Operator: Greetings, ladies and gentlemen. Welcome to the Home Bank Shares, Inc. Second Quarter 2026 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. Please note, if you would like to ask a question during the question and answer session, please press star, then one on a touchtone phone. If you decide you want to withdraw your question, please press star, then two to remove yourself from the list. The company has asked me to remind everyone to refer to their cautionary note regarding forward-looking statements. You will find this note on page 3 of their Form 10-K filed with the SEC in February 2026. At this time, all participants are in a listen-only mode, and this conference is being recorded. If you need operator assistance during the conference, please press star, then zero. It is now my pleasure to turn the call over to Donna Townsell, Director of Investor Relations.
Donna Townsell: 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. HomeBancShares reported another solid quarter, generating a record net income as adjusted of $128 million, while significantly expanding our balance sheet and maintaining strong profitability. Loan growth, stable margins, and improving book value, underscoring the strength of our franchise. Most importantly, we accomplished all of this while maintaining strong credit discipline and preserving the profitability that has long differentiated our company. Our team is prepared to provide you with more details about the quarter with our opening remarks today coming from our chairman, John Allison.
John Allison: Well, thanks, Donna. It's been another quarter come and go. The second quarter of 26 was and many more. I'm sure full of records for the record book, shared lots of records for the record book, excuse me. There were a couple of items that I think we should talk about. Number one is our merger with our friends with Mountain Commerce. It's evident that some of our merger earnings came through a little earlier and a little stronger than we anticipated as we felt some of the earnings impact in the first quarter. We got to like that because this trade was non-diluted and therein lies the benefit of a non-diluted trade. is where the two companies should be creating more value together than either company can achieve separately. In our view, the meaning of that is one plus one should equal three, not 1.75. With our deal being a three, both groups immediately start sharing the benefits of their union. In this merger, Mountain Commerce and Home Bank shareholders will equally enjoy the ride together. Perhaps the biggest surprise of the quarter, though, was the surprising long growth with a legacy footprint. We were forecasting a negative $600 million in loans and actually had a plus $26 million. That's a $626 million swing on the loan side. As a result, we will no longer forecast next quarter's loan growth. Obviously, we don't do a very good job of that. The problem is that our customers are really a group of outstanding loyal entrepreneurs that are constantly looking for opportunities that we only learn about most of the time when they need a funding request. Many of them do a deal on the spot, commit to do a deal on Monday and say we'll close on Thursday with cash. The good news is we know their limits and they know our limits. The second quarter performance speaks for itself. During the quarter, we incurred approximately $12.7 million of merger-related expenses. Excluding these expenses, the earnings were, and you're going to get to hear it again, EPS is 64 cents and earnings of $128.1 million after tax. That's an 8.4% increase from last quarter and almost 12% from 6-30-25. In addition, revenue, $295 million at 10.6% from the prior quarter to 266.7. Adjusted pre-tax pre-provision net revenue reached a company record of $171 million. When you adjust for the efficiency ratio, it came out 40.46. Good job by both teams, Mountain Commerce and Home BancShares on the expense side. And it adjusted ROA of 2.09. Stable margin of 4.51, same as last quarter, up six basis points from 630 to 25. And I said good job for MCB and Home on the expense side. On a justice basis, these performance numbers are some of the best our company has ever run. I want to thank all our associates for an amazing quarter, and that includes our new partners, Bill Edwards and his outstanding Tennessee team. We have completed the conversion of our legacy company in June, and I think it went as smooth and as good as it could be expected. Now on to Mountain Commerce. We stepped up stock repurchases during the quarter. From first quarter, we repurchased 500,000 shares, and this quarter, we repurchased 1.5 million. I said our goal was to repurchase over a short period of time the shares that we issued in the Mount Commerce transaction, and we're already approaching the halfway mark. On M&A, we're looking at some other opportunities, but with the non-performing loan that we told you about last quarter, our stock took a drop, even though it was a 2% plus ROA, and again repeating is one of the top most profitable banks in America in the top 10. We bid on a group, we bid on a good opportunity but because our stock was temporarily depressed and we hold our standards high because we do not dilute our shareholders, a bid was not acceptable to that opportunity. We'll hope to revisit that company soon as our stock is recovered. As to the large non-performer, There has been significant movement from last quarter's report, but