Greetings, ladies and gentlemen. Welcome to the Home BancShares 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. [Operator Instructions] The company has asked me to remind everyone to refer to the cautionary note regarding forward-looking statements. You will find this note on Page 3 of their Form 10-K filed with the SEC in July 2022. At this time, all participants are in a listen-only mode and this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Donna Townsell, 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 Stephen 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. It's been a hectic and exciting quarter here at Home BancShares as we have completed the merger of Happy State Bank, while also watching the volatility of the economy fluctuate at the same time. But 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 BancShares 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 discipline 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 desire to stop inflation and they should not because it is killing our seniors, fixed out better on fixed income. The reason I think they'll not back up is in the late seventies as inflation roar, vulgar made the mistake of backing off rate increases too soon and had to come back in the eighties and take rates to 20% plus to correct the problem that he probably could have fixed the first time. We have to get rates in parody with inflation to even begin to take control of this outta control monster. Last quarter, I said it was 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 off the buts and take decisive action. Actually a hundred basis point shock would be a good thing now and if they'd stopped the puppet show, I think that would be…

All right. Thank you. Thank you for those remarks and congratulations on such a great quarter. Now we will turn to Chris Poulton, and he will share update on CCFG.

Thank you, Donna, and good afternoon to everyone. CCFG continues to see demand for our products. During the second quarter of this year, our portfolio grew by $274 million to just over $2.4 billion and about $450 million of new originations. This growth is part of a portfolio rotation that began in Q3 of last year in preparation for anticipated paydowns during the second half of 2022. Last quarter, I spoke about these expected payoffs and paydowns. For Q2, we received $190 million in payoff pay downs. However, we expect that number to increase significantly in the coming 3 to 4 months especially as prepandemic projects are completed, sold or refinanced. For context, we've already received approximately $200 million of payoffs in July alone. I expect an equal amount or more in the coming months or months. This level of paydowns is a feature of our portfolio as it allows us to continually rebalance our product mix for changing market conditions. Over the course of the last 6 to 9 months, we've slowly reduced our level of active construction loans while increasing our originations in multi-asset loans and facilities. Of the $450 million of new commitments in the second quarter, almost 90% were in multi-asset loans and facilities and 65% were with repeat customers. Historically, periods of market volatility of affords opportunities to support our existing roster of clients as well as add new institutional asset acquirers to our client mix. One of the strengths of the CCFG platform is our willingness, in fact, our desire to realize repayments, which allows us to position our portfolio for what lies ahead. This is especially true during times of market disruption. Thank you, and I appreciate the opportunity to share our results this quarter. Donna, back to you.

Thank you, Chris. And now for more operating results of the quarter is Stephen Tipton.

Thanks, Donna. It's a pleasure to get to report on our company today. First, I would like to recognize our bankers on the ground in Texas for their tremendous effort over the past several months. The happy closing and conversion has been a monumental task for all of our teammates, and thanks to you all. As Johnny mentioned, it's certainly been a busy 3 months at Home, but our patience and persistence is beginning to pay off. The net interest margin improved nicely to 3.64% for Q2. The addition of the Happy balance sheet, variable rate adjustments across the loan portfolio and higher earning cash balances all contributed to the increase, and we would expect to see additional improvements as rates continue to rise. We are keeping a close watch on deposit balances and customer activity in this dynamic rate environment in our new markets in Texas. We took the opportunity in Q2 to make improvements to our funding mix specifically a subset of broker deposits, along with several fully indexed or 100% beta municipal relationships. We will continue to refine the deposit base and navigate this rapidly rising interest rate environment. After peaking at a little over $20 billion early in April, total deposits ended the second quarter at $19.6 billion. As the mix is refined, we believe the result is a more granular core deposit base highlighted by over $6 billion in noninterest-bearing deposits or 31% of the total base. Switching to loans. Production was strong at $1.6 billion for the quarter with $1.1 billion coming from the community banking markets in Texas, Arkansas, Alabama and Florida. Kevin can provide additional color on what he is seeing in the pipeline during Q&A, but the activity in our committees in the past few months has been really good. Switching to capital and a few key ratios. We had total risk-based capital of 16.6%, common equity Tier 1 capital of 12.8% and tangible common equity to assets or a TCE ratio of 9.01% as of June 30, all of these well in excess of our internal targets. Johnny mentioned the strength of Homes balance sheet in his remarks. Given the capital ratios we just mentioned, top-tier reserve coverage on loans and the flexibility of having well over $2 billion in cash to invest or to put into loans, we are extremely well positioned to weather any storm or opportunity that comes our way. Donna, with that, I'll turn it back over to you.

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

No, no, this is Tracy. Do you have anything you want to add this morning or the...

Before we go to Q&A, you got anything you want to say. I think I'll cover most of it. And again, it has been an extraordinary quarter for Happy Bank and Centennial Bank and staff members shareholder, you couldn't have been prouder with the efforts since going out to do that. And as Johnny mentioned, been able to go down and meet the West Texas shareholders want to uplift that was and just meet the people and meeting our friends and our new shareholders, and we're looking forward to working for them as I've committed with us. All of us here at this company work for the shareholder. We look forward to the next quarter results. John?

