Home Bancshares Inc Q3 FY2021 Earnings Call

Good afternoon, and welcome to the Home BancShares, Incorporated Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead.

Thank you, Gary. As he said, I am Donna Townsell, 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 Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; and Stephen Tipton, our 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 am going to turn my phone off. We don't want to hear anything in the morning, right? That’s why I have turned my phone off. Good afternoon, and welcome to the Home BancShares 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 had. Home had another very productive and solid quarter with earnings of $75 million or $0.46 per share. During the first nine months of 2021, the 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 about our people. If you pull out $3 billion in excess capital, the company, which is virtually earning zero, the company is running around at a 2% ROI even though we're running at 1.68 now when you pull that out, it runs to 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 BancShares, both shareholders and employees to the Home BancShares’ family. When I think about, if I could choose to operate in the two best states in the United States, they're both business-friendly and tax-friendly and have the largest incoming demographic movement, it would be Florida and Texas. Panhandle and 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 day of announcement, if this deal doesn't work, it is no more. The complexities of making a bank transaction accretive in today's environment are 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 in both boxes. This transaction checks those boxes. We'll come back to the Happy deal later in the presentation. Let's go with the highlights of Q3 and the first nine months of the year. As I said earlier, we have $75 million and $0.46 through the nine months for the third quarter, and the nine months' earnings of $245.7 or $1.49 is also a company record. The third quarter showed strong loan recovery even though we were down $64 million ex-PPP for the quarter; September was up $55 million ex-PPP. Unfunded commitments of loans and credit lines were 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 optimism for good-quality loan growth, and I mean quality loan growth. Loan yield is at 5.64. The excess deposits are putting pressure on a return on assets, creating an embarrassing 1.68. However, without the excess capital, Home is churning at a powerful 1.98. Most companies would be proud of 1.68, but that number is unacceptable at Home. We've got to push the money off the balance sheet. We got to balance it with low-yielding investments or we can change sales and match to the race to the bottom of loan yields. We did none of that or very little of it. Patience on this one was tough. But we're playing the loan game, and we're not looking for a quarterly pop. And believe me, we could have played if we wanted to. Actually, Jamie Dimon said having access to liquidity could be your friend. With $3 billion in excess liquidity, it's not all bad, with REITs appearing in an upward trend and optimism about loan growth for 2020, excess liquidity may be an asset. For the quarter, we maintained strong asset quality, the strong ratio was the non-performing, and I think record levels passed this. Very strong capital ratio, and even with a bulging capital ratio, Home's 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, with $4 million of that being basically a data processing system for our loan program. $1.1 million of that was merger expense and $1.3 in other. On a linked quarter basis we were up $2.7 million, as I said, $1 in merger and $1.3 in other expenses. Back to Happy. Excuse me. Happy has a great senior leadership team led by their founder and backbone of the company, Pat Hickman. Pat will be joining the Home BancShares’ 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 Banc 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, trusts, marketing, BSA, CRA, ER and compliance. They are all top drawer. It is our goal to keep as many of their people as we can. The talent in Happy’s workforce is even better than we thought. Many of their people are even more impressive than ours. Asset quality, however good, is not as clean as Home's asset quality, but it's certainly better than most when seen. With the yielding loans better than Homes, which is highly unusual and the hardest part of the equation to achieve, we think getting Happy's expenses in line close to Home's is the challenging thing. The 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, Emerald Lubbock, Tampa, Plainview, Dumas and of course, Happy Texas to mention a few Texas branches. We are poised to continue the growth of our company as we have come from $24 million in 1999, when this transaction took place, to $24 billion in assets. That is providing, and all goes well. Let's talk about deals in general. Now as we look at these M&A deals over a period of time. They just haven't worked. Just virtually none of them work. Actually, there have only been a few work in the last 10 years, and I mean a handful, outside of merger of equals, whatever that means. I'm not sure what that is, but there's been very few work. Why don't they work? 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 better paw of poor performers. So it's like, as we say something else, but anyway, 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 to tangible book, and 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 side and do not have the knowledge, experience or the reputation to do that. Home has all the above and checks that box. Deal costs and fees of double accounting costs must be included in the purchase price of the deal. Check that box. Focus on the deal at hand and not trying to do multiple deals at once. Regulators - and you can check that box. Actually, we just announced the deal when somebody came up to me and said, 'I got a deal for 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 do another, bringing another deal Johnny, and the Wall Street Journal picked up on that. I was quoted with that; that's actually a Donna Townsell 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 your credit.

