Home BancShares, Inc.

Good afternoon, and welcome to the Home Bank Shares Incorporated third quarter 2021 earnings 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 telephone keypad. 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 Townsall, Director of Investor Relations. Please go ahead.

Thank you, Gary. As he said, I'm Donna Townsall, Director of Investor Relations, and our management team would like to thank you for joining our third quarter conference call today. Reporting today will be our Chairman, John Allison, Tracy French, President and CEO of Centennial Bank, Brian Davis, our Chief Financial Officer, Kevin Hester, our Chief Lending Officer, Chris Fulton, President of CCSG, John Marshall, President of Shore Premier Finance, and Stephen Tipton, Chief Operating Officer. And now I am happy to turn the call over to our Chairman, John Allison, for our first report on the quarter.

Thank you, Donna. I better turn my phone off. We don't want to hear Amarillo in the morning, right? That's what I have on my phone. I'll be in Amarillo in the mornings. Good afternoon. Welcome to Home Bank Share's third quarter earnings release and conference call. I have with me today most of Home's executive committee, and they will be here to present as well as answer any questions that you might have. Home had another very productive and solid quarter with earnings of $75 million, or 46 cents per share. During the first nine months of 2021, Your company earned $245,664,000, or $1.49 a share. As we would have said in the past, that is a world record. Home is again marching towards our $300 million-plus goal for the fourth year in a row. I can't ask much more of that out of our people. You know, if you pull out $3 billion in excess capital, which is virtually earning zero, the company is running right at a 2% ROA. Even though we're running a 168 now, when you pull that out, it runs a 2. We've talked about adding additional earning assets through M&A for several years, and I'm happy to welcome our new partners with Happy Bank, both shareholders and employees, to the home banks of this family. When I think about if I could choose to operate in the two best states in the United States that are both business-friendly and tax-friendly and have the largest incoming demographic movement, it would be Florida and Texas. Panhandle to panhandle. Well, you can check those boxes. Florida, check, and Texas, check. The happy deal will continue to propel the future of home and build long-term shareholder value of our combined companies, and we're certainly more valuable together than we are apart. As I said on the deal announcement, if this deal doesn't work, none work. The complexities of making a bank transaction triple accretive in today's environment is not easy. If the acquiring bank is not patient and disciplined and badly wants a deal, that's probably what they're going to get, a bad deal. Doing a deal for the sake of doing a deal is not in our DNA. As home's single largest individual shareholder, I can assure you if it works for me, it works for our shareholders and employees of both banks. This transaction checks those box. We'll come back to the happy deal later in the presentation. Let's go to the highlights of Q3. and the first nine months of the year. As I said earlier, we earned $75 million and 46 cents, and through the night, that's for the third quarter. In the nine months, earnings are $245.7 or $1.49, and I said that's a company record. Third quarter showed strong loan recovery. Even though we were down 64 million XPPP for the quarter, September was up 55 million XPPP. Unfunded commitments of loans... and credit lines was up $250 million to $3 billion. This is a confirmation of our earlier statements that we said on our calls that we expected loan growth to pick up in the second half of the year. I don't want to jinx our forecast, but it's certainly nice to have the optimism for good quality loan growth, and I mean quality loan growth. Loan yield is at 5.64%. The excess deposits is putting pressure on our return on assets, creating an embarrassing 1.68. However, without the excess capital, home is churning at a powerful 198. Most companies would be proud of a 168, but that number is unacceptable at home. We could have pushed some money off balance sheet. We could have bought some low yearly investments. Or we could have involved ourselves in the match to the race to the bottom on loan yields. We did none of that or very little of it. Patience in this one was tough. But we're playing the long game, and we're not looking for a quarterly pop. And believe me, we could have played if we wanted to. Actually, as Jamie Diamond said, having excess liquidity could be your friend. With $3 billion in excess liquidity, it's not all bad with rates appearing in an upward trend and optimism about loan growth for 2020. Excess liquidity may be an asset. Well, the quarter maintains strong asset quality, strong ratios to non-performing, and I think record low past dues. Very strong capital ratio, and even with a bulging capital ratio, Holmes ROTCE was 17.39. We beat on revenue and efficiency ratio of 42.29. That's okay, but not our best. Non-interest expense was up 8 million year-over-year. Four million of that was basically a data processing system for our loan program. One million of that was merger expense and a million three and others. On a late-quarter basis, we're up $2.7 million. As I said, a million in merger and $1.3 and other expenses. Back to Happy. Excuse me. Happy has a great senior leadership team led by their founder and backbone of the company, Pat Pittman. Pat will be joining the Home Bank Shares Board, and we're looking forward to seeing him. The CEO of the company is a great operator, Michael Williamson, and we look forward to having him head up Happy Bank for us in Texas, wherever we might go in that state. He will be the guy. In addition to a very strong loan team and a very experienced president group throughout the entire network, don't forget the quality of HR, investments, trust, marketing, BSA, CRA, ERM, and compliance. They are all top drawer. It is our goal to keep as many of their people as we can. The quality of Happy's people is even better than we thought. Many of their people are more impressive even than ours. Asset quality, however good, is not as clean as Holmes' asset quality, but it's certainly better than most we've seen. With yield on loans better than Holmes', which is highly unusual and the hardest part of the equation to achieve, we think getting Happy's expense in line closer to Holmes' is the challenge at hand. Demographic movement of people and companies are favoring Texas and Florida from Panhandle to Panhandle. After this acquisition completes, we'll have 222 branches from Key West to Pensacola, including Orlando, Miami, Fort Lauderdale, Tampa, Destin, Palm Beach, and in Texas to mention a few, Austin, Round Rock, Dallas, Fort Worth, San Antonio, Amarillo, Lubbock, Tampa, Plainview, Dumas, and, of course, Happy Texas, to mention a few Texas branches. We're poised to continue the growth of our company as we have come from $24 million in 1999 to when this transaction completes to $24 billion in assets. That is providing it all goes well. Let's talk about deals in general. You know, as we looked at these M&A deals over a period of time, they just haven't worked. Just virtually none of them work. Actually, there's only been a few work in the last 10 years, and I mean a handful, outside of merger of equals, whatever the hell that means. I'm not sure what that is, but there's been very few work. Why don't they work? You know, most acquirers have not fixed themselves. I mean, they were poor performers before, and they go buy another poor performer, and they just make a bigger pile of poor performers. Okay. I think the group thought I was going to say something else. But anyway, and the buyers pay too much for a deal. They pay too much, and they dilute their own tangible book value, creating years of earnings to get back to just even. You've all heard the statement, two-year earn back, three-year earn back the tangible book. Well, I can assure you there is no dilution in this transaction. It becomes accretive to both shareholders on both teams, which will be our shareholders day one. Buyers cannot execute on cost saves and do not have the knowledge, experience, or the reputation to do that. Home has all of the above and checks that box. Deal costs and seasonal double accounting costs must be included in the purchase price of the deal. Check that box. Focus on the deal at hand and not try to do multiple deals at once. Regulators frown on that. And you can check that box. Actually, we had just announced the deal when somebody came up to myself and said, I got a deal for you, Johnny. I want you to look at this bank. And Donna said they won't even let the body get cold before they try to bring you another deal, Johnny. And the Wall Street Journal picked up on that, and I was quoted with that. That's actually a Donna Townsend quote. So I want to be sure you feel better about that, Donna, that you got credit for that quote.

