Earnings Call Transcript - HOMB Q2 2025

Operator, Operator

Greetings, ladies and gentlemen. Welcome to the Home Bancshares, Inc. Second Quarter 2025 Earnings Call. The purpose of this call is to discuss the information and data provided in the quarterly earnings release issued after the market closed yesterday. The company presenters will begin with prepared remarks, then entertain questions. The company has asked me to remind everyone to refer to their cautionary note regarding the forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in February 2025. This conference is being recorded. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.

Donna J. Townsell, Director of Investor Relations

Thank you. Good afternoon, and welcome to our second quarter conference call. With me for today's discussion is our Chairman, John Allison; Stephen Tipton, Chief Executive Officer of Centennial Bank; Kevin Hester, President and Chief Lending Officer; Brian Davis, our Chief Financial Officer; Chris Poulton, President of CCFG; and Scott Walter of Shore Premier Finance. Opening remarks today will be from our Chairman, John Allison.

John W. Allison, Chairman

Thank you. Welcome, everyone. I want to thank you for joining today. Today is the 76th quarter that we've had the privilege to report to our shareholders since going public in June of '06. I have to say that we've come a long way since June of '06, and even further from the day in 1998 when my co-founder, Bunny Adcock, and I made our original purchase of a $22 million Holly Grove bank in Holly Grove, Arkansas. We've come from $22 million in total assets then to almost $23 billion now, from 5 employees to 2,600 now, and from one small office in Holly Grove, Arkansas to 217 banking offices in five states, from a pretax income of $400,000 to an after-tax income of over $400 million now. Home Bancshares' story is certainly one for the record books. Many of you have been with us and enjoyed this amazing ride through the years, and we're extremely appreciative of your long-term loyalty to what has turned into one of America's best and most profitable banks. For that, Bunny thanks you, and I thank you, and our 2,600 associates thank you. We have moved from one of the smallest, there were about 10,000 banks there as I recall, to #64 in total asset size among U.S. banks. With our $5.9 billion New York Stock Exchange market cap, our company ranks #35 in the U.S. in market value. I've said on the conference call last quarter that the second quarter would look a lot like the first quarter, and we were right on the button. However, this quarter was a little better with record earnings of $118.4 million or $0.60 earnings per share, producing a return on assets of 2.08% versus last quarter, which was $115.2 million in earnings, producing a return on assets of 2.07%, which is pretty consistent. Those were non-GAAP numbers, but I'll take them. The non-GAAP ROTCE, return on tangible common equity was 18.26% and 17.68% GAAP return on tangible common equity. Loan loss reserve remained strong at 1.86%. Tier 1 capital continues to build at 15.6%, leverage ratio at 13.4%, total risk-based capital of 19.3%. Over the past 12 months, we have grown tangible common equity by $1.36 or 11.25% from $12.08 to $13.44. While at the same time, the company bought back over 3 million shares, equating to about $86 million worth of our common stock and paid out about $150 million in dividends to our shareholders, all while continuing to grow tangible common equity. That performance displays the earnings power of your company. We continue to add more strength to our already fortress balance sheet. We've continued to be aggressive on stock buybacks, buying 1 million shares for both the first and the second quarter—2 million shares so far this year. We introduced, for the first time, the buyback yield, which is an incremental increase in value for each individual shareholder based on the reduction in the number of shares. In addition, we are paying $0.20 per share for quarterly dividends to reward our shareholders. Over the last 8 years, we have bought back $520 million of our stock, approximately 22 million shares at an average value of $22.60, while at the same time, continuing to grow tangible common equity. It's what it is, so far, so good. Nice start to 2025 with already $233.6 million of non-GAAP earnings, which certainly is a record income for this company. Last year at this time, I think we were around $201 million in non-GAAP and $203 million in GAAP. So for the first 6 months so far this year, we are up a little over 15%. I certainly can't ask for much more from these assets. We need to find something to buy that will be additive to our income. I was looking at about $450 million in income this year, and next year, I kind of had targeted $0.5 billion. That just rings a bell with me. I used the term $500 million, $0.5 billion kind of rings the bell for '26. However, we need to acquire some more assets to get that done. We are presently looking at several opportunities, and we will pick the best of the line to keep the forward progress moving in a positive direction. The intention is to hopefully have an announcement before the next quarter's report. Back to you, Ms. Donna.