Home remains focused. The buyer has to almost have a premium in their buying stock for any deal to have a chance to work. And to be fair to the seller, it certainly will be diluted for sure. Home has that. Home always had a powerful buying stock, large enough to scale to make a difference and impact earnings. Happy Banc, 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 the makeup of the shareholders because you know, as well as I know, a lot of these firms being 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 as private with 1,300 individual local shareholders, and we're proud of that, and we think that private is better and they can't harbor the deal. I'm sure Home, we won't do that, they can't harbor the deal. Remember that investment bankers get paid regardless if it's a good deal or a bad deal, accretive or dilutive tell your banker, tell your investment banker be sure who you hire, who you're doing business with first, and then tell your banker your limits and stick with that. Experience of M&A. The Home has done, this is Home's 25th deal. And probably for Happy, I think it's seven or eight deals. So both having experience on both sides worked out well for us, and that checks that box. Good buyers have to remain disciplined and 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 that same time. Home is disciplined and we'll walk and have worked on several transactions in the last year or two. A fund investor said to me, a fund not a fun, fund investor said to me, 'Why should I hang around and see three years or four years earn back?' He said, 'I get paid now, and the only reason I had to stay around if I can harbor the deal, we can't do this.' They can't harbor the deal in this deal. So check that box. Man only, I give credit for saying that Home, he is the analyst that said Home traded the deal perfectly. You can see the complication of the process. The most investment bankers Centennial and Stephens 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 Banc. And I'm getting a little windy today. I apologize for that but it was a lot of work and as things move, it was a fluid situation, and I’ve to give Stephen Tipton credit, he ran this book on this deal and did an outstanding job for our company, but he just can't move in. It is just like water flowing. It is 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 one of the best deals done in a while. So I will 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 as he did a while ago. But I'm going to speak about Centennial Bank for the first three quarters and the nine months of the year, the rest of our team here. We'll 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 when said numbers are 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% ROI and that's including the excess evaluated assets that we talked about with excess bonds. Phenomenal numbers for Centennial Bank. The bank return on average tangible common equity, non-GAAP closed the first nine months at 19%. Johnny, that kept the P5 and our Allison ratio for the bank above the 60% level for the year at 61.31%, which is really proud of. Net 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 and 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. John stated our bank’s core ROI for the first nine months as over 2.59%, and I think all of our regions were well above the 2%. 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, 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 date. Our company is well positioned with strong capital, the best asset quality we've seen as we deal with potential inflation challenges going forward. As Johnny has mentioned, we are excited and happy, and we're glad to 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 work with Michael Williamson, the CEO as he heads our expansion into Texas. As he joins our regions, I look forward to him climbing the notches along the way to be the top region as soon as he possibly can.

Who's that?

Michael, get him in the middle there.

I'll be glad when he gets there.

But we have met a lot of their directors, and great staff that we've been able to meet, and we look forward to these people taking our company to the next level. Donna?

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 $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 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 NIM. Second, as a result of the excess liquidity, we had $338 million from additional interest-bearing cash in Q3 compared to Q2. The excess liquidity was 7.6 basis points dilutive 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 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 historically normal cash balances had 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 of Home BancShares is to be extremely well capitalized and I'm pleased to report the following strong capital information. For Q3, 2021, our tier one 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 the well-capitalized benchmark of 5%. Common equity tier one was 15.2%, which is 134% above the well-capitalized benchmark of 6.5%. Tier one 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, it's 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. The 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 funding from all around. 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. Moving 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 continued 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 importance at Home. But our folks have taken this to a new level. I appreciate their diligence and commitment to a pristine loan book. The 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 frontline impeccably this week. I am very proud to work with this great bunch of people across our footprint. Thanks again for all your efforts in making Home BancShares 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 Poulton for an update for CCFG.

Thank you, Donna, and good afternoon. CCFG achieved solid growth and originations during the third quarter. Our 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. We saw modest declines in the C&I book as several corporate borrowers pay down facilities with excess cash during the quarter. We would expect to see the C&I facilities redrawn 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 $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 boating is John Marshall.