Well, I'm not sure, but thank you for the credit. Okay.

Home remains focused. You know, the buyer has to almost have a premium in their bank stock for any deal to have a chance to work. And to be fair to the seller, or it certainly will be diluted for sure. Home has that. Home has had a powerful bank stock, large enough to scale to make a difference and impact earnings. Happy Bank at $6.2 billion will be 20% of our assets, and that checks that box. You need to pay lots of attention to who the owners of the bank are. Is it hedge funds, mutual funds, long-term holders, flippers? What is it? What is it that is the makeup of the shareholder? Because you know as well as I know, a lot of these funds will be sold. They'll sell the stock before the sun comes up in the morning and short the buyer. Well, in this case, we're acquiring Happy is Private with $1,300. individual local shareholders, and we're proud of that, and we think that private is better, and they can't arb our deal. They can short home if they want to, but they can't arb our deal. Remember that investment bankers get paid regardless if it's a good deal or a bad deal, creative or dilutive. Tell your banker, tell your investment banker, be sure who you hire and who you're doing business with first, and then tell your banker your limits and stick with that. The experience of M&A. This is home's 25th deal, and probably for Happy, I think it's seven or eight deals. So having experience on both sides worked out well for us, and that checks that box. Good buyers have to remain disciplined and have to have the ability to walk if the seller pushes them into dilution. Because unbeknownst to the seller, he's shooting himself in the foot and the buyer at the same time. Home is disciplined, and we'll walk and have walked on several transactions in the last year or two. A fund investor said to me, fund, not a fund, F-U-N, F-U-N-D investor said to me, why should I hang around and see three years or four-year earn back? He said, I get paid now, and the only reason I have to stay around is if I can arm the deal. Well, you can't do this. They can't arm the deal in this deal, so check that box. Not only I give credit for saying that Holm, he is the analyst that said Holm threaded the deal perfectly. You can see the complication of the process, but both investment bankers, Sandler and Stevens, understood the limits and worked towards achieving the ultimate goals of creating one of the most outstanding deals of the last 10 years. That is evidenced by one of the few stocks that went up on announcement. Donna, I guess I've talked about the quarter, and I've talked about what made the deal work with Happy Bank. And I've got a little windy today. I apologize for that. But it was a lot of work. And as things moved, it was a fluid situation. And I have to give Stephen Tipton credit. He ran this book on this deal and did an outstanding job for our company. But it just kept moving. It's just like water flowing. It's just sometimes good, sometimes bad days. But overall, it worked out to be a great transaction for our shareholders, for the happy shareholders. and they should be, I think, one of the best deals that's been done in a while. So I'll hush now and let you have it back.

Thank you, Johnny. It's always nice to hear your thoughts on things and to hear about setting new records and the excitement that's building panhandle to panhandle on our acquisition. But I think the criteria for a successful acquisition is definitely an important conversation. So hopefully everyone enjoyed your commentary there. Thank you. And now we will hear from Tracy French with results for Centennial Bank.