Donna J. Townsell, Director of Investor Relations

Okay. Thank you very much for a great report, and congratulations on a strong quarter. Our next report today will come from Stephen Tipton.

John Stephen Tipton, CEO of Centennial Bank

Thanks, Donna. As Johnny mentioned, the second quarter was another strong performance by Home and Centennial Bank. Highlighted by strong revenue and stable core expense trends, we were able to produce an adjusted return on assets of 2.02% and an adjusted efficiency ratio of 42.01%. The reported net interest margin came in at 4.44%, in line with the prior quarter, even with a lower level of event income. The core margin, excluding event income, was 4.43% versus 4.42% in Q1, and is up 20 basis points from the same period one year ago. I'm encouraged to see the trajectory of the margin in June as we enter the second half of the year. Deposits ended slightly lower in Q2, down $53 million as a result of seasonal tax payments that occurred in April, but we are pleased to see balances grow in both May and June. As we observed the deposit activity early in the quarter, we hated to see the money go out, but we are comforted to know that we have core customers that are doing well, making money, and operating in dynamic growing states like Arkansas, Texas, Alabama, and Florida. In our other business lines, the trust, wealth management, and mortgage divisions continue to improve and show meaningful additions to the bottom line. I'd like to thank our regional and division presidents and all of our bankers on another great quarter. With that, I'll turn it back over to you.

Donna J. Townsell, Director of Investor Relations

Thank you, Stephen. Next, we will hear from Kevin Hester on the lending portfolio.

Kevin D. Hester, President and Chief Lending Officer

Thanks, Donna. We continue to achieve recoveries from the charges taken in the fourth quarter cleanup. This quarter, we recovered a total of $3 million, and we remain on track to achieve the expected $30 million in total recoveries over time. One large non-accrual loan from that group remains very close to being resolved in a positive manner, but that resolution will have to wait another quarter. In addition, the multifamily construction in the north part of the DFW Metroplex is complete, and we will begin leasing activities this month. Asset quality metrics were mixed, but none of the changes were material in either direction. The slight increase in non-performing loans was primarily due to a large yacht for which we are in the middle of the arrest process. We have possession of the vessel, which is in very good condition, and we expect a full payoff on this loan once we exit the arrest process. Solid loan growth split evenly between CCFG and the Community Bank complete the results of another impressive quarter. Donna, I'll give it back to you.

Donna J. Townsell, Director of Investor Relations

Thank you, Kevin. And now Chris Poulton will provide an update on CCFG.

Christopher C. Poulton, President of CCFG

Thank you, Donna, and good afternoon. An uptick in originations for Q2 led the portfolio growth for CCFG. For the quarter, we closed approximately $500 million in new commitments, which brought our year-to-date total to just over $800 million, which compares favorably to prior years. The portfolio grew by about $122 million during the quarter, taking our total over $1.8 billion, putting us in plus territory for year-to-date as well. Our unfunded commitments, approximately $1 billion, have been fairly consistent over the past year. As we look forward, we may see an uptick in payoffs during Q3, but ultimately, we expect the portfolio to be stable to up over time. Donna, that concludes my brief update from CCFG.

Donna J. Townsell, Director of Investor Relations

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

John W. Allison, Chairman

Well, I feel like we need to have a solid two record quarters back to back.

Donna J. Townsell, Director of Investor Relations

I agree. Let's see if anyone in the audience would like to help us find this. I believe that was Michael Rose.

John W. Allison, Chairman

I believe it was Michael Rose.

Donna J. Townsell, Director of Investor Relations

So, challenge extended.

John W. Allison, Chairman

Yes. Well, it was a great start to the year. The first six months have been outstanding. I'm pretty pleased with what's going on. I expect that the third quarter will be about like the first and second quarters. We’ve kind of had to win that back; had a little extra income in both the first and second quarters, and we have a shot at having some extra income in the third quarter here, too. Hopefully, we'll continue to keep it strong until we find something else. We need to find something that makes sense for us that's in our marketplace or close to our marketplace and be additive to the EPS of this company. So anyway, we're working on that. And I guess we're ready for Q&A.