Thank you. It was a great trip, about 6 or 7 of us that were in 8 maybe. And we -- it was really heartfelt. We started to do is we didn't want to expect. And it was wonderful shareholders. They got to hear the home store. So Anyway, I hope we set out information. I hope they're on the phone call today they can listen to the report as core as we are. So Donna, I think we can go to Q&A.

Okay. Thank you very much. So operator, we'll turn it back to you.

Before we go, I'm just going to summarize. I thought it was one of the best quarters in the company's history. And I just want to summarize. You got margin up 43 basis points. You got revenue of $243 million. You got $95 million operating profits with $0.47 EPS, good solid loan growth, peer-leading asset quality, strong liquidity. We're doing lots of work on our debt and pay off our debt increased profitability. We've activated our buyback plan. So I don't know if it's the best quarter in the company's history, we've done the best at sure the top 3 or 4 in the company's history. So we're very proud of the performance of this company during this time. And hopefully, won't have these one-time expenses next quarter. We'll have to still have some bragging around for a while, but not a lot of them. So anyway, I'm ready to go. Thank you.

[Operator Instructions] Our first question comes from Brett Rabatin with Hovde Group. Brett, your line is now open.

I wanted to, I guess, first just talk about the loan pipeline from here. And Johnny, you indicated you still think that interest rates fit fund should be 6%, and the market obviously isn't taking that in. It would seem like given your thoughts on rates, maybe you would want to continue to be conservative and not open the spigot, so to speak, particularly with fixed rate lending. But I'm curious how you're going to treat the current environment until it becomes more, what you're expecting from an interest rate perspective?

I'll comment a little bit, let Kevin talk about that. Kevin, do you want to go?

Yes. From our side, we're going to continue to do what we always do, which is be conservative and make good credits and I think we're going to see an opportunity possibly if things do get volatile, that we'll have an opportunity to keep doing what we do, and you may see some loan growth. You may not. It will just be -- as Johnny always says, we'll take what's given to us, and we'll make that work. And rates will be a part of that. We're not going to -- we're not going to go out here and do anything out of our norm. So we'll continue to work with what we got. Pipeline looks solid. Texas had good growth in a quarter when they're just brand new to us. And so I think that looks good, too, Chris, I think we'll probably won't show the same numbers we showed last quarter. So we'll -- you'll probably contract a little bit, and then he'll go from there. So we're just going to keep doing what we do.

Interestingly, I saw more 6s at the loan committee this week than I've seen. I haven't seen 6s at loans in a while and probably 60% of loans have a 6 in front of them. So anything that we asked for just the market recognizing that's what we're doing. We're seeing some we're still right to. We don't write for an we can. We'll run them love it and blame. We'll write something better. in other markets, we're probably not going to do that. So -- anyway, who knows what's going to happen. Just be careful. That's the thing just to be careful. I don't know if we're going into the back places. I don't know if we're going into a recession. I don't know what we're going to do. It's just cautious times I'm glad that we've done what we've done to protect our shareholders because it could get could get really rough. I remember the last time this happened, is when all the Texas banks blew up. That's when all the failures were in the late '80s. And I think everybody ever has an handle, ever as I was sharing with somebody a while back, we bought I said don't tell me it can't happen in Texas, so we bought as many fail banks in Texas we bought in Florida. So I hope we just stay cautious, be smart and good paper, good loans. That's what we're going to do, Brett.

Okay. That's great color. And then I wanted to ask about the expense savings of $53 million on the Happy transaction. And it sounds like you had some things happened there, but it sounds like it's actually working out maybe as good or better than expected. Can you talk about the pace of those expense savings and kind of what we should expect from an expense run rate going forward?

Well, probably -- I don't have the exact number for the month, but obviously, when we were running at 47% in the first quarter, and happy he's running north of 62%, and we combined through this quarter around 46%, it is pretty amazing turnaround and expense reductions. So some of that -- some people that were probably overpaid helped us as they left. So Stephen and Brian...

Yes, I think we modeled -- Brett, I think we modeled 75% of that number to occur over the course of this year. So obviously, some of the departures help from a personnel expense standpoint. And then we're working through contract renegotiations right now. It's all Johnny and Tracy yesterday on insurance. I think we're going to pick up about 600,000 or so, an improvement there. So yes, I think we'll continue to work on it over the course of this year and at some point, take a look at facilities and some of those type of things too.

Yes. I think on the insurance, I think Stephen said, we were paid about $1.4 million now and Happy with -- we paid $1.2 million last year, Happy paid 800 and combined we're going to pay $1.4 million it's about $600,000 savings, it's $50,000 a month, we'll take that. He's clipping along at to see benefit at those things one after the other as we go through this. So Brian, do you have any…

No, I thought your analysis of got an improved efficiency ratio kind of sums up that we're well down the road on it. where our efficiency ratio go down from a linked quarter basis, that's pretty remarkable when you add in happy at that 60-plus efficiency ratio.

That may be certainly one of the highlights in the quarter with that combination doing the way it does. So thank you for that question.

Yes. Certainly, really strong results this quarter. Maybe just one last quick one. You mentioned marine sales were down 25% -- or applications, I'm sorry, were down 25%. And I think it's kind of interesting that used RV prices are actually up 5% year-over-year in June. John, are you seeing anything that would tell you that the economy is actually slowing and there are some pressure points out there? Or do you just not see anything yet?