Thank you, Donna, and good afternoon to all. Johnny said he was a little windy, so we'll try to give a little color behind the numbers that he did a while ago. But I'm going to speak about Centennial Bank for the first three quarters and nine months of the year. The rest of our team here will share some continued strong numbers that Johnny has mentioned in his comments earlier. Again, back to Centennial Bank, the total revenue for Centennial Bank was $178 million this past quarter. To make that year-to-date, $546 million, which that number is just really proud to be associated with. The strong revenue number with our efficiency ratio coming in at 37.54 year-to-date. Still has the bank over 2% ROA, and that's including the excess evaluated assets that we've talked about with the excess funds. Phenomenal numbers for Centennial Bank and the crew. The bank's return on average tangible common equity non-GAAP closed the first nine months at 19%. Johnny, that kept the P5 NR Allison ratio for the bank above the 60% level for the year at 61.31%, which is really proud of it. That interest income has remained steady due to the efforts of all of our regions managing their loans and deposit rates and terms, along with the excess funds at a low cost today. That's something that is extremely important for our company. Centennial Bank's non-interest income has increased by 16% with the great work of the service charge area, our mortgage, and all other managed areas of the bank. I'd say that our bank's core ROA for the first nine months is over 2.59%, and I think all of our regions were well above the 2%, and I'm talking about the community banks with our New York operation and marine operation. They get a little bit better than that, so exceptional numbers. All of our community bank regions have shown phenomenal growth in core deposits with four regions over 20% growth compared to this time last year. with our Alabama region leading the growth percentage over the year at 43%. As we continue to stay disciplined and committed to not make short-term gains that could affect our company, long-term shareholders should feel very comfortable at this state. Our company is well positioned for strong capital, the best asset quality we've seen as we deal with the potential inflation challenges going forward. As Johnny has mentioned, we are excited and happy, and we're glad that we have met and worked with Mr. Pat Hickman, the chairman of Happy State Bank, who has built an outstanding bank in Texas over the years and made one heck of a successful story in our banking world. We do look forward to working with Michael Williamson, the CEO, as he heads our expansion into Texas. As he joins our regions, I look forward to him speaking. going up the notches along the way to be the top region, Johnny, as soon as he possibly can. Who's that? Michael. Get him in the mill there. I'll be glad when he gets there. But we have met a lot of their directors, great, great staff that we've been able to meet, and we look forward to these people taking our company to the next level.

Thank you, Tracy. Appreciate that. Now Brian Davis will give us the financial report.

Thanks Donna. Today we reported 144.6 million of net interest income and a 3.60 net interest margin for Q3 2021. Our third quarter net interest margin decreased one basis point from Q2. Today I'd like to go over a few net interest margin items. First, during the third quarter, we had 232 million of PPP loans forgiven. This forgiveness causes the acceleration of deferred fee income for the loans forgiven. Our PPP deferred fee income increased $3 million from Q3 to Q2. This increase was 7.3 basis points accretive to the NEM. Second, as a result of the excess liquidity, we had $338 million of additional interest-bearing cash in Q3 compared to Q2. The excess liquidity was 7.6 basis points diluted to the Q3 NIM compared to Q2. Third, there was event income in the margin for Q3 of 3.5 million compared to 942,000 for Q2. This had a positive impact to the Q3 NIM of 6.3 basis points. Fourth, accretion income for Q3 was 4.9 million compared to $5.8 million for Q2. This had a negative impact to the NIM of 2.3 basis points. One other item from a historical point of reference, the Q3 excess cash versus the historical normal cash balances has a negative impact to the Q3 NIM of 72 basis points. That's a big difference. I'll conclude with a few remarks on capital. The goal at Home Bank Shares is to be extremely well capitalized, and I'm pleased to report the following strong capital information. For Q3 2021, our Tier 1 capital was $1.8 billion. Total risk-based capital was $2.3 billion, and risk-weighted assets were $11.7 billion. As a result, the leverage ratio was 11%, which is 120% above with a well-capitalized benchmark of 5%. Common equity Tier 1 was 15.2%, which is 134% above the well-capitalized benchmark of 6.5%. Tier 1 capital was 15.8%, which is 98% above the well-capitalized benchmark of 8%. And finally, the total risk-based capital was 19.6%, which is 96% above the well-capitalized benchmark of 10%. That said, I'll turn the call back over to Donna.

Thank you, Brian. And now for an update on loans is Kevin Hester.

Thanks, Donna. My comment 90 days ago was that the first half of 2021 was much like we anticipated. The same still applies after the third quarter with continued declines in PPP loans through forgiveness, coupled with even better credit metrics. We discussed the possibility for loan growth in the second half of 2021, and while non-PPP loan balances dropped in Q3, the amount was less than previous quarters and the month of September reflected an increase in loan balances. Pipeline for the fourth quarter is still solid and reflects what we expected to see when we said that loan growth could return in the last half of 2021. As Brian indicated, PPP balances were reduced by $232 million in the third quarter, And that leaves us with a total of only $247 million remaining or about 20% of our total fundings from all rounds. COVID modified loan balances dropped by $36 million in the third quarter to $228 million overall. Hotels make up two thirds of that balance and their overall recovery is still underway. Our monthly tracking shows solid improvement across the board. and we feel very positive about the prospects for these credits in 2022. Movement back to P&I will be required before any distributions can occur, and we see many with a pathway to that occurring with a solid spring season and or continued improvements in travel. Credit metrics continue to improve in the third quarter to record-setting levels. Non-performing loans improved to 51 basis points, which is two basis points below pre-COVID levels, and down seven basis points on a linked quarter basis. Non-performing assets are even better at 29 basis points, down 15 basis points below pre-COVID levels, and down six basis points on a linked quarter basis. The allowance coverage of non-performing loans is at 469%. That's up 61 percentage points on a linked quarter basis. As Johnny said, Early-stage past dues reached a new low at 39 basis points, which is 40% below where we were pre-COVID. There's no substitute for excellent asset quality, and nothing creates more distraction or will get you in trouble faster than poor asset quality. This has always been the highest of importance at home, but our folks have taken this to a new level. I appreciate their diligence and commitment to a pristine loan book. pilot program for our new end-to-end loan origination system was rolled out this week, and about 25% of our lenders are working in the system as we speak. I want to thank those lenders for being on the leading edge of the project. I also want to thank our design and implementation staff for all the effort over the last 18 months. It seemed like we would never get here, but they've done a great job and are supporting the front line impeccably this week. I'm very proud to work with this great bunch of people across our footprint. Thanks again for all your efforts in making Home Bank Shares a top-performing company. With that, Donna, I'll turn it back over to you.