Operator, Operator

First question comes from Stephen Scouten with Piper Sandler.

Stephen Kendall Scouten, Analyst

Hey. Good afternoon, everyone. I wanted to start around loan growth. Another really nice quarter, both CCFG here and the Community Bank. And year-to-date, this seems like the best organic loan growth you guys have had really as long as I can remember. And so I'm just wondering what you’re seeing from your customer base, if there's been kind of an increase in aggressiveness to drive that new loan growth or really what might be driving the success there?

Kevin D. Hester, President and Chief Lending Officer

Hey Stephen, this is Kevin. Johnny says we take what the market gives us. I wouldn't say we're being more aggressive, but there are markets where we’re seeing positive developments, and our team is performing well in those areas. It’s challenging, though, as we face some competition that seems to have anticipated the rate cuts that haven't happened yet and is trying to secure some of that advantage temporarily. This has created challenges throughout our operations. All our presidents are discussing this. However, we are in many strong markets, and with Chris and his team's efforts, we have numerous good opportunities to lend, which is why we are in this position.

John W. Allison, Chairman

We had the loan committee yesterday, and we discussed nearly a $100 million project along with a couple of $30 million projects. The loan committee meeting went well. While there weren't many loans, we focused on several large ones that we've been developing for some time, and they finally came to fruition. We are seeing this momentum. The broader market may push us down eventually because they are already writing loans. They didn't pursue us during the rise, but now they're leading as things fall. The reality is that anyone can give loans away, so I'm uncertain if this situation is finished. We are hopeful that leaders like Trump and Tau might meet to discuss lowering rates. This may or may not happen. However, we don't want a repeat of past scenarios where rates drop sharply. President Trump has mentioned reverting to 1% money, which would lead to rampant inflation again, which is concerning. We need a gradual, planned decrease in interest rates rather than a sudden drop that could disrupt everything.

Stephen Kendall Scouten, Analyst

Yes. Makes sense. And then maybe going to the M&A side of things. Obviously, we’ve seen some more deals in Texas as of late. You noted earlier that you guys are looking at a few things currently. I'm curious maybe if you could give us an idea of what size opportunities you might be targeting here in the near term? And then would there be anything that you all would pursue right now similar to CCFG or marine where you're acquiring loan assets versus a whole bank deal?

John W. Allison, Chairman

We're likely not considering the acquisition of a whole bank at this time. We're focusing more on opportunities for growth with certain banks, particularly those that align with our strategy. We have identified a few potential targets, and we plan to discuss these next week, including a visit to one of them. Our goal is to achieve a return on assets in the range of 2.02% to 2.08%. We’ve maximized our current resources, so it’s essential for us to seek out new acquisitions. We are committed to ensuring that any potential deals are beneficial and fit well with our growth strategy. We are also open to partnerships with companies that are financially strong and looking to grow.

Stephen Kendall Scouten, Analyst

Yes, it does. And you kind of led to my last question, which is just with the way the math works today with the marks and the interest rate marks still, do you think you can get a triple accretive deal still at this time? Or do you have to take a de minimis amount of dilution to get something across the finish line?

John W. Allison, Chairman

We haven't experienced dilution in the past. It's interesting that you mention it. I reviewed some serial acquirers recently. Looking back at one from 10 years ago, the stock price today is the same as it was then, and the dividend hasn't changed either; they are paying the same dividend as a decade ago. Those who purchased that bank haven't seen any appreciation from their investment. If we analyze serial diluters from 5 to 10 years ago, some are still at the same price as a decade ago; it was about $1.5 lower, but bank stocks have increased a bit recently. So, we won't engage in that practice. I don't understand why some choose to dilute endlessly. Our intention is not to follow that route. I might consider a short-term dilution if it’s a favorable deal that would positively impact EPS, but I won’t dilute just for the sake of it. There were opportunities we passed on that some of these other companies accepted. For instance, Veritex secured a solid deal, and I congratulated them on it. While we weren't involved in that particular trade, we did participate in another recently. Reflecting on how we were outbid on deals 5 to 8 years ago, and noting that the stock value now is lower than back then with unchanged dividends, it illustrates that no one benefited. That's the issue. We need to achieve a tangible earn back within four years.