we stand by our comments that we expect no further loss. The loan was non-performed, and no income was recognized in this quarter for the loan, or this would have even been a stronger quarter. While work remains, we're encouraged by the progress that has been done this quarter. I have to say here that Kevin Hester, David Carter, and Mike Cook I want to thank, special thanks to them. They spent a lot of time on this non-performer. They took the bull by the horns and protected the shareholders of HOME Back shares and thank you guys for a great job. That's a solid testament to the quality, commitment, standards of our people. Mike Cook now taking over the leadership, a while back took over the leadership of the Dallas region. That region now reflects the credit culture of homes operating and underwriting standards. It's certainly nice to have those loan problems for the most part behind us now, but there is some work to be done. However, we think we see the light at the end of the tunnel. In our environment where industry loan growth remains challenging, exceptional loan growth should always be examined carefully. Growth generally comes from a combination of pricing, structure, terms, or credit standards. and when there is robust, standout, extraordinary loan growth in an environment that does not support that kind of loan growth, one should look closely at the right structure and terms. It's extremely important that your team from the top down to the junior lender must have lending experience and not only lending experience but quality lending experience with skin in the game. At home, that starts with me at the top as an asset quality hawk who's spending my sixth Thank you for joining us today. We're excited about that. Glad to be in Rockwell. And this is a new branch, not a replacement. New events included hiring our first in-house counsel, Mr. Jeff Campbell, who will fill the role of corporate counsel. We want to welcome Jeff to the family and look forward to working with him. Donna, I just want to make a quick recap of the quarter, if you'll allow me to do that. and I want to leave this with the investment community. Record adjusted income, record revenue, loan growth from a negative 600 and a $626 million swing, stepped up repurchases from 500,000 to 1.5 million, PPNR, a record 171 million, an adjusted efficiency ratio of 40.46, stable margin of 451, and Mountain Commerce already being a contributor sooner than expected. That has gone well. Continued confidence in Holmes' credit culture. So when you look at the adjusted earnings, the profitability metrics, the efficiency ratio, the stable margin, elevated share repurchase, and strong balance sheet growth, I believe Holmes' second quarter, once again, produced one of the strongest banking performances in America. You know, to your honor, I rest my case. Back to you, Ms. Donna.
Donna Townsell: Okay. Well, thank you, Johnny. It was another amazing quarter. And our next report will come from Stephen Tipton.
Stephen Tipton: Thanks, Donna. As Johnny mentioned, the second quarter of 2026 was a strong showing with the inclusion of Mountain Commerce Bank in Tennessee and a little organic loan growth from Legacy Centennial Bank. Adjusted earnings, particularly excluding merger expenses were $128.1 million, producing a 2.09% return on assets, the same as last quarter, and a 16.82% return on tangible common equity, which is on a TCE ratio of 13.22%. The reported net interest margin was 4.51%, in line with Q1, all while adding $1.5 billion in loans and deposits from Tennessee. The core margin excluding event income was 4.47% and in line with where we got it to on the call in April. The overall loan yield excluding event income averaged 6.96% and exited the quarter at 6.99%. While interest-bearing deposit costs averaged 2.38%, and exited the quarter the same at 2.38. Total deposit costs were 1.85% in Q2 and exited the quarter at 1.84%. Strong non-interest income was a highlight for the quarter at over $53 million. Higher loan recovery income, fee income at CCFG and increases from our SBIC investments were the primary drivers and got us back to levels we saw in quarters 2, 3, and 4 of 2025. Switching to the balance sheet, legacy deposit balances declined in Q2 by $179 million as a result of tax payments and seasonal outflow in April. Worth noting, deposit balances increased by $86 million in May and over $200 million in June to end the quarter at $19.1 billion. Loan production rebounded in the second quarter to just over $1.4 billion, with nearly $1 billion of that production coming from the community bank footprint. Switching to capital, we repurchased 1.5 million shares of stock during the quarter for a total of $40.4 million. As of June 30th, we have over 15 million shares remaining available for repurchase under our current authorization. and nearly $450 million in cash at the parent company. Tangible book value per share grew 45 cents to $15.32 or an annualized increase of 12.1%. Capital levels remain extremely strong with common equity tier one capital ending at 16.4% and total risk-based capital at 19% and reserves total loans of 1.92%. We're proud of the second quarter results here at home, particularly with the inclusion of our partners at Mountain Commerce, and look forward to the second half of 2026. With that said, I'll turn it back over to you, Donna.
Donna Townsell: Thank you, Stephen. And to close out our prepared remarks, Kevin Hester has the lending report.