Thank you, Donna and good afternoon. The boat business in the third quarter seems 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 our 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 scores of 780. Recall that we closed on the $400 million acquisition of LH Finance in the first quarter of 2020. 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 ROI 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 up 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 throwing the dock, the recent shows in Canaan, 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. Our final report today comes from Stephen Tipton.

Thank you, Donna. First, since our last call, as everybody knows now a 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 Happy and look forward to the future. Since the announcement, we have filed the proper regulatory applications and should have the rest of SEC documents filed any day now. Now I'd like to give the standard color on deposit activity, re-pricing efforts, trends, and a few additional details on the balance sheet. On the deposit side, balance continued to climb during the third quarter of 2021 as total deposits increased by $112 million from $630 million. 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.

I mean, Chris [Poulton] led the charge in deposit growth.

That is correct.

My Gosh. It must be some hot money; Chris led deposit somewhere. I don't. Chris, what do you do?

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

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 the funding costs, interest-bearing deposits averaged 23 basis points in Q3, down three basis points on a linked quarter basis and X to the quarter in September at 22 basis points. Total deposit costs were 16 basis points in Q3. While CDs are 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 into 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 from 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 doing 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.

And I hate that. I have a conference, and I hate the fact that I will be there. I have 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. I miss it. Overall asset quality is the key to everything. And you heard Kevin Hester's report on asset quality. And you heard the earnings. Earnings were good, strong as usual fourth year on the run for $300 million plus, as I said, I can't ask much more of our people than that, because that's an awfully strong ROI to get that kind of income out of the assets that we have. And now we picked up hopefully we get the conclusion of Happy Banc and welcome most people to the Home BancShares family, as I said earlier, and that should give us the extra assets that we need, the earning assets to increase the profitability. There Brian talks about capital ratios, manage 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're going to have loan growth we didn't. So I don't want to jinx it, Donna. I am going to leave that alone and just say it is what it is. How about that? So, guys I'm in conclusion to say.

On to the next quarter.

Does anybody else? Brian, Kevin, Stephen?

No, sir.

Well, I turn it back to you, and let you go to Q&A.

Thank you. Gary, we'll turn that over to you.

We will now begin the question and answer session. [Operator Instructions] Our first question is from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, everyone.

Hi Jon.

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?

Jon, 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 Chris [Poulton], he said it, I think, at least once or twice this year that it's taking longer to get things done, the municipalities that all of our third-party providers, it's just taking longer to get deals done. And 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 like the fourth difference in loan growth and our statement of 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, I was actually looking at different corporations yesterday, and they’ve sold in that respect, and we haven't. So when I say quality of 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 say that. It's really hard not to. We've been forced into agencies to match some stuff. And we've done that. We don't like that. But we've been forced to have to do that. Overall, I think, Stephen, we're about what 513?

Yes. When you strip out the debt income and PPP, and the purchase account increase in the core loan yields, it's about 513. We look over a four or five quarter period, it's been plus or minus.

We haven’t changed that. In these cycles, you see REITs go to nothing, and terms change and lower equity on the front end and non-recourse and it gets frustrating as they chase. The harder they chase, the more you see those things coming up. And we're seeing that stuff. No, whack it. And we can't say it for right now. As I said, we could have had lots of loan growth; we just don't do that. We just pass.

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

No, I think it's Kevin here. 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 footprint plus what we see in the pipeline, a lot of activity in those three regions and southern regions in Florida from Central, Southeast, and South. There's a lot of activity 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 activities coming from, all the community bank side, and then Chris has got his group as well.

Chris, you got a comment?

I don't know that I do. I think it's been pretty similar for us; the story for the last couple of quarters. We continue to see demand for our products across all our markets, and the challenges are in 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, we continue to feel pretty good about things.

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

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

And we've seen race to the bottom, right? So we don't say race to the top on deposit costs in the future, but there will be somebody will come out with some big CD specials as you know in the past, but hopefully that'll be a while. It looks like maybe it may be 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.

Thanks for the help. I appreciate it.

We'll see you at your conference. Looking forward to it.

Hi, thanks. Good afternoon, guys.

Hi Brady.