Stephen Kendall Scouten, Analyst

Yes, I think I know the deal you're talking about in Florida right there. I think I remember the one you're talking about there. So I think that's why your stock trades where it goes, Johnny. So I appreciate how it goes. Thanks for the time.

Operator, Operator

We now turn to Matt Olney with Stephens.

Matthew Covington Olney, Analyst

Probably for Tipton. I want to ask about just deposit pricing in the footprint. I saw some good results in Q2. But just curious what you're seeing as far as deposit pricing. Any incremental pressure you saw during the course of Q2? Some of your peers have talked about seeing potentially some higher deposit costs in the third quarter or at least until the Fed makes its next move. Just curious what you're seeing with respect to deposit cost competition in the footprint.

John Stephen Tipton, CEO of Centennial Bank

Yes, it’s similar to what we discussed in the first quarter. The same individuals are running the same promotions as they have for the past six months. Our team negotiates these effectively, allowing us to offer slightly lower prices than some competitors. We have about $1.1 billion in CDs maturing in the latter half of this year, and we are hopeful and optimistic that we can reduce the rates slightly from their current levels.

Matthew Covington Olney, Analyst

Okay. I appreciate that, Stephen. And then I guess the other question is more for Johnny. Johnny, you mentioned that buyback yield in the press release and in the prepared remarks. Just curious about your thoughts on the buyback and the 1 million share pace that you mentioned in Q1 and Q2. Just trying to appreciate if you still have a similar appetite for that pace even at these current valuations.

John W. Allison, Chairman

That's a good question. We'll see if we can allocate some capital in the next 30 days. We have been buying back stock, which has been dilutive for us. I believe your team is analyzing the buyback yield and helping us understand where we need to be. We discussed a special dividend for our shareholders and are still seriously considering it. Let's see how much we can buy back in the next 30 days and how much cash we currently have at the holding company.

Christopher C. Poulton, President of CCFG

About $400 million.

John W. Allison, Chairman

$400 million, that’s comfortable. Anyway, we've got a few that we got to pay off.

Christopher C. Poulton, President of CCFG

$140 million.

John W. Allison, Chairman

$140 million, I thought that paid off July 1; it pays off July 31, right? So we got $140 million to pay off, happy the sub debt, and we'll pay that off when that comes up. We’ll probably sit for a little bit. But actually, we've got so much capital and that's going to reward our shareholders. And we may do that anyway; certainly a thought that's on our mind to do is to do something with that.

Operator, Operator

Our next question comes from Brett Rabatin with Hovde Group.

Brett D. Rabatin, Analyst

I wanted to start by asking Johnny about the $450 million this year and $500 million next year. Are those just rough estimates? Because that would suggest some decrease in net income during the latter half of this year.

John W. Allison, Chairman

We are currently at $233 million. That aligns with our quarterly run rate of about $110 million to $120 million. If you annualize that, it reflects our current situation. I don't see that as an unrealistic target. Next year, however, is more ambitious. We might not reach $450 million this year; it could be around $440 million or potentially $460 million, depending on how things unfold before year's end. I believe hitting $500 million is achievable if we can secure some assets. That’s the crucial factor. Recently, I attended a bank conference and mentioned that I can't expect more than a 2% return on assets from our team. However, Donna pointed out that I still do, so while we will strive for it, it may not be feasible.

Brett D. Rabatin, Analyst

Yes. Is that $450 million, is that on reported or the core earnings?

Christopher C. Poulton, President of CCFG

It would be reported earnings, combined with the shareholders.

John Stephen Tipton, CEO of Centennial Bank

It would be better than that, Brett. I think that was just a round number.

John W. Allison, Chairman

Do you hear that? I like what he said, just a round. I think he voted for a $420 million budget, and I voted against it.