Kevin Hester: Thanks, Donna. As Johnny noted, we found a way to post marginal organic growth in loans in the second quarter, which looked very difficult when we talked 90 days ago. This included flipping what was an anticipated large payoff early in the quarter into a hold with even a slight increase, which put us on a good path for the rest of the quarter. In last quarter's remarks I mentioned that Q3 payoffs appeared high as well, and that is still the case. In fact, the gap is higher now than it was 90 days ago. Johnny joked about us not being very good at forecasting, and we discussed on the last call some of the reasons why early projections can be skewed toward declines. That said, we have work to do in order to post loan growth in this quarter. Regarding Johnny's comments about loan growth in general, we are seeing loan rates from the competitors creep lower and lower, while probabilities for the next Fed interest rate move are up rather than down. We will continue to maximize loan opportunities while trying to protect our strong NEM so that we can continue to post best-in-class profitability. Asset quality remains solid with an eight basis point drop in non-performing loans and a four basis point drop in non-performing assets. Early stage past dues remained under 50 basis points. And loan loss reserve coverage of non-performing loans improved to 177%. As others have said, we began the quarter with the Mountain Commerce Bank acquisition, and from a lending perspective, the combination's gone very smoothly. The similarity of their markets and their lending philosophy to ours will result in a shorter learning curve and earlier meaningful contribution. On that note, Donna, I'll send it back to you.
Donna Townsell: Thank you, Kevin. Johnny, unless you have additional comments, I think we're ready for Q&A.
John Allison: Well, I do want to talk about loans a little bit. On Wednesday's loan committee We approved about $350 million worth of loans. That's primarily the hits coming from our South Florida group that really have a lot of things going on. JC and David and their teams are doing an outstanding job in Florida. There's $350 million worth. I knew those were coming. I didn't know they were coming this quarter. One of them we've been working on for several years. and it's going to be the best and most fabulous project ever built in Miami, Florida. So we're excited about being in that loop with that team of people and it's a fantastic facility that's being constructed and it is one of our customers. So we just have more, they have lots, probably the second half, they said the second half they're going to bring even more. So that's pretty exciting from that aspect. Some of this is construction so They put their money in first, but it is loan growth that's coming down the pipe for us before long. Anyway, you never know from one day to the other. As I said, our FBO guy bought another FBO thing, and we didn't know it was on that transaction. Kevin just visited with another one. Anyway, we're working on it. It's hard to, as I said, it's like catching a grease pig in a ditch. You think you got him, and he gets away from you. Maybe we'll catch you in this quarter. So that's all I got to say. Donna, I'm ready for Q&A if the rest does.
Donna Townsell: Okay. Operator, we'll turn it back over to you.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Arfstrom with RBC Capital Markets. Your line is now open. Please go ahead.
John Arfstrom: Hey, thanks. Good afternoon. Good afternoon, John. You guys just gave us a bunch of information on loan growth or not loan growth, so I'm a little bit confused on it. But what does your gut tell you today on it? Kevin, you talked about maybe more paydowns expected in Q3 than you expected in Q2. So maybe the indication is down, but then, Johnny, you're talking about a bigger pipeline. So I know you said it's hard to predict, but what does your gut tell you for loan balances in the near term?
John Allison: Well, we have probably more going on in the Florida market right now than we've ever had going on in that market. It is quite explosive. we have been working on some of the projects we had basically billions of dollars worth of opportunities that are going to come our way it may be it may be the next 60 days it might be six months but they're coming those projects are coming from our long-term customers in that market so it's just hard to tell when they when they pull the trigger but overall i'm pretty optimistic you know we were down going to be down 600 million we ended up moving up $26 million. And that happened just all of a sudden. It just, it came in and it fed, it's kind of surprising. So, you know, we're not very good at projecting future loan growth. Seems like when I say we're going to have it, we don't. When we say we're not going to have it, we do. So I'm pretty much, I think it's going to be to keep it at where it is. I think we've got to work hard, but I don't think it's a problem with it. We had our lenders conference in Florida recently, and I told the group, I said, we're down, projected to be down X number of dollars. I need you all to step up. So I don't know if they just reached in their pocket and brought some stuff that they were going to bring next quarter in, but it all came in pretty fast, pretty quick, including the $100 million piece of credit, another $40 million piece of credit, some really good customer credit. We didn't sacrifice, we don't sacrifice quality and margin. for Lone Grove. So we're not going to do that, and we didn't in this cycle. Kevin, you got any comment?
Kevin Hester: No, it's all fair. Hay alts are where they are, and we outran them this quarter, and we'll continue to try to do that. Will that happen every quarter? We don't know until it happens. So the answer is you're still confused.
John Arfstrom: We did our job. I'll probably hold it flat in the model. That's my guess. Chris Poulton, I think last quarter he also talked about maybe some paydowns in Q2 and Q3. Those balances are a little bit lower, but any help on... What you've seen in the pipeline there and kind of expectations for activity in your business?