Well, on the residential side, it's certainly short on the residential side. So the subdivisions and house is going to slow down now just going to -- I think rare about 5.50 now on 30 or mortgages, we slow some people base. That's for our housing people that's been one of the strengths of all of us, all the banks have had good run in housing, finance housing and their mortgage book. So that's worked really good. I hate to see that go away. But it's got to. It just -- it's going to don't happen. I don't think there's any doubt about it. Kevin, you got any color on that?

No. I would just say from our perspective, remember, we're in some pretty good states from a from a housing perspective, and we may feel it less than some others. Historically, Venerate than we were across our footprint even and they're watching closely not only what we have on the ground, but what other banks have on the ground with our borrowers also. So they're watching it closely, looking at specs and how well they're moving and if it's slowing down. And so that's what we -- that's what we're going to do the rest of the way through. It's just trying to be real close to our borrowers and make sure that we know what's going on.

It's good having operating in Florida and Texas, the 2 best states in the nation for business is such a plus because to comfort our shareholders and their loved ones, having an oven those strong operations that will stay, they can absolutely be countercyclical to each other. And one of them is down, the other one can pick up. When we got both our sources pulling together floater, you see what happens as you see what this month turned out for us. So that's what happens when you get together. But if Florida slowed down Texas continues on, they can be contesting with each other and that provides some comfort to me and I'm sure our shareholders out there in the world. We'll continue to try to grow in it states, by the way.

Our next question comes from Brady Gailey with KBW. Brady, your line is now open.

So Johnny, you were active in the quarter, putting some cash to use in the bond portfolio. You're still sitting on a pile of cash. Maybe thoughts on kind of how that progresses from here. Do you still slowly drift that cash into bonds? Do you wait and pause here for a second? What's the outlook on your continued cash to bond deployment?

Well, we're sitting on about $2.5 billion now after paying off some deposits. So we'll probably -- we'll probably start putting some of it in here to work a little bit. I think it's probably -- we're going to wait after the next increase and then -- which is -- 75 to 100 basis points, I assume probably 75. We'll start deploying a little more we've been picking our spots. As you probably know, we picked the -- some of these companies are raising capital, and we know the companies, and we've been betting spots and getting great yields I don't know where I said earlier, just want to say Johnny is predicting 6%. I think you can see what we can see 6% so like in our 6% loans and our securities we're getting back on some of the shares are getting better made, as you well know. So I think we'll start. We'll watch what happens in the next 2 weeks, and I think we'll probably start putting some more money to work here in the third quarter.

And then after you guys put so much reserves through the pandemic. The provision has been kind of the core provision has been close to 0 for a while now. How do you think about that as we potentially head into a recession. Do you start to have the provision? Or you guys have so much on the reserve side, do you think you could have a zero provision for a while here on out, even if we do see some more economic weakness?

Well, I tell you one thing. We won't have as much to put in as other people will. So we've maintained a lot of reserves as we believe in. A lot of people use their reserves as a peak. They pull it out and put it in the income, and we did. We just set disciplined and patient as we always are and let the money in reserve so everybody can sleep at night. Well, now then we got what may be a recession coming up, maybe, and it is going to be marked reserves. We've seen some of the big banks go in and put in reserves, big amounts are home has to decide to put some reserves in I don't think it will be substantial. So if we're going into a recession, I think we're prepared. But if we get a one time -- we like reserves, if we get it one time free shot it. putting $230 million reserve we'll certainly take it. So that's always been our attitude. You know that we are with too much reserves. These people use like a piggy bank. They what good is it doing to put in the income because it's just a onetime deal. And based on what we're seeing, it looks like you may be going the other way. Kevin, you got to comment. I don't want to and you deal with that every day.

No, I think you said it well. We didn't take it out as we came through the end of COVID. So we are, I think, higher than most folks. And if we do have to put some in, it won't be to the levels that some others would have to.

I think that's correct.

And then finally for me, just -- was there something else?

No, no, I'm sorry.

Yes. So finally for me, just on M&A, it's an interesting time to think about M&A for you guys. Happy as closing in the books and you guys have a ton of capital and you're confident in your balance sheet. But at the same time, we're headed towards economic weakness. So I know a lot of times, you all like to buy when things are cheap bank stocks are cheap right now. So how do you think about the dynamics of participating in M&A in the near term?

We had a more Happy's book April 1, that cost us $128 million I reported that last time. And I'm just shocked at when I think about that. When I think about somebody doing an M&A transaction today. Not only have they got to mark the bond book, they got to mark the darn loan book and these people are rolling 2% or 3% to 3.5%, think about the value of that loan book and what that's going to do. So having a hell can they pay anything for any month today in the marketplace. It's going to -- I think it's going to lower. Average price is 50 a tangible book right now. We're still freight over two. But there's only a few of us paying over 2X tangible well in the entire United States. So my thought is that it's I guess it's a long role doesn't turn, but it's pretty interesting to me. Somebody try to sell their bank in this environment based on what they're going to have to do with their AOCI, and we want the great turnaround dealer loan mark the earn back to tangible book could be 42.5 years. It is -- it's selling to me. You go to mark that loan book and these rates now. And that's really going to be pretty disastrous. I don't know what that will -- what impact that will be, but I don't know what impact is made on the bond book. So it makes a similar impact on the loan book I don't know if M&A can be done. And these people have got M&A going on that haven't gotten to the mark date yet, Brady, I don't know what the hell we're going to do. You get what I'm saying? We marked $127 million, and we marked the loan book, we have to we had some of the bear mark the loan book today with interest rates, I guess it could be as much or more than what that was. Pretty good, right? Happy had good. Happy stay out by set. Happy did a good job on their loan rates all the time. They did a good job. If you remember, we were the highest in the countries were higher than us. So if you take these people that roll low loan rates, what they will do. It could be six, seven deal -- like Happy it could be $400 million, $500 million. I don't know what it means in today's market. Pretty scared. I hate to be raising capital today. I'll tell you that.