Brett D. Rabatin, Analyst

And then it sounds like the loan volumes are still strong, but you're expecting some payoffs in 3Q. Any color on the pipeline relative to 1Q and then just what the production was this quarter?

Kevin D. Hester, President and Chief Lending Officer

Brett, this is Kevin. The pipeline is still pretty strong. You are right. We had a couple of things that we thought would probably pay off in the second quarter that moved into the third quarter. So last quarter, I was saying we had an uphill climb because of what we saw coming to payoffs, a little bit pushed to the third quarter. But production is good. I think $1.1 billion last quarter. Pipeline is still like it was.

Brett D. Rabatin, Analyst

Okay. And then maybe just the last one around the margin. And if the Fed does cut in September, perhaps, how do you guys think about the impact to your margins?

John Stephen Tipton, CEO of Centennial Bank

Brett, this is Stephen. I think the same thought process as we've communicated in the past. I mean, we still screen to be a little asset sensitive. But I think in the first 25 or 50, whatever it is, down scenario, that gives us certainly some cover to lower deposit rates. We've seen a little bit of sensitivity around 4% or 3% in some of our deposit book and going below there. I think if you see the Fed make a move at some point, that will give us the news and the ability to lower that and hopefully be able to offset what occurs on the loan side from the variable rates.

John W. Allison, Chairman

You didn't ask this question, but I need to mention that our expenses were high this quarter due to a lawsuit settlement that has been ongoing for several years, totaling about $3.5 million. When excluding one-time expenses, the actual expenses, according to Stephen, are $111.5 million, which I also verified and find accurate. The expenses have not become unmanageable; they haven't run off the rails. We expect to perform better next quarter. This issue has been developing over years. While we addressed it on the expense side, we also had an offsetting income item from selling a fintech operation from Happy Bank, which brought in about $3.5 million in pretax income. The expenses should return to around $111 million to $112 million for the next quarter.

Brett D. Rabatin, Analyst

Good to hear. Congrats on the quarter, and hope things cool off a little bit in Arkansas.

John W. Allison, Chairman

Yes, there are we who laughed here; it's too high. Kevin told us something about the 10-day advanced weather; the low is today at 96 or something, right, Kevin?

Kevin D. Hester, President and Chief Lending Officer

That's correct.

Operator, Operator

We now turn to Jon Arfstrom with RBC.

Jon Glenn Arfstrom, Analyst

Stephen, maybe for you just to clean up on the margin. In your prepared comments, you talked about being optimistic about the June margin. Can you give us a little bit more detail on that? It seems to indicate you think it's going to step up, but just curious your thoughts on that.

John Stephen Tipton, CEO of Centennial Bank

Yes. So thanks, Jon. The core NIM, excluding event income in June was 4.47%. So it was up a handful of basis points from where the quarter averaged. Some of that was loan yields were up a couple of basis points. Deposit costs were flat, and then the investment portfolio has performed a little better as of late.

Jon Glenn Arfstrom, Analyst

Okay. Very helpful on that. And then just a couple more smaller ones. But can you talk a little bit about the mortgage banking outlook? I know it's a small line item, but maybe it's symbolic of a little better activity in some of your footprints on housing. Can you talk about that a little bit?

Kevin D. Hester, President and Chief Lending Officer

Jon, this is Kevin. I think the performance has been variable. We have one month with strong lock activity, followed by a month that isn't as good. Without a decrease in rates that brings mortgage rates lower than they currently are, I don't anticipate seeing a significant positive trend over multiple months.

John Stephen Tipton, CEO of Centennial Bank

This is Stephen. I would say we're committed to the space. We brought a team in the DFW area on board kind of late in the first quarter of this year. They had a good second quarter and are already profitable. I think we’ll continue to be in that space and work on growing it the right way.

Jon Glenn Arfstrom, Analyst

Okay. And then a small one on Shore. I know you mentioned the yacht. Is there anything else in there? Or is that really substantially all of the change in non-accrual loans?