Chris Poulton: Sure, John. It's Chris. Well, we did get the pay down this quarter that we had anticipated, and yet we were still kind of flat, which means we had good production. I think we've originated eight, $900 million so far this year. I think that still looks pretty good for us as we continue. It's a pretty good number run rate for us. I think like Johnny said you know things we work on some things they go away sometimes we let them go away and and sometimes they come back we're seeing a number of things come back our way we say if you love somebody set them free um you know we let them go and test out the market and come back and sometimes we can work a transaction out I'll be making a west coast swing I think next week and have a whole bunch of things lined up that were things we probably worked on several months ago that now they want to sit down and talk so
Brett Rabattin: I feel good about there being opportunities out there.
Chris Poulton: Like Johnny said, will they come in in the next couple of weeks or the next couple of months? I think we'll see. I don't see anything different now than I did before about our opportunity to be able to get transactions on our terms if we're patient. I just think it's always about the impatient here. It's hard to predict long growth when your goal isn't long growth. Okay.
John Arfstrom: All right, I'll step back. Thanks, guys.
Operator: Your next question comes from the line of Brett Rabattin with Stone X Group. Your line is now open. Please go ahead.
Brett Rabattin: Hey, guys. Good afternoon. Wanted to start on the margin and it sounds like you're being able to, you know, everyone's concerned about competition and Funding costs moving higher. But it sounds like you're being able to grow core deposits. So I wanted to see if all those were sticky. And then just if you can hold the loan yields and not see too much matriculation on the deposit side. It would seem like the margin, at least on a core basis, could hold up pretty well. But I wanted to get some additional color on how you guys see things playing out. And then, obviously, you've typically been a little bit asset sensitive. If we get a rate hike, what does that mean for you?
Stephen Tipton: Hey Brett, this is Stephen. I can take the last first. Yeah, I guess our alcohol bottle shows almost a 6% increase in an up 100 basis point environment. So the Fed did move a quarter or a half. I think it's a net positive for us. On the deposit side, our folks have done a great job in negotiating rates on money markets and CDs. We're seeing and a lot of competition in the four plus percent range. I think most recently half of our CD maturities automatically renewed at our lower rates and the other half they've negotiated in about the three and a half percent range. So they've done a good job there working relationships to keep what we have and then through loan committees and our presidents have folks out pushing Okay, that's helpful.
Brett Rabattin: And then just around the, you know, you had really strong growth in fees, particularly service fees, trust and mortgage. you know, or any of those do you think impacted by any seasonal factors or can those levels be sustained? And, you know, any thoughts on just if the outlook there is for growth or if maybe those numbers were a little bit high for 2Q?
Stephen Tipton: Hi, Brett. Just speaking again. Yeah, you know, as I mentioned in my comments, there were a handful of items that were up in Q2 from Q1. I think on the call last quarter we talked about non-interest income was about as low as it could be at $44 million adjusted for the marketable securities when we were about $52.5, $53 adjusted for that this quarter. Some of that's wealth management. Like you said, trust, financial services are in alignment with Ameriprise. They're kind of hitting their stride and both of those areas are doing well, so some of that should continue. The loan recoveries, some of Chris's fee income at CTFG that comes when payoffs are a little higher, some of that's going to bounce around. I think our view is if you look at the last five quarters, it averages about $50 million over the past five quarters, and that's kind of where we would expect things to be over the long term.
John Allison: Yeah, well, last quarter was kind of, first quarter was kind of an anomaly. We, you know, we normally have much more income there. We just didn't, we didn't get it. We didn't get the, we didn't get the kick that we normally get. And that happens maybe one quarter out of four annually. So, and sometimes, sometimes not, but that was just, revenue was down as a result of that. We didn't, we didn't get, we got no kick, just nothing. So. but 50 is a good number, somewhere in that number, give or take 50.
Brett Rabattin: Okay, great. Appreciate the caller. Congrats on the quarter.
John Allison: Thank you.
Operator: Your next question comes from the line of Michael Rose with Raymond James. Your line is now open. Please go ahead.
Michael Rose: Hey, good afternoon, guys. Thanks for taking my questions. Johnny, just as it relates to Mountain Commerce, you said that, I think in the press release too, that it's contributing earlier and stronger than what you expected. Can you just give some greater color there on what you mean, maybe just in terms of expense savings, revenue synergies, or just any other color broadly you have on what would qualify that statement from your view? Thanks.
John Allison: As we're going through the quarter, first month, second month, and third month together, I could feel the income by looking at the income statement that we're getting extra income from somewhere, and it had to be coming from there, basically. So some of it was improvement at home, but a lot of it was coming from them. I really didn't expect that. I guess I was shocked by the fact I didn't expect that kick that quick. We convert in November, and that's about a $5.5, $6 million savings to the company that we'll pick up at that point in time. So I just wasn't, I think I wasn't prepared for it that quick and I saw the numbers and the revenue numbers and all of it coming together and just was extremely pleased with what I was seeing on the daily reports. I mean if you remember we run a, we get a daily P&L statement here and you begin to see it and you think where'd that come from and how'd that happen and it was just all positive. That's basically it, Michael. Just felt it over the quarter, day by day as we operate.