Our next question comes from Matt Olney with Stephens. Matt, your line is now open.

I wanted to go back to Chris Poulton, and Chris mentioned that some of his growth that he's seen has been in that multi-asset facility lending. And I know those facilities can have lots of different assets and go different directions. So just curious if Chris as seeing any themes from your clients within that -- within those facilities.

Matt, it's Chris. Yes. No, I don't -- as you say, there's different things that facilities do. Sometimes that's loans, right? So folks that have some loans, they want to package together and we'll back lever. Others are acquirers of assets and they put those together, they bought some things, and they want to put those together. So I'd say it's been probably about half and half mortgage assets versus commercial real estate loans. But one of the things we are seeing is that some of the lenders had facilities in place, warehouse facilities in place. And during the last, say, 6 months or so. Certainly over the last 3 months, we've seen some of those facilities pull back. Those facility providers pull back, and that creates opportunity for us coming at a lower leverage, higher price because they may be forced to look at whether they put equity to work to do that or they take a little bit of leverage as they pull some stuff off of those warehouse lines. So that's probably been the biggest opportunity is folks that are having to find alternatives.

And Chris, I think you also talked a while ago, maybe it was a year plus ago about being patient within New York City, just anticipating a slower recovery and I think that's been the right call. I think you pivoted maybe a year ago to some more deals on the West Coast and other parts of the country. Is that where you're seeing some of the paydowns at this point that you expect in the back half of the year on the West Coast and other parts of the country?

Yes. We had a couple of deals in New York payoff as they finished. So probably 3 of those are New York deals. I had a -- yes, 2 on the West Coast, 1 in Florida. So I think it's -- it would be what you'd expect it to be, which is pretty representative of where we've lent before. I haven't seen anything really be where it's all West Coast or all New York, et cetera. I think it's -- whatever our portfolio looked like 3 years ago, you're getting that percentage pay off now. Some of the stuff we expected to pay off this past quarter, I mentioned $200 million of paid off in the last couple of weeks since July 1. Some of that we kind of expected to probably happen in June. We are finding, like on our side, loans take a little longer to close, and sometimes that means payoffs take a little longer to come too because everybody is still trying to deal with getting third parties done, etcetera. That's been the biggest delay, probably a lot of these is if somebody is refinancing today, getting your third parties finished, getting the -- getting the appraisals done and getting the legal work done, et cetera. Everything just takes longer today. So I don't know that we've seen it be more concentrated or not.

Okay. Appreciate that. And I guess I want to switch gears. I wanted Stephen pitch it on the spot here, asked more about deposit pricing and I guess we're hearing across the board about banks moving up deposit pricing rates over the last few weeks, just culminate the higher rates. So we'd love to hear more about Home Bank's strategy and how much pressure you're getting to move up rates higher and just trying to appreciate where the deposit betas could be for Home Bank this cycle.

Sure. Matt, we're seeing the same thing. The first rate increase in March, we were able to be pretty agnostic too. We had to pass a little more along in May and a little more along in June. So certainly, it's got customers' attention today. I think you start seeing you start seeing 2% rate gets everybody's attention. Yes, I think our ALCO model on the checking account side, we ballpark about 40% when you blend everything together and it's something that we use to try to manage by. We've got some balances that they are contractual that are tied to treasuries that obviously have moved a tremendous amount over the last three or four months. But the negotiated rates and the rate sheets that we have in our regions, we've -- I would say we've been in that the 20% to 40% range of what we passed along. We're taking it customer by customer and market by market. We -- Tracy and I have had that conversation multiple times or on a weekly basis or more frequent here lately, just in terms of being on top of some of the movement. I think some of the outflows you've seen is people spending money and having to spend their money. But it's something that we're watching very closely and are going to keep every core customer that we have regardless the rate.

In terms of deposit growth from here, you seem to be in a pretty unique position with the excess liquidity. Would you think you would grow deposits in the back half of the year? Or is this now just a time to be careful and just kind of hold on to what you get or even contract? Are there any higher rates that you could be running off the back half of the year?

I think it's careful and watch what we got. Certainly, we're going to always continue to focus on customer relationships and generating new business. But I think it's something we'll watch closely. There's always some seasonal movement around municipalities and schools and when money flows in and flows out and some of those kinds of things that may affect those levels in the upcoming quarters. But just based on what we've seen over the last couple of months, I would think things -- I wouldn't expect any material growth from where we're at today. But like we said, we're in a good position with $2.5 billion -- $2 plus billion in cash that we can pick our spots.

Our next question comes from Stephen Scouten with Piper Sandler.