Kevin D. Hester, President and Chief Lending Officer

Yes. I mean that was the change for this quarter; that’s been on our radar for a solid 6 months. The arrest process takes quite a while. It takes longer than I would hope, even when it's here in the U.S. We think we're in good shape once we’re able to do something with it. But right now, it's sitting in our possession and working through the legal process.

John W. Allison, Chairman

It's a $9 million yacht with a payoff of less than $5 million. So it's just a matter of getting it sold. There isn't likely to be a loss, possibly some legal fees, but overall, it shouldn't result in a loss. The process just takes much longer than we expected and continues on. However, I believe we're nearing the end of it. The arrest puts it in our hands, and then the judge allows a certain number of days for us to be paid off. If that doesn't happen, we end up with the boat. I think we're close to acquiring the boat.

Kevin D. Hester, President and Chief Lending Officer

We're close. It's close.

Operator, Operator

We now turn to Catherine Mealor with KBW.

Catherine Fitzhugh Summerson Mealor, Analyst

Really nice quarter. Most of my questions were asked and answered. But my one follow-up is just on credit. You mentioned you still have about $30 million left over of charge-offs just from the Texas cleanup a few quarters ago. Any update on the cadence of that $30 million and how we should see that come through over time?

Kevin D. Hester, President and Chief Lending Officer

Yes, to clarify, I was referring to the $30 million recoveries we expect, which is mostly $1.5 million per quarter. There are a few specific amounts within that, and if one of them occurs this quarter, we could receive an additional $1.5 million. However, from a recurring perspective, we anticipate receiving $1.5 million each quarter from one of the loans we previously charged off.

Catherine Fitzhugh Summerson Mealor, Analyst

Okay, great. And then just one more question about the buyback. Given your recent activity in this area, is it reasonable to expect that if you announce a deal this quarter, you might temporarily reduce the buyback? Or do you anticipate that as long as there isn't a restriction on buying back stock, you'll continue purchasing shares alongside any M&A activities?

John W. Allison, Chairman

We haven't stopped buying back stock, and I don't foresee any restrictions that would prevent us from continuing, even if we were to acquire assets worth $4 billion to $7 billion. Steve and I discuss this several times a week, assessing our position on it. We hold a daily executive meeting where we review related topics. So I wouldn't say we're halting buybacks, but I can't commit to a specific amount either. However, I am confident we will keep buying back stock. I have a strong preference for nondilution; we don't dilute, and if we buy back stock, it shouldn't result in dilution. Sometimes I question if our buyback strategy is the best approach. We have analysts evaluating this for us and will present their findings soon. I was initially unfamiliar with the buyback yield, but we've started incorporating it into our reports, and it does provide an additional benefit to our shareholders.

Catherine Fitzhugh Summerson Mealor, Analyst

That makes sense, especially if you are looking at deals. Are you considering adding $400 million to $700 million in assets? That seems quite small given your capital levels. You should still have plenty of capital available unless you pursue multiple deals.

John W. Allison, Chairman

Billion, I didn't say million? I'm sorry, $400 billion to $600 billion. We’d buy $400 million if it was a good enough trade for us. It takes a lot of work.

Catherine Fitzhugh Summerson Mealor, Analyst

And you're also not the kind that would issue cash with an acquisition, right? It's always stock for stock given your currency.

Kevin D. Hester, President and Chief Lending Officer

Cash in an acquisition, would you do cash?

John W. Allison, Chairman

Well, we haven't. It gets dilutive, right? It gets really dilutive. Our dollar bills worth 2.25. So it sure works better to use your currency and do a trade. But we throw some cash in the deal. We used to throw cash in about every deal we did. We put 10% or 20% cash in. We're not afraid to do that. It does creep up on the dilution; it gets there pretty quick.

Operator, Operator

We now turn to Michael Rose with Raymond James.

Michael Edward Rose, Analyst

Just a question on hiring. We've seen a lot of banks disclose hiring plans, some formal, some informal. Just wanted to get a sense from you guys what the hiring plans were for you, if you plan to accelerate them. I know the expense run rate will come down next quarter, what you said earlier, but is there an opportunity here? Is it a little too rich for what you guys are looking at, at this point?

