I like payoff, and we make the loan with the intention to get repaid. So, when that happens, we tend to not celebrate when we make the loan. We tend to celebrate when we get paid off. So, I’ll probably celebrating a lot in the third quarter.

Brian Martin: Okay. Good to hear. I guess and Johnny, I guess, to your point about potentially lowering maybe loan yields, if not, may I guess, are you getting any pushback today? I mean I think you said that the yield was 9.25 or maybe if that was — maybe I missed that, but on new originations. Are you getting any pushback on that such that if you start getting a few payoffs just to kind of overcome those you get a bit more volume? Or I guess, I know some of that’s — if you have M&A opportunities, you may push it back a bit. But is that part of it here with some payoffs coming that at least trying to think about maintaining origination/

Kevin Hester: Well, this is Kevin. I’ll just say, yes, we always get pushed back registries that’s — we ask our folks to do the best they can do. And because of that, they’re going to get pushed back. Definitely, we’ll say that. Johnny mentioned lowering rates. I mean that’s not something we’re necessarily looking toward. I think what he was saying is that if there’s an opportunity out there that we’re really feel like is a very good credit opportunity that requires us to lower our rate to get it. We have the ability to do that if we choose to do it. We — that’s not been our something we’ve done a lot, and we wouldn’t do a lot of it, but in the right situations to get a customer we really want or be to do something maybe non-CRE that that doesn’t impact the concentration levels, then we certainly have the ability to do it.

Brian Martin: Got you. Okay. All right. Yes. And I just want to make sure I understand. It seems like there’s an opportunity, at least on the M&A side, and we’ll see how the loan volumes hold up here, but it sounds like the originations are still — the opportunities are still there. So, there’ll be time to consider that. So, all right. That’s all I had, guys. The other stuff was answered.

Kevin Hester: Thank you very much. Appreciate.

Operator: With no further questions in the queue at this time. I would like to hand the call back to John Allison to conclude.

John Allison: Okay, back to me. Thank you. It was a great quarter, and Home is running very smooth right now. So, I want to thank everybody for their efforts and what they’ve done, and we’ll talk to you here in the next quarter. And I hope the next quarter is as good or better than the one we just completed. Thank you very much.

Operator: This concludes today’s conference call. Thank you all for joining. You may now disconnect your lines.