Home BancShares, Inc.

Good day and welcome to the Home Bank Shares, Inc. second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Donna Townsville, Director of Investor Relations. Please go ahead.

Thank you, Rocco. I am Donna Townsend, Director of Investor Relations, and our management team would like to thank you for joining our second quarter conference call. Reporting today will be our Chairman John Allison, Tracy French, President and CEO of Centennial Bank, Brian Davis, our Chief Financial Officer, Kevin Hester, Chief Lending Officer, Chris Fulton, President of CCFG, John Marshall, President of Shore Premier Finance, and Steven Tipton, our Chief Operating Officer. Before we jump into the numbers, I wanted to highlight a couple of developments that occurred in the second quarter. First, you may have seen our announcement earlier this week where Homes wholly owned subsidiary Centennial Bank announced the appointment of a new Director of Corporate Social Responsibility. This move highlights our intention to enhance the development of strategic initiatives supporting Centennial Bank's focus on environmental, social, and governance topics. While these pillars of corporate citizenship have always been important at Centennial, we feel like a more formalized program will ensure that we continue to keep ESG top of mind. Also, there continues to be discussion around fintech partnerships. Home recently joined in with 65 other banks to form an investment fund designed to help accelerate technology adoption at community banks across the United States. The partnership brings together seasoned fintech entrepreneurs and bank experts to invest in the next generation of companies, changing the way financial institutions and their customers move, track, and interact with money. These are just a couple of examples that show Home's desire to continue to be one of the best banks in America. Now, to transition to what you all called in for, our first report of the quarter will come from our chairman, John Allison.