That's right. It's all the same. I respond to any and all sorts of names. So guys, it feels like I think it's pretty clear that you all are very well positioned. You've talked about it, higher reserves liquidity put to work, been more patient. How do you think about using the buyback as well at this point in time? You were still relatively active this quarter. And so just trying to think about how continually active you might be, especially when like a day like today where the stock is down for purposes, I don't really know, be honest with you.

I figured it would be up at least $2 a day. I don't give -- I don't know if we can do about it.

Do you think you to be as active with the repurchase or...

Yes, I think we will -- as long as they keep it down here, just put it where we can just pick it up. We might pick it up. you realize we bought 1 million shares, but then we bought the bonds. But we we're down here up cash to buy it with. So we've just been passed along we've got our other securities that went up -- you can see the base signed down on this last quarter call us $1.8 million, but they're back they're up. So we think banknote really particularly the ones we invest in are pretty good banks, and they're going to be around. They're not going out of the business. And this reminds me it was fourth quarter 2018, and we're making more money than we know what to do with. And I've said, Donna, our stock's going straight down and Donna gets back packed on all of the country, and we're going to tell everybody how well Home Bancshares is doing while they're beating up many stock. If you remember that, I would probably burn $150,000 worth of jet fuel. We went all over the country, and everybody was pessimistic. Nobody believed us. Nobody believed we were doing what we were doing. We were swimming up main was a book in man and there was a Russian in inmate and everybody will scare today. Banks are actually in pretty good shape today. at least particularly on in great shape. So I told that to get you back fat. She said, what 4 months, we're going to going to tell how well we're doing. She said they won't believe it was this time every I don't know at home, things are very good here with Home Bancshares.

Sounds good. I'm curious, I'd love to hear a little bit more from Chris around what he's seen in his markets in those larger ticket loans, I feel like -- I don't know, I feel like Chris kind of hate everything. I feel like it always sounds like he reluctantly does loans in his market. So I'm just kind of curious what he's seen and if anything worries him in any of those are...

You got in fact, pretty close. Thank you, Chris.

I thought I was a ray of sunshine but -- what I tell you guys is, hey listen, every once in a while, we reluctantly agree to give some people some money. But I think that's served us well, and it's continuing to serve us well because we could have plowed into some things over the last year thinking time is right for us. I think we've had a good origination year so far. I think well, what we're seeing is, especially on the bank side, bankers aren't that creative generally to begin with. They're not the most creative people to begin with, I think. And when things look like they might be disruptive, they just go home, right? So as far as I can tell, once Memorial Day hit pretty much every large bank in the country just went home and they'll come back after Labor Day and see if they feel like doing something. So we're seeing opportunities over the summer and through the second, third quarter, where people are just saying, "Hey, listen, I got this project, I want to move it forward or I'm buying these things and don't want to do that, and we're going to have to get that done over here." And some of the people I normally go to for higher leverage and lower costs aren't going to be there for us right now. And would you look at it? And we do, right? I just think we always do what we do, which is we look at a deal and we find about what we think about it. We find 4 or 5 ways out of it. And then we say, "All right, I'd probably do it like here. And sometimes that's disappointing to folks. And sometimes they say, I can make that math work. We're finding more people now saying, I think I can make that math work because that might be my best option. But it's taken a little while though. I would say the last couple of months, it's been borrowers readjusting their expectations because they're saying, well, I used to get 70% at L plus 2 75%. And they say, "Well, you should go do that. That's a good deal. It sounds like a pretty good deal. I do that if I were you. And they said, "Well, yes, I don't have that right now. Okay. Well, we can talk about what we would do. And by the way, what we would do is what we've always done, be in the 50s on leverage. And we're going to be over, and we're happy to keep talking to you about that. And so I think our product is useful to people right now. And so we'll continue to be there. And that's why I think we get the phone calls because people know we'll be there. And if we say we're going to do it, we'll close, which is important today because things are a little disrupted.

Yes. Okay. That's super helpful, Chris. And then maybe the last thing for me. I'm just curious, Simmons, I think, was talking about overdraft NSF charges. Maybe this is more of Stephen Tipton or Brian question, but I'm wondering what the level is of overdraft NSF fees that you guys had? And if you think -- or if you start to do any of the work on potential pressure on those given kind of regulatory focus on those charges in general?

Stephen, this is Stephen. Yes, it's top of mind. We're in conversations with our regulators on a consistent basis. We operate our system in, I would call it, the most compliant least risk way today. You are seeing a lot of banks announced that they're doing away with NSF fees or overdraft fees or creating caps and cushions and things like that around their program. And yes, we're in conversation on that. No decisions yet, but evaluating data and may look at something like that in the future. But we're in discussions, as you know, I'm sure there aren't any tetany guidance out there from the regulators. So in a lot of cases, banks are kind of shooting from the hip on what changes to make. But it is something that we're looking at and may evaluate later this year.

Great. So I appreciate it. And Johnny, I think if you go around the country, again, you should do it in the RV and do just a bunch of big campaign type events. I think that will be highly entertaining. You can do a little dance like President Trump did at the beginning, too.

Thanks for that, Stephen. The price we feel good. I'll see you on the road.

Our next question comes from Michael Rose with Raymond James.

Just to -- just.

I remember what your children we're -- I don't believe you can tag.