John W. Allison, Chairman

You mentioned hiring plans? That's not something we focus on. I believe that's a bit cowardly. Over the years, we've had several teams approach us wanting to leave their current companies. I often wonder how you can face those CEOs. I once attended a meeting in Dallas and encountered the CEO of a company whose employees were planning to leave. It troubles me when a young loan officer is developed and nurtured only to be enticed away with a $200,000 bonus from another firm. That's not how we operate. While we are open to hiring individuals from other companies, it's not a strategy we prioritize. We don't intend to make that a focus.

Michael Edward Rose, Analyst

All right. Maybe just one more separately maybe for Chris. Obviously, devastating what happened out in California. You guys have an office out there. There's going to be some rebuilding. How much of an opportunity is that for you all? And is that something that we should consider as we're thinking about the growth potential over the next couple of years?

Christopher C. Poulton, President of CCFG

Yes. Thanks, Michael. I think it remains to be seen in terms of what kind of opportunity it's going to be. It's a long-term opportunity if it's an opportunity. I think I read the other day, I was talking to somebody, they've issued 50 building permits total. Since then, I find it very hard to believe California will start rebuilding in the near term.

Operator, Operator

We now turn to Brian Martin with Janney Montgomery.

Brian Joseph Martin, Analyst

Johnny, could you provide an update on M&A? Last quarter, you mentioned a preference for smaller deals over larger ones. Have there been any changes in your outlook regarding the size or type of opportunities you're considering in the near term, or any geographic preferences? A bit more detail on that would be appreciated.

John W. Allison, Chairman

No. They're in the $2 billion to $6 billion range, and they're in the United States, footprint around. Does that help you?

Brian Joseph Martin, Analyst

Is there a preference for multiple smaller deals versus one larger deal within the $2 billion to $6 billion range in the U.S.?

John W. Allison, Chairman

It doesn't matter. That's probably what will happen. We'll sign up a deal, and then there'll be another one pop right behind it. But if it is a good deal and it works, we'll go ahead with it, provided the regulators allow us to do that. I assume they will.

John Stephen Tipton, CEO of Centennial Bank

I think the margin has increased a bit this quarter compared to where it was at the end. Additionally, the sub debt is maturing. So, what is your expectation regarding the impact of that sub debt on the margin as we approach Q3? Sure. So Brian and I were talking before the call, it's about 5 basis points or 6 basis points that it will benefit the NIM when it goes away. Again, it's going to go away end of this month or 1st of August. So you'll have 2/3 of the benefit this quarter and then the full benefit in Q4. But absent that, I mean, I'd still say pleased with where June ended. If we can hold in this 45% range and then layer a little benefit from the sub debt, I think we'd be pleased for that in Q3. I mean we talked a little earlier about what you're seeing on loan pricing and some of those things, and we'll see where that goes, but yes, very pleased with that.

John W. Allison, Chairman

I think we have just short of $1 billion repriced between now and the end of the year.

John Stephen Tipton, CEO of Centennial Bank

Yes. We've got a little less than $800 million in loans, fixed-rate loans that mature in the second half of this year. Those were coming off at $546 million. So there will be an opportunity to get those up some. We've got about $1.1 billion next year that's at 5.99%. So who knows what happens with interest rates between now and then? But certainly, in the second half of this year, I think there's an opportunity to get a little extra yield on what's maturing.

John W. Allison, Chairman

Got you. Okay. That's perfect. I wanted to ask about the loan yield, which you addressed. Regarding the expense number, just to clarify the core number related to the $111 million, Stephen, when you account for the $3.3 million and if your reported expenses are $116 million, what else should be adjusted to arrive at the core number close to $111 million?

John Stephen Tipton, CEO of Centennial Bank

Yes. We incurred just over $1.3 million in legal expenses related to our West Texas lawsuit, which we discussed last quarter. We had a significant invoice in April from the previous month. Those invoices have recently decreased to a minimal amount. Assuming we resolve this matter soon, I expect those legal expenses to cease. This leads us down to the $111.5 million range.