Just one more on loan growth, but 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, in normal times, I think 3% to 5% is a good, and I think five is probably the normal growth rate. But we just haven't seen it. I guess we've been so picky, and we've been through some crazy times, 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. I was confident I was reading off the sheet. But we had some big payouts at the end, and we went down. But that part's exciting. The rest, as you can see, I mean, the cost of funds is excellent, the asset quality is excellent. The addition of Happy Banc is going to be great. I think they have loan growth for the quarter. That's good. I haven't seen all the numbers on them at this point in time, I guess will be on FDRC website here before long. But I mean, you can't ask for much more than what the company is doing. We just need some additional assets, and we get those and I can take companies running about a 2% ROI, and I can look at $24 billion worth of assets and imagine the 2% ROI, 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's expenses in line with Homes. And I'm kind of running off here a little bit but you asked about it. It's really loan growth is the key. As you see, there is not anything else that I know of inside the company that needs to be fixed.

And then, I know you guys have talked about possibly redeeming the $300 million of sub-debt, things like 5 and 5H that become callable in April. Now you have Happy in the mix. Maybe just your updated thoughts on potentially redeeming a portion or all that sub-debt. 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've got now, Brian?

We have got $125 million put back to-date. And we'll have $150 million by the time we get to the payoff date.

Thanks. Stephen kicked 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 us some money on that so we wouldn't have to go back over and over five years no call. I guess we can just refinance where we are. We would like to pay that off. We will pay at least half of it all. But we would like to pay the entire balance off. And even if we don't get the ability to pay it off, we'll try to borrow some money and pay it off on a $5 million a month and get rid of it. So at least that's what it looks like. Brian, any comment on it?

No, I think what says pretty much accurate what we've been talking about.

That's a pretty good that's about a dime. That's close to a dime.

It's a dime with our current share count. When our share count goes up, it's probably closer to $0.08.

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

No, it's all tier two capital; we're basically doubled to 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 game for us. We'll be pushing in that direction.

And then finally, from me also on the capital theme. It looks like you repurchased some stock this quarter. The 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. We were generating, company generates lots and lots of capital. So we owe our shareholders a dividend; they're just going to have to be patient and dividend increase. They have to be patient here. We'll get through these processes in the 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 out for 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 to the amount we can buy though, based on the rule 10(B) 18, that's right.

The daily average from three months prior to the announcement of Happy is kind of where we're capped at. But we're able to do that on a daily basis and have been, and we plan to continue to.

Got it. Thanks guys.

[Operator Instructions] The next question is from Stephen Scouten with Piper Sandler. Please go ahead.

Good afternoon, everyone.

Good afternoon, Stephen.

I guess one thing I was curious about it goes it's 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 got other capitals sitting there in your reserve as well. So how do you think about that today? I know you like to have higher reserves, but at some point, the accountants make you take this down to a much lower level from here or how can we kind of think about that?

I don't, I would think so. But however we just bought 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 $4 billion with loans here. We think that's prudent for us to do that. And 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 Happy, probably next year. Hopefully, we can get through the next year if we don't have any hiccups and we'll move on. I don't know if they'll let us do that. That's just me speaking.

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 and his 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. Chris does one hell of a job for this company and his team does. We haven't had any loan problems, and we were before the call we were all this and Chris and I know, and then the next 90 days do you want it, he said, but I'd like you to pay me up front. So I'll let Chris talk to them. I'll let him like 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. How well they've done for us and how well that's worked for us. So I don't like Chris; I don't think he likes to collect too much. So I let him comment. Chris, you want to make a comment?

Yes, sir. Thanks. Last thing, as Johnny said, I don't think we've been that limited. With that said, 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 that the balance sheet is getting larger, I think that probably does give us a little more room to maneuver and feel more comfortable about that. So I would think there are 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 right away. But certainly, over the coming period, whatever that is over the next quarters or years, etc., 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, Stephen.

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

Hi, guys, good afternoon.

Hi Brian.

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 loan yield where it's at in conjunction with the growth?

Yes, 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 489, excuse me, 484-90 range on coupon yield before origination fee. So that's a little lower than where you'll call the net yield is today, but back to this whole group has mentioned, we'll continue to maintain the discipline there and find our spots where we can originate volume.

Well, he 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. A lot of things we've been working on for a period of time are 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, and I won't be too optimistic because I don't want to be disappointed, or I don't want to disappoint the street. We tell it pretty much like we see it.