So just going back to the comment on marine. It sounds like growth kind of slowed -- was that more kind of self-inflicted just kind of given where we are in the market? Or is that just kind of the both sales season is kind of over. We're drifting towards late summer fall? Is it more seasonality? Or is there anything more purposeful a read-in there to that?

Well, there's a little seasonality. I'll let John talk more about that, but this is a term we have the boat shareholders loan activity happens in. The factories are still all sold out. You remember a my both last August, and I get for a test run on September a year. It's 13 months after. So all the factories, I think John confirm this is still booked up. John, do you want to talk about that?

Yes. Thank you, Mr. Allison and Michael, thank you for the marine question. I think -- remember, we've got a record quarter that's now in the rearview. We funded $88 million in retail loans that brought our balance sheet up to just north of $1.1 billion. Look, there's a confluence of headwinds, rising rates, depleted inventories, Michael, that you spoke to and Mr. Allison spoke to, and it's a seasonal summer lull. People are enjoying boats that they've already recently purchased. This is all in advance of the fall season. Typically, we've seen a seasonal pickup, but as Mr. Allison said, we've seen a substantial drop off in the month of July. And I don't know if it's related to those -- any one of those factors that I mentioned, the headwinds or a combination of all of them. But presales, both are presold all the way out 2 years from now. So as quick as the factory send them instead of these things tuning the commercial side of our business with funding on inventory lines, they're going straight to our retail closing. So I still think we're probably a 2-year period out before we start seeing our commercial business build back up. But again, the quarter was a record for us on the retail side. And good news is, and I don't think we spoke to this today, but is that asset quality remains very, very positive. But Michael, thank you for the question.

Yes, absolutely. I'll wait for Johnny to give me an invite on that boost arrives.

You have to do a come.

I'm down. I think at the beginning of the comments, you made beginning the intro comments, you made some comments around Dallas and maybe Houston. Is that something that over time would be kind of interest to you either on the M&A front? Or would you actually maybe look to maybe hire some teams just to bolster what you got from Happy?

Well, we look at both. We look at both sides of that opportunity. We really haven't been one that picks out loan teams in the past. However, we are looking at that, something that we think has a possibility. But I don't know that I mentioned you I don't think I mentioned but we'll continue to grow in Texas and Florida. But I left -- there's not a lot left in Florida, you've got to take smaller stuff, but there's some opportunities in Texas. We're just kind of -- the main play, I think, Michael, is and we're getting there with it. Obviously, as you can see by the efficiency ratios in the company is execution on Florida. You know this company has always executed. We've done been with us on 25 deals we've all -- we've executed on 25. So our emphasis around here is executing complete the execution and its way down the road on a heavy transaction. And then once we get that done, we'll go look because there are an amazing number of banks, particularly in Texas that are for sale. So there I think there will be good opportunities there. And people are getting realistic on price. The problem is, Mike we hear my earlier comments about marketing the bond book and marketing loan book and trying to get a deal is still not diluting. I'm not sure that can be done in this market right now. I'm not sure that's possible. Brian, do you think it can be done?

If your focus is on no dilution of tangible book, no. Take such a large interest rate mark on the loan book that would be pretty painful.

Yes, that's my point. I really wasn't paying attention to that, Michael. I was thinking about the bottom of wet that $128 million on Happy, and then I have to think about the loan books and I thought, well, these loan books are bigger than the securities books are and taking a hit like that, we'll just dilute to lose. So if you remember a store, we ended up diluting $120 million by $100 million, wherever it was, about 18-month earn back on a Happy transaction. have the revenue came in a little stronger from the healthy side than we did not anticipate or it may not be that long.

Great. Maybe one just last quick one. Securities are about 21% of assets at this point. I know you invested some. How should we think about the size? Would you grow it much more as a percentage of assets from here? Right now, do you feel more or less comfortable?

You so much per growth? Yes. We do -- as far as I'm certain we're sitting on, we put another $2 billion to work. And maybe if you look at these rates and what happens they shot up I think the tenure got to about 3.50 and then they bought it down to two way to Friday on below three. And we'll see what happens. You kind of ticking back up now a little bit we can't tell how much money the Feds want to spend to buy down the 10-year. And they're trying to -- the good news is they're trying to keep housing going. So we will probably try to buy the tenure down. But at some point in time, they be there to buy when that is. But it's not real. The problem is it's not real. That's not a real number. And we need to get back to reality of what a real number is. And I think probably we could spend maybe in the next quarter. However, we gave money to our securities expert and took him a while to spend it in it because of the volatility of what was going on in the marketplace.

One thing we also have, we had a $250 million treasury that matured and we reinvested it into quite a lot to reinvest that.

That's right. We had a 250 -- we got another $250 million meets on a treasury batteries, right?

Like August 11.

So yes, we'll probably a little bit more work. If I'm right, my fear is we got -- you hear the talk today, well inflations oh, we got we peaked, we peak on way down. FED has got -- going down in early '24 or late '23. If we do, it's not going to stay there. It's just what Volker did in the late '70s, and he brought it down people start streaming, so he backed out and then bit had to go back in the '80s states 21%. So I think that same thing that the same thing to repeat itself here for care. So probably $500 million maybe this quarter. If we feel good about it, we might put $500 million at work.

The good news is we'll get an increase in our earnings because of the Fed, we're doing 1.65% a day. If I do 100 basis points, we'll get 2.65.