Thank you, Kevin. Now the street is happy to hear about loan growth in September, so hopefully that's kicking off a positive trend. Now we will turn to Chris Bolton for an update for CCFG.

Thank you, Donna, and good afternoon. CCFG achieved solid growth and originations during the third quarter. The portfolio grew approximately $75 million to $1.63 billion on originations of $320 million. In particular, the commercial real estate portfolio grew by over $100 million, while we saw modest declines in the CNI book as several corporate borrowers paid down facilities with excess cash during the quarter. We would expect to see the CNI facilities redraw in the coming quarter or quarters. As a result of the originations performance this year, our unfunded commitments have grown to just under a billion dollars, which is up about $100 million from the beginning of the year. In the past few calls, I've spoken about delays in the closing process. Supply chain disruptions continue to impact our market. We did see an increase in closings during Q3 as several transactions cleared the pipeline during the quarter. We do expect the delays in the deal process will persist, however, and I remain pleased with the demand for our products and with the overall pipeline.

Thank you, Chris. I appreciate the report there. Now for an update on voting is John Marshall.

Thank you, Donna, and good afternoon. The boat business in the third quarter seemed to offer something for everyone in terms of soundness, profitability, and growth. As the COVID cloud lifts and our business tests the post-COVID guardrails, that are defining our new normal. Importantly, COVID has had no detrimental impact on the asset quality in our book. Delinquency is down to 20 basis points, and if a harbinger of default, non-accruals are similarly down to 22 basis points. Both are personal bests, if you will, since we joined Centennial four years ago. Consumer originations of $155 million year to date maintain super prime status, with average FICO's of 780. Recall that we closed on the $400 million acquisition of LH Finance in the first quarter of 20. While COVID has shrunk our balance sheet, as inventory for sale has been difficult to replace, we are still larger now than we were in early 2020. The result is that our year-to-date pre-tax profit contribution is $23 million, already exceeding full year 2020 of $21 million. That achieves a core ROE of 3.39% and an efficiency ratio of 19.4%. To recap, we started 2020 with a $500 million balance sheet. LH Finance took us to $900 million, and COVID cash and stimulus prepays have reclaimed $60 million. With this backdrop, there is evidence of rebuilding commercial inventories, steady consumer demand, and a continued reduction in prepays. a recipe in my mind, Donna, to growth in the future. Based on the buyers trolling the docks in recent shows in Canton, Newport, Annapolis, and pre-ticket sales for the Fort Lauderdale show next week, retail activity will remain elevated. We're well positioned to rise on the returning tide. On that positive note, Donna, let me turn the conversation back to you.

Thank you, John. And our final report today comes from Stephen Kitton.

Thank you, Donna. First, since our last call, as everybody knows now, tremendous effort was put forth by many involved in our M&A process. Long days and nights by a lot of people, and I'd like to thank all of our teammates who participated in those due diligence efforts. As Johnny mentioned, we're enjoying getting to know our friends at HAPI and look forward to the future. Since the announcement, we have filed the proper regulatory applications and should have the S4 SEC documents filed any day now. Now, I'd like to give the standard color on deposit activity, repricing efforts and trends, and a few additional details on the balance sheet. On the deposit side, balances continue to climb during the third quarter of 2021 as total deposits increased $112 million from 630, and it appears we now have solid footing north of $14 billion in total deposits. Growth in the quarter was led by our New York office with over $70 million in growth, followed by the Arkansas regions, accounting for nearly $60 million in growth.

You mean Chris led the chart in deposit growth?

That's correct.

My gosh.

There must be some hot money if Chris led deposits somewhere. Chris, what did you do?

Turns out if we don't need deposits, I'm good at getting them.

Touche. Focusing on our core base, Non-interest-bearing balances increased over $60 million on a linked quarter basis and now stand at over $4.1 billion, or 30% of the total deposit base. Switching to funding costs, interest-bearing deposits averaged 23 basis points in Q3, down 3 basis points on a linked quarter basis, and exited the quarter in September at 22 basis points. Total deposit costs were 16 basis points in Q3. While CDs We're at an all-time low at 7.5% of total deposits. We still have opportunity near-term to lower those maturing time deposits. Looking in Q4, we have $335 million maturing at nearly 1%. So there will be opportunity to lower those or see those exit. Switching to loans, total production picked up in Q3 with over $1 billion in originations, with $700 million of the total coming from the community bank footprint. As Tracy and Johnny mentioned, we continue to maintain our disciplined approach to pricing and underwriting that has long served us well. Payoff volume was lighter in Q3 at $751 million, which included one large multifamily project with a legacy borrower moving to the permanent market. And proper structure there generated a nice event income for us as well. As Brian Davis mentioned in his remarks, when normalizing for the impact for PPP, event income, and excess liquidity, We're pleased with how the net interest margin continues to hold up. In closing, Tracy mentioned the improvement we have made in several areas of the service charge set, and we're now seeing the impact. I would like to recognize our wealth management group, Centennial Financial Services, in crossing the threshold of $1 billion in assets under management. That group is beginning to generate strong revenue and helping to build a comprehensive relationship with our customer base. Congratulations to that group again. And with that, I'll turn it back over to you, Donna.