Michael Rose: No, certainly appreciate that, Collar. It's obviously a good deal for you guys. Maybe just going back to loan growth, I know we've already kind of talked about it a fair amount, but you do have pretty good momentum here. As you mentioned, 350 million recently approved loans. You know, I guess, do you think with Mountain Commerce in the fold and maybe, you know, some bridging into some higher growth economies, you know, now that Dallas is back in a bigger way and, you know, what's going on in Texas? I mean, could we think about structurally better loan growth from home than we've seen in recent years? Or is just the competitive environment, particularly given that some of those markets are more competition, just going to be harder?
John Allison: I can agree that we could have better loan growth. I don't want to talk about what other people are doing because it sounds like I'm throwing stones, but we're seeing some ridiculous stuff being done by some people in the marketplace. It's just really frustrating. We're not going to do that. We've got tons of capital. It's a powerful earnings machine. and we're going to continue to do what's right. And we're not going to get off into chasing rainbows. So we've never done that. We're not going to start doing it now. But I mean, we're seeing structure in terms that, I mean, they're just ridiculous. We're seeing that. So we're not going to do that. We're going to continue to, as I said, keep the quality, the margin and stability. We're going to price that over loan growth. Could we get loan? It might get loan growth. Hell, it's nothing to loan growth. You can get all you want. Give it away, change the terms of the structure, and you can load the wagon. You can just absolutely load the wagon. And, you know, that doesn't mean that it's going to long-term be good. You can look at the asset quality of home over the past, since we've been public, basically, and look at the quality of what we produce, and we'll continue to do that. We're not going to change. We're not going to run off into the sunset. I got people pushing me to lower our standards and go do that, and they can do that after I'm gone. After I retire and I go to the house, they can do that, but they're not going to do it while I'm there. And I don't plan on going after that soon. What was it we had? What was the drink we had here before with Michael?
Operator: It was sugar syrup.
John Allison: Slurpees. The quarter was so good, I told him before, we should have had Slurpees this quarter with Michael. He should have bought a Slurpee.
Michael Rose: I'll wind it up for you next quarter. How about that? Absolutely. Just one follow-up on that. Just in the absence of loan growth, just assuming that the competition does remain intense here in the near term, how should we think about the pace of buybacks is kind of what you did this quarter. Well, we should kind of contemplate, or is there room to maybe even move that higher, just given what's out there and how profitable you guys are?
John Allison: We do what we say we're going to do, and we said we're going to buy back the number of shares we issued in Mountain Commerce. So you probably, you know, we'll look for opportunities. They gave us a great opportunity last quarter. That's when we stepped up and bought a buck because they took us down. and gave us, I think our average is $25 or something, Stephen? $26, so that was a great opportunity for us. If, in fact, we get an opportunity, we'll be extremely aggressive. But it is our intention to buy that back because it is our intention to do another M&A deal on the heels of Mountain Commerce.
Michael Rose: All right, makes sense. I'll step back. Thanks, guys.
John Allison: Thank you. Appreciate it.
Operator: Your next call comes from the line of Stephen Skouten with Piper Sandler. Your line is now open. Please go ahead.
Stephen Skouten: Can you guys hear me? Sorry about that.
John Allison: There it is.
Stephen Skouten: Appreciate it, guys. I'm curious, just following up on those M&A comments, John, and kind of what you guys are, what you're seeing in the market right now, kind of, you know, with bank stocks up kind of across the board, if that's making it, the conversations more palatable or if, you know, sellers' expectations just continue to go higher because, you know, the group trades up. So just kind of wondering how those dynamics are playing out in the conversations you're having.
John Allison: Well, you know, it's a race and Time raises all ships, or whatever they say. Rising time raises all ships. Well, we're seeing that in the marketplace right now. It's pretty good space. Bank space is a pretty good place to be. The last deal, when our stock was down and we bet on, and I understand they wanted a better trade, had they taken that, they'd be up 25% today. So it's... It's almost basically the same. It's how many of their shares for our shares and what that trade means. And we're not seeing a lot of M&A out there right now. People are looking at their balance sheet and are thinking about, is this a diluted, diluted, diluted transaction? So we're not seeing a lot of that. And we're certainly not going to do that. I'm having people say, well, Johnny, with your currency right now, you could go buy this and that and this and that. If you just take a little dilution, well, we don't dilute. That's what the world would like for us to do. And then they can say, well, hell, they diluted that last deal. So anyway, we don't do that. We'll continue to do what we're doing. I think there's opportunities out there in the marketplace. But the deals either work or they don't work, as I've said in the past. They're either accretive, accretive, accretive, or they, you know, our stocks back up close to two times tangible book now. So that gives us the ability to move up and make somebody happy if they want. want a better price. You know, it could be, you know, you trade with somebody last month and they get the stock and it's up, I don't know, 30% since then. So, you know, it just depends. Timing means so much, as you know. Timing is the key to where their stock is, where our stock is, and if it works or it doesn't work. What does hold tight? You know, hold tight on, it's worked for this company for the last 25 years to hold tight on underwriting, and hold tight on acquisitions and do the right thing. So I think we could see a stock market turnaround here before too long. Things are not as strong as they have been, but I don't think it'll be bank stocks. I don't think it'll be home. I kind of went around the horn there, but I don't know if I answered anything that you asked or not.