That's right. Yes. We'll get...

We got to raise way.

I think about that, Michael. This is our bank. The last quarter, increased our income by about $6 million just on interest income that came from the pad. So somebody is running a check for that. That just out a little boy. You think about the rest of the world out there, all the banks out there are doing not all in having liquidity, but most banks good banks have liquidity, and they're getting lots of money and that's cost us as taxpayers lots of money. It serves me a little bit.

Our next question comes from Brian Martin with Janney Montgomery.

Just -- most of my stuff has been answered, but just maybe one on the margin for Stephen. And just kind of just get a sense for kind of what -- if you could just talk about what the loan repricing, what's kind of through their floors, kind of what's moving here with rates? You guys have covered the liquidity part, but just understanding what the loans are? And are they through their floors and kind of what's moving today on -- on the loan book would be helpful, Stephen.

Sure. So I guess numbers are about the same today that we covered back in April. We've got about $1.7 billion or so on the community bank side, we'll call it, that's tied to Wall Street Journal Prime now. Happy had a big has -- Happy had $1 billion plus of that on their books. We're up what, $1.25 billion since that time. So we're -- functionally, the vast majority is at or beyond their floors now where if we get $0.75 billion next week or 100 depending on what you think we'll benefit from that. And then same on Chris' portfolio tied to LIBOR or so for should be moving now. So there's $4 billion or so that that's moving as rates move up here. for top of the house. We show, I think, net interest income in an up 100 scenario at about 6% increase and an up 200 scenario, about a 12% increase. And so that kind of takes -- that is obviously going to wrap everything together between loans and cash and investment cash flows and then the funding side. So that's what we've tended to focus on here lately.

Got you. Okay. And then just the starting point, I think, Johnny, you gave some color on kind of the monthly margin. Kind of the jumping off point for the core margin or the margin as June, when you back out some of the marks and the juice in there, kind of what was the core margin kind of running in the month of June on a clean basis on a core basis?

Well, you want me -- I'll try and take that one. This month of June for 3.87% that included about $1.5 million in $1.6 million of additional accretion income that was for the whole quarter for the loan book. If you kind of normalize that, that's about 9 basis points. And so you would have about three basis points of that in for the quarter. So 3.87% probably would normalize to about 3.81%. The good news -- the good news is we're seeing it. We're following it every month. We want pick up. So that's been very positive. Once on the revenue side coming out of record revenue, we're watching it building I'm seeing July building over June right now. So I'd like to see those numbers on the revenue side to continue to build.

Yes. That's powerful. And -- how about -- Johnny, you talked about maybe not adding as much as other banks on the reserve side, depending on how things play out if we go into a recession or there's stagflation, is kind of the level you're at in the reserve percentage, kind of a floor today in your mind and that it really kind of holds worth that and goes higher if we go into a downturn? Or is there more room to bring that down a touch from where it's at, given current conditions?

Well, I don't know what current conditions are. As of right now, we're fine. I don't know what current conditions are going to be in 90 days. But one thing, as I said, for sure, will know is that we won't be putting as much in the we put in because we maintain strong reserves. So I just always like to $2.40 billion, $2.50 billion. So $2.30 billion somewhere in that range, still that is fine. If we had -- if we went into we went into a recession, and if we did anything, I don't know, $10 million, $20 million made $30 million max, I can't imagine us doing what we do last time $50 million, $45 million or $50 million. We move to $60 million.

More than that COVID.

Yes, we did $100-something million in reserves. So I think we got -- I think we're in pretty good shape right now. I don't know what movies forecast what's going to happen with the economy. That really -- I don't know -- I said last I don't know the Moody's guy there a bit kind of wearing I think it's a different word. But we'll pay attention we listen I think we're in good shape I wouldn't mind going back to 2.50, 2.5% reserve, but I wouldn't mind that at all fire money, right. our money. It's our shareholders' money. We just got it in a different account, just provides more security and safety and more conservative for our shareholders.

Right. Got you. Okay. And then just, Stephen, you talked about doing some refining on the deposits this quarter, I guess, is much of that done, I guess? Or is there more to be done there as far as how to think about deposits, I forget what you said earlier about growth, but just trying to understand if there's more things you're doing there or just kind of mostly complete now?

No, I think most of it is complete. We had $300 million in wholesale deposits that we moved out early April. Same thing there. I think they were top into the Fed fund range and kind of always out of the money. And then we had some others in the footprint that we've talked about over the years in certain pockets of Florida with municipalities and the ability to kind of help plug gaps in the funding base. So a lot of that was addressed in Q2. And I think from here, we'll be just working on interest rates to maintain the balances we can.

Our final question comes from Jon Arfstrom with RBC.

Stephen or Brian, can you help us a little bit on expenses I know you talked about maybe getting a little bit more out of expenses early, but what kind of a run rate are you thinking about for Q2, give us some parameters.

I don't know if I'm going to give out an exact number, but we do have some of our people as we've kind of said all along, it will be August where we actually see what some of the run rate is going to be because we have a lot of people that are been on the payroll all the way through conversion. And those people are dropping off right now. So -- we got a lot of the expenses already just because of some unexpected attrition. I don't know if you have any specific number, Stephen, do you want to give out or not.