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

John, are you going to the boat show in Fort Lauderdale?

Yes, sir. I'll be there next week, Wednesday through the weekend. I'm disappointed to learn that it sounds like you may not have occasion to join us.

I hate that. I have a conference, and I hate the fact that I'm not going to be there. I've ordered me a new formula boat, as you know, and they have one on display there, so I was going to go by and look at that. But anyway, I won't be able to make that. Overall, asset quality is the key to everything, and you heard Kevin Hester's report on asset quality, and you heard the earnings. The earnings were good, strong as usual, fourth year on the run for $300 million plus. You know, as I said, I can't ask much more of our people than that because that's awfully strong of our way to get that kind of income out of the assets that we have. And now we've picked up, hopefully we get the conclusion of Happy Bank and welcome those people to Home Bank Shares families, as I said earlier. And that should give us the extra assets that we need, the earning assets, to increase the profitability. Here, Brian talked about capital ratios. They're about as strong as you can get. And I guess the highlight of all of this, everything's good, but what makes me smile is the possibility of loan growth, and we're seeing our unfunded commitments going up, and we had a September loan growth, and the book looks good. So I don't want to tell you that we're going to have loan growth because last time I told you we were going to have loan growth, we didn't. So I don't want to jinx it, Don. I'm going to leave that alone and just say it is what it is. How about that? Tracy, you got anything in conclusion to say? On to the next quarter. Here we go. On to the next quarter. Anybody else? Anybody else? Brian, Kevin, Stephen?

No, sir. No, sir.

No, sir. Well, I'll turn it back to you and let you go to Q&A.

Okay. Thank you, Gary. We'll turn that over to you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question is from John Arstrom with RBC Capital Markets. Please go ahead.

Hey, thanks. Good afternoon, everyone. Hey, John. On the growth question, maybe your least favorite question, Johnny, but... What do you all think changed between August and September in terms of some of the demand that you're seeing and some of the growth that you're seeing?

Hey, John, this is Kevin. I don't think anything changed. I think we've said all year that we felt like the second half of the year is when we thought some things could happen, and we felt that way 90 days ago. We saw that in our pipeline. If you listen to the Chris has said it, I think, at least once or twice this year that it's taking longer to get things done. The municipalities, all of our third-party providers, it's just taking longer to get deals done. I think that was part of what we saw in September. We're just seeing some things happen that we've been working on for a while and seeing happen.

I think the point there is the difference in loan growth, and our statement was quality of loan growth. And we didn't see, we saw a lot of people just stealing from each other for a period of time, and it truly was a race to the bottom. And as I looked at margins, company margins over the last, Tracy and I were looking at them yesterday, actually, different corporations, and they've sold their soul in lots of respect, and we haven't. So When I say quality loan growth, I'm talking about stuff that we can make money on. So we haven't caved in to – it's hard not to, let me say that. It's really hard not to. We've been forced in some instances to match some stuff, and we've done that. We don't like that, but we've been forced to have to do that. But overall, I think, Stephen, we're about what, 513?

Yeah, when you strip out event income and PPP and – The purchase account increase in the core loan yields about 513. When you look over a four or five quarter period, it's been plus or minus. We haven't changed that.

A lot of people in these cycles, you see rates go to nothing and terms change and lower equity on the front end and non-recourse. And it gets really frustrating as they chase. The harder they chase, the more you see those things coming up. And we're seeing that stuff. Don't like it, and we don't play. As I said, we could have had lots of loan growth. We just don't do that. We just pass.

Yeah, yeah. Yeah, I think back to the Sims comments about running it hot. And, you know, now you're at a 70% loan-to-deposit ratio. So, you know, it's encouraging to hear that you're seeing the quality opportunities there. I guess Chris touched on redraws in the C&I business. John talked about some evidence of rebuilding inventories. On the same topic, this quality loan growth, are you seeing it broaden out, or is it mostly Chris's business where you're seeing it?

No, I think it's – this is Kevin again. I think obviously Chris can tell you what he's seeing, but we're seeing within – The last 90 days, what was produced internally in the community bank footprint, plus what we see in the pipeline, there's a lot of activity in those three regions and southern regions in Florida from central, southeast, and south. There's a lot of activity down there, as you can imagine. A lot of folks moving to Florida and a lot of activity down there. So that's, I think, where a lot of the activity is coming from on the community bank side. And then Chris has got his group as well.

Bruce, you got a comment?

No, I don't know that I do. I think it's been pretty similar for us story for the last couple quarters. We continue to see demand for our product across all our markets. And, you know, the challenges are finding good deals and then getting those deals across the finish line. Everything takes a little longer than we'd like, but we continue to refill the pipeline. So continue to feel pretty good about things.

Okay. Good. Good. That's helpful. And then just one on deposits, Stephen, for you. You know, like a lot of banks, you have this high-class problem of a lot of deposits. How do you expect the deposit base to react if we see interest rates continue to move higher?