Thank you, Donna. That's pretty exciting about the FinTech. That's somebody that had ESG for us. I think those are positive developments for our company. Good afternoon, everyone. Thank you, Donna. And, again, welcome to Home Bank Show's second quarter 2021 earnings release and conference call. The performance for the second quarter was another solid quarter for our company with $0.48 EPS and $71.9 million in profit, good asset quality, and decent expense control. Loan demand is the frustrating part of the equation. While sitting on $2.7 billion in cash and no reasonable place to invest for a decent return, we've decided to hold close and be patient and do not set our future. We may be wrong, but it is a decision that we made, and we're holding tight. If we're right, we think we're only six months away from raising rates, which may include an earlier period of time of tapering in purchases by the Fed. I pay a lot of attention to Jamie Dimon, and I agree with what he said. He's sitting on $500 billion, and he says patience is certainly the key here because rates are going up. As I said in the first quarter, we had to wind our back, and a lot of things that we've been working on came home to us. I meant that as a pun, H-O-M-B. During the second quarter, we had the breeze to our back with continued income from investments we'd made last year. Since going public in mid-'06, We together have been through the worst financial collapse since the Great Depression, and the worst pandemic the world has ever known may be worse than the one in 1970. By the way, as you well know, throw in a couple of hurricanes in Florida during that time. These huge events created fear, uncertainty, and lots of anxiety for all Americans as well as people throughout the rest of the world. I want to thank you all for your support during these very difficult and stressful times. In addition to all the events that happened, we were going over $10 billion and incurred an addition of $2 billion. How funny is that? We blew through $2 billion, but $10 billion was a big mark for us. And all the associated expenses, the adjustments for $10 billion took us longer and cost more than we ever anticipated. New terms to our vocabulary like enterprise risk management, CFPB, bank secrecy, just to mention a few. Actually, one exam, less than five minutes, the next exam was spent on capital, earnings, asset quality, margin, and liquidity. I thought these were the most important components to running a successful and profitable banking organization. The other 50 minutes was spent on things I'd barely heard of for the last four or five years. Through all the unseen and crazy times, Home has continued to produce peer-leading results with ROAs running from 180 to 190 and some over 2%. We have managed her through the crisis regardless of pandemics, hurricanes, or COVID-19 viruses. Whether the business was good or bad, regardless of interest rates going up or going down, or adjusting to what plan of attack that our management decides on, that's what good management teams should be doing. Let's take a walk back over the last three and a half years, 2018, 2019, 2020, and the first half of 21. And I think you'll agree with me that the consistency of homes earning is impressive, even without all the unusual circumstances we found around us. I'm going to read 2018, 19, 20, and 21. So in 2018, we did a 209 ROA. These are adjusted numbers. We did a 209 in 2019, a 196 in 2020, a 192 in the first six months of this year, a 197. That converted into income of, in 2018, $303 million, in 2019, $294 million, in 2020, $309 million, and the first six months of this year, $167 million. The total revenue net after interest expense was $663 million in 2018, $662 million in 2019, $694 million in 2020, and $365 million in 2021. You know, I think you have to agree with me that these numbers are pretty impressive and shows the stability of this corporation and how the management team adjusts to the situation today. that's in front of us. I cannot ask for much more performance than those impressive numbers. As a result, we decided to pick up our M&A tool out of the toolbox. We've worked on a couple interesting opportunities, but to no avail so far. I was visiting with a very smart, good friend in the money management space, and I was telling him the difficulties we were going through. I told him, I said, it appears The bankers are screening all banks to see who can pay the highest price, and then they go out to potential sellers and say, hey, look how much home could pay for your bank or someone like home. There's not many like home, but there's a few of us that trade at a pretty high multiple tangible book. It's almost like a pocket listing that a realtor has when the potential seller says, well, my home's not for sale, but if you can get somebody that's crazy enough to pay this price, He said, then my house will be for sale and you can sell it. Kind of like a real estate pocket listing. My friend laughed and said, they don't work. And I said, what doesn't work? He said, the M&A deals just don't work. He went back to 2010, looking at all transactions, and there were very few that worked. Very interesting comments. He said, on announcement of a deal, Bank A buying Bank B, he sells the seller immediately. and shorts the buyer. I said, why would you do that? He said, well, that's probably the highest price that the seller's going to have. Can't expect it to go up because it's tied to the buyer's price. And he said, besides that, I don't get paid until I sell and cash the money out. He said 98% of the deals are diluted to the buyer. If it's a three- or four-year earn-back to a tangible book, why would I sit around for four or five years waiting for that earn-back to come back to get some money back to even? The only deals that make good sense are non-dilutive transactions that have all the deal costs calculated into the transaction and experience acquirers. He said, you'll never hear this from an investment banker, but remember, they get paid whether it works or it doesn't work. He said, keep your discipline. Why do you think they want to do a transaction with our own? It's because your stock is good. And why is your stock good? It's good because you're disciplined. Why are you disciplined to make your stock good? It makes lots of sense. Another interesting point that came from the matrix of the deals is the higher price the tangible book paid. It had a run from like one four times tangible book all the way up to two three times tangible book. And the higher the tangible book multiple, the longer the market punished you and put you in timeout. And in some cases, it was years. because they're waiting on the Earn Back the Tangible book, and nobody wants to hang around for that because nobody keeps up with it and nobody calculates. We'll continue to look for like-minded partners in the space in addition to this one, the integration risk. However, a lot of that integration risk can be mitigated when you find like-minded partners. Dilution is the killer. If a buyer dilutes himself today to buy your book and has a four-year earn back to tangible book, don't you think he'll do it again before four years and again and again? It is conceivable that you may never get your tangible book back to where you started. One way to look at it is home's market cap is $4 billion based on a multiple of tangible book. If I dilute my shareholders by 5%, I've just reduced the value of my company by $200 million. Now, that tells you why smart money managers short the buyer, because if it's a diluted transaction, the company is not worth today what it was yesterday. If there is no dilution, there is no reason to short the buyer. Let's say that again. If there is no dilution and it's an accretive transaction, there is no reason to short the buyer. If the company has local shareholders, And it's private. The odds of negative treatment by the market is substantially reduced. If a company's owned by a bunch of hedge funds, it really complicates the transaction even more because they're gone by daylight. If it's announced today, in the morning they'll be gone. They all sell. To me, sophisticated bank investors, individual investors, pension funds, quality portfolio managers, and ETFs, and then there's the hedge funds. It's important to analyze the stockholder ownership, before engaging in a transaction. We still are engaged on the M&A, but are looking for other opportunities that could increase our earnings. We have a $300 million sub-debt that is callable in April at $5.625 and $71 million worth of trust preferred. We have been putting back $5 million a month, and in April we will have $150 million set back. We may request, I don't know, Tracy, you think about requesting the very latest allows to do a special dividend. Is that correct? Working the numbers as you speak. We're working the numbers. We're going to send them to them. So we may request a special dividend, and if they were to approve that, then we could pay off the entire debt. That's about $17 million pre-tax, and it runs at about $0.08 EPS. That's without doing the trust preferred, and we might save those and do them at a little later date. But all told, we're doing both. That's about $0.09, maybe $0.10. I would anticipate us engaging at least on half of the subdebt and maybe all of it, probably all of it. With inflation running at historic levels, I guess you saw June. It was up $0.09. June was $0.09. May was $0.05. So that's 1.4%. in 60 days. Kevin, would you say that equated to?