Yes, probably 20% to 25% or so when you factor in comp and benefits and everything.

Yes. So when we get down to -- through this next quarter, that will be a great start to held on through the conversion, which was part of June.

Not really, but I think what I'm trying to get at is if you peel out the charge, you're at $110 million or below for a run rate.

Do you peel what?

If you peel out the charge, you're at about $110 million or below, and it gets better from there just in terms of the core run rate?

Talking about core run rate. Yes, going forward.

We're around about 97, I think 100 is reasonable for us. I would hopefully see 100 this quarter.

I think he's talking about noninterest expense. Noninterest expense, you're talking about the...

On interest expense, yes.

It just happens to be close.

Yes. I think goal would be somewhere in the -- to trend over time again. And I think the goal was to have 75% of the $50-plus million recognized by the end of this year, whether we're close to half there or not, maybe that they give you some direction in terms of where we would hope to see by December and into the first part of next year.

Okay. Okay. And then just back on the margin, that 3.81% you talked about core. I think you guys are saying that's trending up, right? And if we get another 75 basis points, that continues to trend up over time?

That's correct. Yes. That's correct. So it was 3.87%. That was a little -- had a little bit too much in it, so it's probably 3.81%, Brian says. So if we got 100 basis points we should approximately core to our model, we have about 6% in net interest income. We are used to run all the time. We got an eye on the 4% again. So...

Okay. I'm just -- I know it's late in the call, but I'm just doing my caveman math, and it seems like estimates are too low based on what you're telling us on expenses and earning assets and the margin outlook?

Well, it depends -- you're right. It depends on -- it depends on or patients we get out of that. I don't know what the next cut-off is how many dollars and payroll on the next change. How many people that is through the conversion and then I don't have that number Well, that's on a pretty significant number, though, of the thing. Just in migration and accounting quite a few of them. All of them are kept through conversion and then they were kept off for another 30 days after conversion. So they were on the payroll in July, they'll come off in payroll for August. You'll -- the third -- the fourth quarter, Jon, you'll see -- you'll probably see most of it. Now however, we got lots of real estate there. I don't know we're going to keep that tees office or not in downtown Amarilla. That's a 240,000 square foot facility is pretty nice. So Tracy, you on keeping at.

I think all the property there in those markets, we'll evaluate and make sure we get the biggest bang for our buck. It's -- when you look at how they manage that, they get some lease income and a lot of things cover themselves on that term spots around those -- all the markets, it could be because -- and we're looking for future expansion for certain things, but that probably wouldn't happen.

I sure like the corporate office is just a little big. Our corporate office is 40,000 square feet. My one was 200.

Jon, I think the biggest thing there, it's been very busy quarter for us. The work has been unbelievable by the Texas Group and the Centennial Bank Group, huge conversion, always a challenge, we'll just say, everybody is working through that at this time, being able to go out and really see some of the things that we could cost saves going forward. We haven't been on our radar screen, but we've been focused on trying to make sure we get the customer taking care of and that's been top priority. A lot of hard effort work on that part. Most -- a lot of good that comes along with that and the other thing that we're seeing what the banks together is trying to really take the ideas of what they did and how they did it. Compared to how we may have been doing it for the last few years and coming up with the best solution. So it's really been a good thing for us. We've been working our tail off -- we spent eyeopener a lot of things that we're -- I think it's going to be huge benefit for us at the bank. And I go back to Johnny's comments at the beginning of the meeting. If I look at the bank numbers and what we're doing, I would have never guessed the numbers that we produced this quarter, take out all the merger cost that throws in there. But, that's a hat off to every region that we have out there, including the Texas market that's come off. It's just phenomenal number that I couldn't be more proud of with everybody involved. And then the extra effort that we're spending that's probably not as driven on revenue, and we're just trying to make sure we get through this conversion process as smooth as quick as possible and some of that revenue start since some of that revenue will take back in all the group in Texas is ready to go. The lenders had to begin to be learned how to be CSRs for a long time, held back on some of the production activity. But we have the long meetings, Kevin and I participate in. They've got a good pipeline going, we're working through it. And so there's a lot of things that are going to happen. The second part here that's going to be, I think, even better for the company, but I want to look at the banks that are 2.33% ROA, it's better and get you, Johnny, but I'm going to try.

That now concludes the Q&A session. I will now pass the conference back over to John Allison for any additional or closing remarks.

Thank you. That was a great quarter. Thanks, everyone, for your attendance today. Hopefully, we'll have as good or better quarter next quarter. I think as I said earlier, it's one of the best quarters in this company's history, particularly a lot of the fact that we combined two great companies together Happy and home and have a happy home today. So the earnings power of the two companies is really pretty significant. And as we continue to deploy our funds into the marketplace into both loans and securities. I think you'll see the earnings of the company continue to improve, at least I hope so, and we should see some reduction in expenses. So we've got more to come. I think John Arfstrom was on the right point asking the question he was asking. So anyway, hopefully, we'll get our hands -- it's been so busy. We haven't been able to see where we are on our plan, right, Brian.

Right.

So -- but we've been working towards it. We knew we were making progress. So thank you all, and we appreciate your support, and we'll talk to you in 90 days.

This concludes the Home Bancshares Inc. Second Quarter 2022 Earnings Call. Thank you for your participation. You may now disconnect your lines.