Stephen Skouten: Yeah, that's helpful context for sure. I appreciate that. And kind of maybe thinking about expenses for a minute, I feel like You know, last year into the beginning of this year, you were kind of hanging around a 113, 114 million a quarter kind of range that you were you were hoping to hold everyone to. What's kind of the number in your mind today, Johnny, where you'd like expenses to stabilize and what you guys think you can achieve there?
John Allison: Well, I think somewhere in that range is fair. We got, you know, what do we have, 12 million? What do we come out of?
Stephen Tipton: 12.7. If you take the 12.7 out, it's about 122,000. which I think it's kind of last quarter where we said you know with Mountain Commerce their current expense run rate where we would where we would land and then you know once we get converted in November we'll begin or we will get you know a good portion of those cost savings out at that time so we'll see a little benefit from that in Q4 and then obviously all of that next year.
John Allison: I mean we think about how efficient home operated and then you add Mount Commerce, how efficient Bill operated, his group, and then we're going to get some additional savings. We're getting some income and we should get some additional savings coming up here pretty quick. So I'm optimistic we can hang in that range in the 2020.
Stephen Tipton: Yes, sir.
Stephen Skouten: Got it. That's great. And then maybe just one last clarifying question back on the previous conversation around loan growth and payoffs and whatnot. I think, you know, on last quarter's call, you guys had talked about thinking there could be maybe a billion dollars in payoffs. Kind of curious where you actually ended up seeing that number come in, if it sounds like maybe it was slightly better than what you're projecting there. And then just as you think about third quarter and beyond, if it's north of that billion a quarter number or just kind of framing that, you know, payoff dynamic conversation up a little bit.
Kevin Hester: Hey, this is Kevin. Last quarter's number was a billion dollars, a little bit over a billion dollars. This quarter could be there. It's a little early, but it can be scheduled for that.
Stephen Skouten: Okay. So that magnitude is kind of the same, and then if you're doing a billion for production, it just kind of depends on how it all funds up and the timing of everything of when and if you can see loan growth. Is that the right way to think about it, Kevin?
John Allison: I think that's exactly the way. This is the toughest time in the bank space as rates are going down or going up. It's better for us if they go up, but when they start down, when the rates start down, then people try to jump ahead of a loan rate and go in and cut the rate one and a half or so and cut a deal with somebody and tie it up. This is the toughest. Going up is a lot easier than going down. This is a battle. You take one customer at a time and you fight the battle. This is, in our history, third or fourth time we've fought that battle, and we'll continue to fight the battle this time. But it's not necessarily all right. I mean, the structure of some of these deals and the loan-to-cost and loan-to-value ratios have kind of gone out of whack. It reminds me of around late 2000, 2004, 2005, you know, 2004, 2005. when people are doing stupid stuff. So we're seeing some of that in the marketplace, and that'll come home to haunt people, I believe. We're just not going to play the game. We don't have to. We've got a good machine that's generating really good, solid income, and the difference between a record month and not a record month is how much risk we want to take, and we're not big risk takers.
Stephen Skouten: Yep, yep, makes sense. That's really helpful, Culler, and congrats on another great quarter. Appreciate it, everyone.
John Allison: Thank you very much. We appreciate it.
Operator: Your next call comes from the line of Matthew Olney with Stevens. Your line is now open. Please go ahead.
Matthew Olney: Hey, thanks, guys. I guess going back to the discussion around the competition for loans, Kevin, you mentioned pricing is getting tighter. Any more numbers you can put behind this in the market and then for Home Bank. Any color on just the production yields you guys have seen more recently?
Kevin Hester: I'll let Stephen cover the yields. He had those in his – we were talking about those before the meeting. I think he's got those written down. I'll let him cover those. But, I mean, we are seeing some things in the fives, the high fives, the mid fives. And as Johnny said, it's not just rate. It is rate and structure in the same deals. Yeah, you can kind of get by with giving rate or you can give a little structure to get your rate and get your risk covered. We're seeing it both ways. And that's the challenge is that you give rate and structure away. Like I said, it's easy to grow if you're willing to do that. That's simple.