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

Brain, it's Kevin. I mean, I think from the payout side, you could see some stuff here before year ends. If people feel like that there's a chance that the tax law is going to change that certainly could happen. On the production side, I mean, I think it's a function of, a lot of the deals that we're doing are 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 6, 9, 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 2022. We think we're in good markets that are going to grow. And that's where we want to be.

Anything about Texas? Hopefully, we get that's been a good market. Texas has been awfully strong. So if we can take the assets of $6 million with assets, we get to kind of return to anywhere close to the kind of returns we're getting out of Home BancShares to really be a plus for us. And we're just going to have to work on that, bring their costs more in line with Home, because they got the revenue side; they do the revenue side. So 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 right is the toughest part. And Happy is 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?

Looking at the potential growth piece of it. I mean we've got the we've been working with Scott and Robert and Jeff on Central Texas, and already they're communicating with us on some opportunities that they've had and increased some of their borrower 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 the opportunity to take us to the next level, as I said.

It could be really nice. I mean, you begin in four, five days here, just the last four or five days. David called; he wants us to be in Florida with two huge projects that are coming out of the ground. Our people from Happy are to meet with some customers that they have that want to upsize what they're doing. It's been, it's pretty encouraging here at this rap match; I'm encouraged. I hope that continues and I kind of feel like it may. Enterprise rap, the deal is not given the stuff away and you're not able to do non-recourse. So you're not doing 80% leverage and non-recourse at 3.5%, no --

I appreciate the color. Maybe just one housekeeping one for Brian. Brian, 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 pie wraps up this year. Is that fair?

Here are kind of the numbers: it has to be down from next for this quarter because we had $9.3 million of PPP income this quarter. There is only $8.9 million of the PPP income last period. So 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 we will make $3 million this month undoubtedly very seriously and it's probably going to trickle down. There's only $8.9 million of it last period.

Yes. That's pretty negligible the next year, so really the point. So okay. I appreciate the update guys. Thanks.

The next question is from Matt Olney with Stephens. Please go ahead.

Thanks for taking the question. Want to ask about the excess liquidity position at the bank, and I'm sure there is a preference to deploy that into loans over time, but it seems like there's plenty of liquidity to deploy elsewhere. So I'd 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 the securities portfolio? Thanks.

I want to do is let you do what you guys have, Stephens, there's a 4% return and resolve that problem.

Just 4%. That's it.

That's pretty easy. It's too easy one. It's too easy.

We all have a big desire for security at this point. We don't have that desire. We've put a little bit of securities more than I wanted to put in securities, but we just don't have that desire to lock it in. We keep saying for Rob, we've been saying that for about four quarters. And I continued; we might be four years now we say when we write, well, we live long enough, I guess we'll be rapid rates will go up, but they're just with this. However, the Biden tax plan, I mean the Biden spending plan might not pay us and that might be able to hold rates at a lower rate. If that happens, we may be forced to look at something else.

Kevin was reporting on what one of our competitors’ friends had done recently and bought a bunch of mortgage loans, and just buying a box of them. I'd rather do that than sort of long-term security. So we're constantly looking for opportunities to deploy those funds. But if you're not going to put it in 1.5% securities, we're not going to do that. We just think there is a better wherever they go by; I don't really go buy a million dollars' worth of mortgage loans that are yielding net to 250, 260, or 270. So our mortgage rates are up in the 350s. Right on 30 year-to-date there. Maybe Kevin knows; maybe those will come up a little bit for us over a period of time.

Certainly is a tricky environment. Okay, well, thanks for the commentary guys. That's all for me. Great quarter.

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, Gary. 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. We have an expression here: never go home; you can go HOMB, but never leave HOMB. So we work very hard at it. 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 will give us another $6 billion worth of assets to, I mean, as I said before, they got the revenue side, and we got to work on the expense side, and hopefully we can do that. We can't do it now, but hopefully we will close in January, and I would like Tracy and Mike or way down the road on their plan. Am I right, Tracy?

Very well. Very well. All the things are working extremely well together. That's best; I think ever out of 25 outside me, Johnny.

You crazy said, oh, we're working together better than except for years ago he will tell all of you heard that he is the best acquisition that I ever did.

Only because he was the first one, right?

Yes, she's the first one. Anyway, thank you for your support. Anybody else have anything else to comment about Home? We will talk to you in 90 days.

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