You know, I think absent a move from the Fed, I mean, I think we'll be able to keep our foot on that. I mean, there's still some opportunity there. as some things that we have on contract come due to get to where rates should be today. And then, you know, I think one of the, like you said, it's a high-class problem. To see our non-interest-bearing base grow like it has over the last year and a half is fantastic. You know, at 30% today, the more we can add to that customer base, the less fear we have about rates going up.

We've seen a race to the bottom on rates. I hope we don't see a race to the top on deposit costs in the future. But there will be somebody who will come out with some big CD special, as you know, in the past. But hopefully that will be a while. It looks like maybe we're hearing that it could be this year, it could be next year before we start to see rates go up. But I think it's going to happen.

Yeah, yeah, okay.

All right.

Thanks for the help. I appreciate it.

Hey, thanks, John. Yep. We'll see you at your conference. Looking forward to it.

All right. Sounds good.

The next question is from Brady Gailey with KBW. Please go ahead.

Hey, thanks. Good afternoon, guys. Hey, Brady. Just one more on loan growth. But, you know, when I look at your pro forma franchise, you guys are going to be in two of the best growth markets in the South and Florida and in Texas. In a normalized environment, what do you think is a good longer-term growth rate to consider for home?

Well, you know, during normal times, I think 3% to 5% is a good – I think 5% probably is a good normal growth rate. But we just haven't seen it. I guess we've been so picky lately. We've been through some crazy times, right? 8, 9, 10, 11, 12. And that fiasco and then into the pandemic – I just think we're all forced to still be here, right? We didn't know what was going to happen at that time, but it is pretty exciting out there today looking at the opportunities on the loan side. I don't want to talk too much about it because last time I said loans were going up, they went down, and I was confident. I was reading off the sheet, but we had some big payoffs right at the end, and we went down. That part's exciting. The rest of it, as you can see, I mean, the cost of funds is excellent. The asset quality is excellent. The addition of Happy Bank is going to be great. I think they had loan growth of a quarter. That's good. I haven't seen all the numbers on them at this point in time. I guess they'll be on the FDIC website here before long. But, I mean, you can't ask for much more than what the company's doing. We just need some additional assets, and we get those. You know, I can take, you know, companies run about a 2% ROA, and I can look at $24 billion worth of assets and imagine a 2% ROA on that, and I can multiply that in my head. I don't have to get a calculator, so... At some point, our big goal is getting happy expenses in line with homes. I'm kind of running off here a little bit, but you asked about it's really loan growth is the key. As you see, there's not anything else that I know of inside the company that needs to be fixed.

I know you guys have talked about possibly redeeming the $300 million of sub-debt, the things like 5 and 5-8s. that becomes callable in April. Now you have happy in the mix. Maybe just your updated thoughts on potentially redeeming a portion or all that subject. If you were to redeem all of it, I think it is a nice benefit to earnings there.

I agree with that, and we're working on that, and we're looking at that. We have put back – how much we got now, Brian?

We've got $125 million put back today, and we'll have $150 million by the time we get to the payoff date.

I think Stephen's going to kick that up a little bit between now and the payoff date if we can. And we have one of our customers, friends, whatever, has offered to loan us some money on that so we wouldn't have to go back on another five-year no-call. I guess we could just refinance where we are. We would like to pay that off. We will pay at least half of it off, but we would like to pay the entire balance off and Even if we don't get the ability to pay it all off, we'll try to borrow some money and pay it off at $5 million a month and get rid of it. So at least that's what it looks like. Brian, you got any comment on that?

No. I think what you said is pretty much accurate to what we've been talking about.

That's a pretty good, that's about a dime, isn't it? That's close to a dime?

It's a dime with our current share count. When our share count goes up about 20%, it'll be probably closer to eight cents.

Well, we just want to keep plenty of capital in the chest. You know, Happy Deals is an important transaction for us. I don't think they really impact our capital ratios very much.

No, it's all tier two capital, and we're basically double tier two capital and well capitalized.

So it makes sense for us to take that opportunity and hopefully pay it off in full and get rid of that $18 million pre-tax deal. So that's a pretty good get, of course. We'll be pushing in that direction.

Okay, and then finally for me, also on the capital theme, it looks like you repurchased some stock this quarter. because stock still trades pretty attractively. Do you think you'll continue to be active on the buyback from here?

Well, we've always been active on the buyback side. We like to buy the stock. You know, we're generating. This company generates lots and lots of capital. So we owe our shareholders a dividend. There's going to have to be a dividend increase. We're going to have to be a little patient here until we get through these processes into next year. We're due for a dividend increase, and we have the money to do that, but I think it's more important at this point in time to get the happy transaction done and pay off the sub-debt. I think that's the two top priorities for the company right now, but we'll continue to be in the market buying stock. We're limited in the amount we can buy, though, based on a rule that can be 18.

That's right. The daily average from three months prior to the announcement of PAPI is kind of where we're capped at, but we're able to do that on a daily basis and have been and would plan to continue to. Got it. Thanks, guys. Thank you.

Again, if you have a question, please press star then one. The next question is from Steven Scouten with Piper Sandler. Please go ahead.

Hey, good afternoon, everyone. Good afternoon, Stephen. I guess one thing I'm curious about is just the loan loss reserves. Obviously, you have one of the highest reserves in the industry, so not only do you have high capital ratios, but you've got other capital sitting there in your reserve as well. How do you think about that today? I know you like to have higher reserves, but at some point, do the accountants make you take this down to a much lower level from here, or how can we kind of think about that?