Stephen Tipton: Anybody can do that. We were at about six and three quarters, 675, 676 on production in the second quarter.
Matthew Olney: Okay, great. Thanks for that. And then I guess maybe a similar question, Chris Poulton, I know your borrowing base is very unique and differs a lot from what Kevin was talking about, but curious what you're seeing on the competitive side as far as pricing and structure as well.
Chris Poulton: We don't see much on structure because I think the deals tend to be a little bit more bespoke and so you know we do see you know we see price over the last couple years we've seen price probably come down you know 50 basis points or so overall I think in the market sometimes it comes down a little more we see price I would say a lot more in two areas one construction every once in a while you get some folks step in and just get really aggressive on construction again not necessarily on a lot higher leverage on the non-recourse side. But you do see every once in a while somebody else will step up and get pretty aggressive on price for a few months. And they generally do that and then they fill up and they go away for a little while. And then on the facilities side as well, I think that's where we probably see most of the structure. I think folks that are getting into that facility space might underestimate how much structure they're going to need. But otherwise, I think it's just the normal kind of thing where every once in a while somebody's got to put some money out and burn a hole in their pocket and they get aggressive.
Matthew Olney: Yeah. Okay. All right, guys. That's all from me. Thank you for the color.
Kevin Hester: Thanks, Matt.
Operator: Your next call comes from the line of Brian Martin with Breen Capital. Your line is now open. Please go ahead.
Brian Martin: Hey, good afternoon, everyone. Hey, good. Thanks, Johnny. Maybe just one last one on the expenses, Stephen. I think you talked about the conversion in November and kind of the pace kind of holding where it's at today. I mean, if we think about 27 and you get the savings post-conversion, I mean is it best to look at you know that run rate where you're ending the year similar to what we look like going into 27 or given that you've got you know inflation obviously but you're going to get the savings coming out in the fourth quarter so maybe not much change in the run rate from 4Q heading into 1Q is that a fair way to think about it or is that is that not the right way?
Stephen Tipton: No I think that's fine you know again we're in a fit you know call it half a million dollars a month, give or take, you know, post-conversion with MCV. And Bill's done a great job, Bill and Kevin both, and, you know, have seen some cost savings opportunities along the way already. But the bulk of that, you know, comes out November, December, and then we'll have our typical, you know, kind of beginning of the year, you know, merit raises and those kinds of things that we'll have lost out.
Brian Martin: Gotcha. Okay. Just remind me the savings you expect from the transaction in terms of, you know, I guess what dollars or, I guess, however you frame up the, you know, the savings you're anticipating coming from the Mountain College?
Stephen Tipton: We modeled 20%, which was about $5.5 million annual.
Brian Martin: Okay. And the bulk of that comes in the fourth quarter or post-fourth quarter? Correct. Correct. Okay. Gotcha. Thanks, Stephen. And then maybe, Johnny, just on the M&A, It sounded like there was a trade you guys were on, now you're off it, maybe come back to it. But just in terms of your comments about the conversations maybe being a little bit less today, it sounds like, not putting words in your mouth, maybe there's nothing imminent, but your discussions are ongoing, and maybe if that's accurate, you can confirm that. In terms of sizing or geography, any change in terms of where the interest is?
John Allison: I'm not going to do that. I'm not going to do sizing or geography. Okay. But I like the people, and I like the company, and I like their geography. So I'm going to go back and revisit that. I've sent them the information for the call. And actually, I called them afterwards. I said, I couldn't get there because I was deluding myself because they had my stock down to, what, 170 or something, Stephen? Some number. So I said, it wouldn't work for me. So he said, well, that didn't work for us. And I said, I understand. We're going to go back and revisit that if they're interested and see if we can put something together that makes some sense. It's another nice trade, it appears to me. Good little bank and similar to Mountain Commerce to me in lots of respects. Not the same geographic area, but where they operate their business. They're just good operators. They run a good number.
Brian Martin: Okay, that's helpful. And then maybe just one on non-performings or just credit quality. I know you mentioned some improvement there, all the hard work that Kevin and team had done. So can you just frame up kind of the outlook or how you're thinking about the pace of NPAs and charge-offs as you look in the coming, maybe just the pace of NPAs or just how you see some of the improvement unfolding here in the next 12 months or 12 months, however you want to frame it up, just to see a path of improvement.
John Allison: I don't see any difference we stand by what we said before there's no longer no more on the larger one there's no loss coming we're not going to take any loss so we stand by that and outside of that you know we cleaned up a little stuff this quarter and we just tend to pack at it a little bit if there's one or two that sticks their head up but we we're mostly through that I'm not I'm not looking for anything any different on the charge-offs Maybe better from here on than what it has been. But where it is or a little better is what I think. There's nothing coming that anybody's concerned about. It's good. It's actually good. It's actually good right now.