Brian Joseph Martin, Analyst

One thing we need to consider is that we had a special assessment reduction, which accounts for our FDIC number being down $1.5 million.

John Stephen Tipton, CEO of Centennial Bank

Yes. If you examine the salary expenses for Q2, you'll notice they were slightly elevated due to fee income, particularly from CCFG incentive compensation and similarly in mortgage. Mortgage performed well this quarter. Overall, incentive compensation increased by a comparable amount to what was offset by the FDIC credit. So those amounts essentially balance each other out, and there’s about $4.5 million that I do not anticipate will happen again.

Brian Joseph Martin, Analyst

Okay. So the extra that's in there is in the salary line, and that's how to think about that to kind of get to the core number?

John Stephen Tipton, CEO of Centennial Bank

Yes.

Brian Joseph Martin, Analyst

Yes. Okay. And then, Stephen, I think last quarter, and maybe Kevin talked about this, but the payoffs versus originations, you guys had expected some payoffs. It sounds like those maybe are going to roll into the next quarter. But just what were the payoffs in the originations this quarter?

John Stephen Tipton, CEO of Centennial Bank

Yes. Payoffs this quarter were $756 million. And you're right, there are a handful of those that we expected to occur in Q2 that may slide into early Q3. So $755 million; they were about $650 million last quarter. And then origination, Kevin mentioned origination volume was about $1.1 billion. Typically, about half of that is funded at quarter end.

Brian Joseph Martin, Analyst

Got you. Okay. And then maybe just one for Kevin on the credit quality. It sounds like there was an expectation that some large credits would come off this quarter. Is that the one you’re referring to? At least when we think about the third quarter, regarding the improvement that was expected this quarter, are you suggesting that it’s likely in the $10 million or $12 million range and that we might see that type of improvement in nonperforming loans in the third quarter or just some benefit there?

Kevin D. Hester, President and Chief Lending Officer

Yes, you’re correct. There’s approximately $12 million, and I had hoped to announce that we had moved it to the second quarter, but it seems it will be in the third quarter. We also have another project in OREO that isn’t quite ready yet, but we’ll start leasing the apartments this quarter. We’ll see how it goes, and if it does well, it could attract interest from potential buyers. So, we are making progress.

Brian Joseph Martin, Analyst

Got you. Okay. And just the reserve level, it kind of drifted down a little bit this quarter. Just this kind of this level is where you're comfortable for now, and just it kind of hangs around where it's at. Is that how you're thinking about it, given the current credit outlook?

John W. Allison, Chairman

Yes, we're comfortable. We're extremely comfortable with the reserve. If we had an opportunity, we'll build it; we'll build it at some point in time. So I still like a 2% reserve. I just like it. I just always run a 2% reserve. If I get a chance to build it to 2%, I'll take it to 2%. I just sleep better than that; you should, too. But I sleep pretty good at 1.86% to 1.85%.

Operator, Operator

This concludes our Q&A. I'll now hand back to Mr. Allison for any final remarks.

John W. Allison, Chairman

Good quarter. Thanks, everybody, for your participation. I hope you enjoyed the earnings release. I guess next quarter, we'll be 77. Is that right, Donna? Next quarter, we'll be 77. Bunny is in here with us. You got anything to say to the folks?

Robert H. Adcock, Board Member

No, just fantastic quarter. That's what I would say. I can say on behalf of all the other Board members, we're very, very, very proud of this group sitting in this room today and all that you've done. Thank you. Appreciate it.

John W. Allison, Chairman

Brian, anything that you want to say or anything we left out that you think we need to cover?

Brian S. Davis, Chief Financial Officer

No, I think we pretty much covered it all.

John W. Allison, Chairman

Stephen, anything else?

John Stephen Tipton, CEO of Centennial Bank

Good quarter.

John W. Allison, Chairman

Kevin?

Kevin D. Hester, President and Chief Lending Officer

I'm good, sir.

John W. Allison, Chairman

Donna?

Donna J. Townsell, Director of Investor Relations

Not here.

John W. Allison, Chairman

All right. Well, we're going to be going. We'll see you and talk to you in 90 days. Thank you.

Operator, Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.