I would think so, but however, you know, we just, we're buying a $6 billion company in Happy, and even though we did our due diligence, things look different sometimes when you get inside one. So I think we're going to try to maintain that reserve, particularly in light of the fact that we're picking up $3 or $4 billion worth of loans here. We think that's prudent for us to do that. After that point in time, if the asset quality turns out to be where we think it is, we may be forced to do something. But as of right now, I think we'd like to try to hold on to that. I think it's prudent for us to do that, is to hang on to that for at least into, hopefully we'll close happy, probably next year. Hopefully we can carry it through next year. If we don't have any hiccups, then we'll move on. I don't know if they'll let us do that.

Got it. Okay, great. And then I guess thinking about CCFG and that book of business, and I know you got asked this on the deal announcement call, but as the balance sheet grows, how aggressive do you think you would let that team be and Chris's group be in terms of growing a little bit more rapidly if that opportunity set is out there?

Well, I want Chris to do what Chris does. You know, Chris does one hell of a job for this company, and his team does. And we haven't had any loan problems. And we were, before the call, we were all pissed. And Chris said, oh, I can do a billion in the next 90 days if you want it. He said, but I'd like you to pay me up front. So I let Chris talk to that. I let him make that comment. he has all the rope in the world. I mean, he has the ability, he has the authority to do pretty much what he wants to do because of his track record with us. And they've done it, you know, how well they've done for us and how well that's worked for us. So I don't think Chris is, I don't think he likes to collect too much. So I'll let him comment. Chris, you want to make a comment?

Yes, sir. Thanks. Well, I don't think, as Johnny said, I don't think we've been that limited. Excuse me, I do think we felt like we were probably about a reasonable size given the rest of the balance sheet. And so given the fact the balance sheet got larger, I think that probably does give us a little more room to maneuver and feel a little more comfortable about that. I would think there's opportunities there. I'll be honest with you. I don't think we're going to rush out and do that. Johnny didn't take me up on the offer of paying me in advance or right away. But certainly over the coming period, whatever that is, over the next quarters or year, years, et cetera, there's certainly opportunity out there to do that. Just as a way of reference, prior to joining Centennial, this group was running well over $3 billion. So the size doesn't scare me. I think it's just a matter of being able to pick the right things and do it in our time. And as Johnny said, I think we do it in ways that we feel most comfortable with. So I would say I don't see any reason why we wouldn't grow over that period of time. But I certainly don't feel the pressure to do it. But it's nice to be able to.

Perfect. Very helpful. Thanks for the color, guys. I appreciate the time. Thanks, David.

The next question is from Brian Martin with Janie Montgomery Scott. Please go ahead.

Hey, guys. Good afternoon.

Hey, Brian.

Hey, just maybe one question, and just back to the loan, not the loan growth, but just the loan yields, and maybe Stephen can comment or just somebody, but just your expectations given kind of the competition in the market with all the liquidity out there to find your well-priced deals and kind of sustain that. you know, that loan yield where it's at, you know, in conjunction with the growth.

Yeah. I mean, if you look at our production for the quarter, I think the community bank group, which is the biggest component of the total was in the, you know, 489, excuse me, 480, 490 range on coupon, you know, before origination fee. So, you know, it's a little lower than where you'll call the net yield is today, but, you know, back to, you know, This whole group has mentioned we'll continue to maintain the discipline there and find our spots where we can originate volume.

Well, it originated a billion what?

1.07, I think.

1.07 billion for the quarter. So it hasn't gone away. The opportunities are still there for us. So we're encouraged by that. We've been running a lot less than that, and it's really picked up. Okay. A lot of things we've been working on for a period of time are kind of beginning to come around. As Kevin talked about, they're slow. And some of our credits have just taken a while to come to fruition. So I'm pretty optimistic. I don't want to be too optimistic because I don't want to be disappointed. I don't want to disappoint the street. As you know, we tell it pretty much like we see it.

Yep. Okay. And then how about just maybe back to that, kind of the origination volume was a pretty big jump this quarter in that origination volume number and, you know, in conjunction with a little bit of a decline in the payoffs. I mean, do you think these levels, you know, when you look at the jump this quarter, I mean, do we kind of see maybe a step back down a little bit on the origination side? And, I mean, I guess how are you feeling about, you know, kind of the payoff levels given maybe some of the potential, you know, tax law changes out there? I mean, I guess is... is a lower level, you know, more on the sites now as you get into next year, possibly?

Hey, Brian, it's Kevin. I mean, I think from the payout side, I mean, you could see some stuff here before year end if people feel like that there's a chance that the tax law is going to change, and that certainly could happen. On the production side, I mean, I think it's a function of, you know, a lot of the deals that we're doing are our construction type acquisition bridge type stuff between Chris's group and our group. And those take longer to develop and they draw up over time. So you're going to see some of the fruition of the stuff we've closed over the next six, nine, 12 months, both on the community bank side and on Chris's side. So I think it's, we just have to kind of take it as it comes. And I feel good about, We still feel good about the second half of the year. We feel good about 22. We think we're in good markets that are going to grow, and that's where we want to be.

