Home BancShares, Inc.

Greetings, ladies and gentlemen. Welcome to the Home Bank Shares Incorporated second quarter 2022 earnings call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued this morning. The company presenters will begin with prepared remarks, then entertain questions. Please note that if you would like to ask a question during the question and answer session, please press star then one on a touch tone phone. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page three of their form K-10 filed with SEC in July 2022. At this time, all participants are in a listen-only mode and this conference is being recorded. If you need operator assistance during the conference, please press star then zero. It is now my pleasure to turn the conference over to Donna Townsall, Director of Investor Relations. Donna, please proceed.

Thank you. Good afternoon and welcome to our second quarter conference call and our first quarterly conference call as a newly combined company. Today's discussion will follow a slightly different format. In an effort to get to Q&A more quickly, our prepared comments today will come from our Chairman, John Allison, Chris Poulton, President of CCFG, and Steven Tipton, Chief Operating Officer. The rest of our team is present and available for questions. Tracy French, President and CEO of Centennial Bank, Brian Davis, our Chief Financial Officer, Kevin Hester, our Chief Lending Officer, and John Marshall, President of Shore Premier. You know, it's been a hectic and exciting quarter here at Home Bank Shares as we have completed the merger of Happy State Bank while also watching the volatility of the economy fluctuate at the same time.

as you can see from our press release this morning those distractions didn't hinder our operating performance one bit and to get more into the details of that i will turn the call over to our chairman john allison thank you donna welcome everyone to the home bank shares 2022 second quarter earnings release and conference call i guess the only thing we know for certain is uncertainty these times require a steady hand a disciplined team of managers that provide strong leadership and are willing to go against the grain. I've always said there is no substitute for experience. We have for two years been beating the table about the danger of inflation and then now suddenly everyone's waking up talking about inflation. Did they just wake up? Where have they been? Home has been planning and taking action for the last year and a half. So I think we've called it right when we talk about inflation. We do not believe that the Fed is likely to back off of their hawkish desire to stop inflation, and they should not because it is killing our seniors that are on fixed income. The reason I think they'll not back up is in the late 70s as inflation roared, Volcker made the mistake of backing off rate increases too soon and had to come back in the 80s and take rates to 20-plus percent to correct the problem that he probably could have fixed the first time. We have to get rates in parity with inflation to even begin to take control of this out-of-control monster. Last quarter, I said it's conceivable that Fed funds could hit 6%, and I'm sticking with that call. Fed member Bullard is now calling for a 4% number. The only way to stop this monster is for the Fed to get out their butts and take decisive action. 100 basis points shock would be a good thing now. And if they'd stop the puppet show, I think that would be good for us. When you look at the 10-year that's below the two-year, why is that? How does that come about? It's got to be that it's being manipulated. With consumer prices running from 8% to 20% and PPI running from 11% to whatever, it appears the Biden administration is still trying to raise taxes While Americans are already paying an inflation tax of between 8% and 20%, this group of Keystone cops don't have a clue and just don't get it. It still appears that the Biden administration and I have virtually no one with business experience in their entire cabinet. Has anyone ever heard of supply and demand? Has anyone ever heard that there is no substitute for experience? You can't make chicken salad out of chicken waste. And it was said during the Clinton administration, it's the economy's stupid. But Ron White says you can't think stupid. I don't know if he's right or wrong. Our company has deployed some excess funds during this quarter as we planned. And even if it had some loan growth, I think we ended up with a little over $200 million worth of loan growth, primarily led by Texas and New York. Good job by all. The strong quarter is a result of planning and patience that your company has been exhibiting over the past because of our strong belief that inflation was raising its ugly head. The Fed has been very late to the table, which may result in higher rates, longer correction time, and a more complicated problem to bring it under control. Interesting fact for all you younger individuals out there, what do you think the average Fed funds rate for the last 50 years are? I'm saying the average Fed funds for the last 50 years, a lot of you have never seen a four or five. You think it was two or three? It was actually 5.44. That illustrates the fact that the world can exist at higher rates as