And you think about Texas. Hopefully, you know, that's been a good market. Texas has been awfully strong. So, you know, if we can take the assets, that $6 billion worth of assets, we can get the kind of returns or anywhere close to the kind of returns that we're getting out of home bank shares, it ought to really be a plus for us. And we're just going to have to work on bringing their costs more in line with home because they got the revenue side. They do the revenue side. So, you know, you think about it, that's the toughest part of one is the revenue side. As I said earlier, getting the revenue and getting the rate is the toughest part, and HAPI's doing that. So we don't have to work on that side of it. We just need to work on the other side of it. So, Tracy, you got a comment on that, anything?

You know, looking at the potential growth piece of it, I mean, we've got, you know, we've been working with Scott and Robert and Jeff of Central Texas. And already, you know, they're communicating with us on some opportunities that they've had and to increase some of the bars relationships. So some of the periods of time that they've managed down there, with their capital position. They've had to tone it down a little bit, but as Johnny mentioned in his opening remarks, their rates are a little bit better than ours over time. So we think the customer relationship there and our size is going to certainly give those staff members opportunities to take us to the next level, as I've said.

It could be really nice. I mean, you begin in four or five days here, Just in the last four or five days, David Drury has called. He wants us to be in Florida with two huge projects that are coming out on the ground. People from Happier calling us to meet with some customers that they have that want to upsize what they're doing. It's pretty encouraging here at this right now. It's encouraging. I hope that continues, and I kind of feel like it may be. And they're price-tracked. The deals are not giving stuff away, and you're not having to do non-recourse. So you're not doing 80% leverage in non-recourse in a 3.5% note fix for 10%.

Okay. I appreciate the call. Maybe just one housekeeping one for Brian. Brian, you know, the PPP forgiveness, I guess, maybe has your outlook changed from what you kind of talked about last quarter given the performance this quarter as far as when that – it sounds like most of that probably wraps up this year. Is that fair?

Yeah. Here's kind of the numbers. I mean, we had – it has to be down for this quarter because we had $9.3 million of PPP income this quarter last there's only 8.9 million of the PPP income left, period. So, you know, we're off to a pretty good start in the first couple of weeks on payoffs, but as Kevin and I were talking earlier this morning, that's drastically slowed down. So we recorded about a million dollars of PPP income in the first few weeks of October, but that's going to slow down drastically. So will we make 3 million this month? Doubt it very seriously, and it's probably going to trickle down. There's only 8.9 million of it left, period. Yeah, so it's pretty negligible the next year. So that's really the point.

So, okay. I appreciate the update, guys. Thanks. Thank you.

The next question is from Matt Oney with Stevens. Please go ahead.

Hey, guys. Thanks for taking the question. I want to ask about the excess liquidity position at the bank, and I'm sure there's a preference to deploy that into loans over time, but it seems like there's plenty of liquidity to deploy elsewhere. So love to hear more about the appetite to deploy that into securities today. And if there's not much appetite, just give us some more color about what kind of environment you're looking for to get more constructive on deploying that into securities portfolio. Thanks.

And what we're going to do is let you be with your guys at Stevens, you know, get us a 4% return, and we'll solve that problem. Just 4%, that's it? That's pretty easy.

That's too easy, by the way. Too easy. We don't have a big desire to put it in securities at this point. We just don't have that desire. We put a little bit in securities, more than I wanted to put in securities, but we just don't have that desire anymore. to lock it in, we keep saying we're right. We've been saying that for about four quarters and may continue. We may be four years now be saying when we're right. Well, if we live long enough, I guess we will be right. Rates will go up. But they're just with this. However, the Biden tax plan. I mean, the Biden spending plan may not pass. That deal, Matt, 3.73, and it turned into 5.6. That may not pass. And that may be able to hold rates at a lower rate. And if that happens, we may be forced to look at something else. Kevin was reporting what one of our competitor friends had done recently. He bought a bunch of mortgage loans and just buying bulks of them. I'd rather do that than put them in long-term securities. So we're constantly looking for opportunities to deploy those funds. But if you – we're not going to put it in 1.5% securities. We're just not going to do that. We just think there's a better way. I'd rather go buy a billion dollars worth of mortgage loans that are yielding net 250, 260, 270. So – I saw mortgage rates are up. 315 is right on 30 of the day. They're up. Maybe, Kevin, those will come up a little bit for us over a period of time. Kevin, we were looking at that yesterday, the thought process on that. We're not going to put it in 1.5% and 1.6% securities. Yeah, okay.

It certainly is a tricky environment. Okay. Well, thanks for the commentary, guys. That's all from me. Great quarter.

Thank you. Thank you very much.

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

Thank you, Jerry. Thank you for joining today. Thanks for your support of HOME. I want you to know that this team works hard every day and every night most of the time. As we have an expression here, never go home. You can go H-O-M-E, but never leave H-O-M-B. We work very hard at it, and we're extremely serious about being one of the best banks in the country, and we have been for many years, and hopefully with the addition of Happy Bank and their great team of people, that'll give us another $6 billion worth of assets to, I mean, as I said before, they got the revenue side. We got to work on the expense side, and hopefully we can do that. We can't do it now, but hopefully it'll close in January, and I'd like Tracy and Michael or Way down the road on their plan. Am I right, Tracy? Going well. Very well. Doing well.

All the teams are working extremely well together. Best, I think, ever out of 25. Outside me, Johnny, when you bought me.

Tracy said, oh, we're working together better than except when I bought him years ago. He'll tell all of you that he's the best acquisition that I ever did.

That's only because he was the first one, right?

Yeah, he's the first one. Anyway, thank you for your support. Did anybody else have anything else to comment about or want to say? We'll talk to you in 90 days.

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