we've done in the past. However, as our US national debt has climbed through the roof, the situation required lower rates to allow Congress to continue to spend like a drunken sailor. In addition, one of the differences today From the Volcker terms is the world is now awash in an additional $200 trillion in debt. So raising interest rates could affect lots of these small countries. Here's the problem. We're all addicted to the sugar high feeling that we get from zero or low interest rates. But you know what? If you're going to dance, you got to pay the piper eventually. Well, the payday is now. I guess we can pay or we can kick the can down the road and continue this craziness. in addition to a $7 trillion Fed balance sheet created out of nowhere. And by the way, I'm told that the Fed has not cut back on the purchase as of yet. So the puppet show continues week after week. Now, what happens when the Fed cuts back or stops buying our U.S. Treasuries and mortgage backs? Who will buy our bonds? You think maybe our good friends, the Russians? Maybe Biden's buddies, the Chinese? Or Trump's buddy, Kim Jong-un of North Korea? This is one of the biggest challenges of all this manipulation because we've been buying our own crap with fiat money created out of the air. I'm very concerned about the ability to have a soft landing. I fear a crash could be in the making with this bold and crazy experiment. The key for banks is to be very premeditated and cautious with their moves. It does not hurt to play a little defense. Banks that threw money at their securities portfolio in the last 12 months many have allowed their tangible common equity to fall in the sixes. That's a number the investment community does not like. And they may be forced or could be forced to raise substantial high-priced capital, as you know, Happy may have had to do. Some banks have and others will be forced to do the same in the future, raise capital. Add to that how much loan mark they need for those trying to sell their companies that wrote long and low. Any loan with a two, three, or four in front of it today is certainly a loser. The good news is your home company has a war chest of capital. We do not need to raise capital. We have plenty. We did not write long and low because I said we've been preparing for two years. I'd hate to be out there trying to raise capital in this environment. Very expensive. We just deployed 25 million of our capital into one of the top banks in the country, and we'll be receiving 7.75% on this bond that they had to sell to fix their tangible book problem. While almost all had blindly plowed money into low-rate securities and low-rate loans, home was a contrarian and set patiently, paying off almost $400 million in debt and quietly building a war chest of cash and capital. Your company also refinanced our sub-debt at much lower rates that resulted in over $37 million in savings over the next five years. The conservative moves your company has made should pay dividends for our shareholders in the future because we did not sell our future. We're already seeing the benefits of the work with Happy, the Happy deal that was closed on April 1st. Your home team is playing the long game, not the short game. We did not receive a very warm welcome. Some people call it a mini-mutiny in a couple of the markets. We hate to see good people go. But that may turn out to be a blessing in disguise with a select group of individuals leaving in a very unprofessional manner without any notice. The way it was executed could have done damage to Happiest Local shareholders that are now new home shareholders. I would hope that was not the intent because they'd be hurting their own customers and their own shareholders. In hindsight, the move appeared that it was in the works for some time. Most employees that left went to some small Texas bank that I'd never heard of. nor do I know a thing about the management or the bond. The good news is that even with the hardship, temporary hardship that it created, it also created many opportunities for those that stay and many new hires that stepped up and took over with lots of enthusiasm and excitement. This will cost a little money over the next couple of years as we use the strength of Home's powerful balance sheet to compete very competitively in that market. It's a long old road that doesn't turn. Ha ha, this should be a lot of fun. Everybody stay tuned. The impact on smaller competitors' balance sheet can be much more severe than the impact on homes. I consider this an unfortunate situation that is pretty much in the rearview mirror except for the competition on loans. I want to personally thank our Texas shareholders on behalf of our entire home team that traveled to meet all of you. Thanks for your time, your kindness, and your hospitality that you showed myself and every member of our team. I personally could not be more appreciative of the very cordial and heartfelt welcome you gave us. After all, we share a common goal as partners in home and happy. Proudly, we own this outstanding company. For the second quarter, we had the one-time merger expenses of $107,316,000. These are non-reoccurring expenses that would not have happened without the happy acquisitions. I'm referencing numbers today that exclude the $107 million in expenses that allows everyone to see the earnings power of the combination on a go-forward basis. Let's go to the numbers. Net revenue was $243,339,000 for Q2. That is a beat over anyone's expectation and a corporate record. Net operating profit was $97 million, also a beat and a corporate record. We thought we might hit $100 million on a run rate on a quarterly basis in the second or third quarter of 23. So we're very pleased with the early performance of the $97 million. That equated to operating EPS of $0.47 a share, and that would have been a huge fee. According to Vax, who rates us a buy, they had us at $0.38, and our own analyst had us at $0.34. I know that was all across the board, so... One sign is the margin, a strong sign. The first quarter of 22, we ended up with a margin of 3.21. And at the end of this quarter, we were 3.64. That's a 43 basis points improvement. I've been watching the numbers come out on the banks, but I haven't seen anybody with that kind of improvement. Maybe I missed someone. But we were watching that on a monthly basis, and we could see the number getting stronger. Just follow me here. March, it was 318. April, 340. May 365, and June 387. June had a little juice in it because it had all the quarterly accretion of the loan marks for April and May rolled into June. So that was a little inflated. PPNR, pre-tax, pre-provision net revenue, was 50% higher in the second quarter than it was in the first quarter. P5NR, pre-tax, pre-provision net profit, was 5206. Tangible common equity came out almost right at 9%. And we maintain our powerful loan loss reserves of 2.11 of loans or 294.3 million. That is one of the highest of all banks in the country. Couple that with our top peer asset quality. If there is a recession, which Wall Street is calling for, we may not have to add as many dollars to reserve as other people do. Some people have used it more like a piggy bank, pull it in, put it out, pull it in, put it out. We didn't do that. We just left it. We like 2.5% reserve. We just believe we err with too much reserve. We're better off doing that. Significant early improvement in our efficiency ratio has adjusted from 47.33 in the first quarter to the second quarter at 46.02. Now think about that just a minute. Before the merger, happy was over 62% and home was at 47. So that's really nice execution so far. More to come, but it'll be harder to get and take longer to achieve. Take longer to achieve a 40 or better. Donna, you like a 40 or better. We're still sitting on about $2.5 billion in cash deployed when we see the opportunities. We're picking our spots to deploy the cash. We continue to repurchase stock when the market puts it on sale. And during the quarter, we bought back over a million shares. Having a desire to meet our Texas shareholders, we held four shareholder rallies, one in Dumas, Texas, Amarillo, Lubbock, and Plainview, Texas. The meetings were very well attended, and we estimate approximately 700 shareholders in total attendance. They were good meetings and covered the home story and the difference between owning stock in a private bank and a public bank, and the value of being able to convert that to real train ride money or cash if needed to be. We also talked about the dangers and these volatile times that the banking sector was experiencing. and reassured our shareholders in the Fortress balance sheet of home to get us through almost anything they could throw at us. We found our Texas shareholders to be wonderful, hardworking, God-fearing, patriotic Americans. We're looking forward to going back as soon as possible. In the meantime, we're probably going to go into central Texas to Dallas Footworks somewhere and have one. On the Marine book, John had a pretty good quarter. I think it was one of his best quarters ever at short premiere. He's hit the wall, sits in. Applications are off about 25% or 30%, and I don't know if that will pick up or not pick up, but the dollar volume is going up. The value of what we're financing is going up, but the applications are down. This time of year, they usually have shows, and that could have an impact on it, plus people wait to buy at those shows, plus higher interest rates. In conclusion, it was a busy quarter, but one of happy at home's best. Not too bad for the first quarter together. I'm very pleased with this successful start and expect more to come in the future. Citicorp's earnings gave a lift to nearly all bank stocks Friday, But regardless of trend that we all fall in the bank space, I'm hopeful for us to separate ourselves from the pack because home continues to outperform most of the rest while remaining very defensive in these volatile economic times. The good news is your company saw this coming and certainly attempted to make preparations to protect all our shareholders, our capital, and our future together. We together will continue to march forward and enhance the success that home is known for throughout the entire U.S. as one of the best. Thank you for your support because it takes all of us pulling together to keep the company growing and the dividends coming to each one of us. The more money we make, the more money we pay in dividends. Hope to see you all soon. It's an honor and privilege to serve as your chairman. Donna, I'll let you have it back.