Brian Martin: Okay, and just in terms of how much improvement in non-performings, given kind of the lifting you've already done, I mean, what could we see over the next 6 to 12 months? I mean, could we see a significant decline in non-performings, or is it more of a slow grind, I guess, however you frame it up?
John Allison: That's really up to the other side of the fence sometimes. You know, it's not – we can see that, but we're not – we're not walking away so you know we expect to collect everything that we have out there so we're and we're not going to accept anything different okay so just in reminding I don't really I really don't see any changes it might get better from here quite honestly that the charge-offs we had I don't know five million
Kevin Hester: This quarter? Yeah, it's closer to six, but we had almost three million of that was specific reserves on loans that we charged off. We had matched up to specifics. So if you take that out, then it was really just a normal quarter.
John Allison: We're actually, it's really marked improvement in asset quality here. There's no, you should have no concerns about asset quality.
Brian Martin: Okay. Yeah, and remind me, the size of the largest credit that you talked about last quarter, where does that stand today, or what level is that at?
John Allison: It's where it was. It's a little less than $100 million. It's still where it was, but that's one that we have seen some movement on. And if reasonable heads stay together, we'll wrap that up. And if they don't, then we'll fight the battle. So there you go. Okay.
Brian Martin: Gotcha. Okay. And last one for me, sorry, was the, just on the margin, Stephen, can you just frame up, like, I know you said that your hope is to see the margin, you know, maintain its, you know, kind of current core level, if you will, but just the puts and takes, what could take that, you know, better or worse, and then just maybe the opportunities you have on the Mountain Commerce book in terms of loans and deposit, where there's opportunities to pick up there?
Stephen Tipton: Yeah, there's certainly opportunity on the deposit side with Tennessee. They've got about $300 million in CDs that mature in the second half of the year that we should get some marked improvement on yield there or potential that some roll off. Yeah, as we've always said, I would say competition is probably the biggest threat, particularly on the deposit side. We've got a billion and a quarter in CDs that mature in the second half of this year that's in the mid-threes. Like I said earlier, we've done a good job and then kind of enter below that range on where we were due. But competition forces that higher, that's probably a risk. But our folks have done a great job and expect that to continue.
Brian Martin: Okay, so not a whole, I mean, not much pressure on the asset side. I guess, I mean, you talked about the loan yields and kind of what you're seeing in the market. So maybe it's just you're not going to push forward with some of those loans at those rates, it sounds like. That's right. Yeah. Okay. All right. I think that's it for me, guys. Thanks, and congrats on a great quarter. Thank you very much.
Operator: Your next question comes from the line of Catherine Mueller with KBW. Your line is now open. Please go ahead. Thanks, everyone.
Catherine Mueller: Good afternoon.
John Allison: Afternoon, Katherine.
Catherine Mueller: Two last questions, just mini model questions. Maybe first on fees. These were a big beat relative to our expectations. And I think you mentioned there was a bully gain and higher SBIC investment income. Can you quantify maybe how how much that increase was in SBIC and how we should think about a normalized run rate going into next quarter.
John Allison: Yeah, that increase was about $2.4 million for those equity investments that we have.
Catherine Mueller: Okay.
John Allison: Great.
Catherine Mueller: And then anything else in the C-line that you felt like was artificially elevated?
Kevin Hester: Well, we did have our purchase accounting accretion go up $2.5 million. And $1.5 million of that was just related to Mountain Commerce. The rest of it would have been from older stuff, Panhoff.
John Allison: Got it.
Catherine Mueller: Okay. So do you think that PAA comes down from the $3.6 million?
John Allison: Well, if the payouts stop, you know, Mountain Commerce will be the same next quarter, I guess, as it were this quarter. The other, if we get to payoffs, you know, that's the key. About $900,000 was payoffs, early payoffs on loans that would generate the income.
Kevin Hester: It does happen periodically. It might happen next quarter, too.
John Allison: Yeah, you never know. Usually, there's always something paying off.
Catherine Mueller: Yeah, but that's helpful. About $900,000 of it was from early payoffs, not just your scheduled PAA accretion.
John Allison: Correct.
Catherine Mueller: Okay, that's great. That's helpful. Okay, great. That's all I got. Everything else is asked and answered. Thanks. Great quarter.
John Allison: Thank you very much. Appreciate it. It was a great quarter for us. Thank you.
Operator: We have reached the end of the Q&A session. I will now turn the call back to Mr. Allison for closing remarks.
John Allison: Thanks, everyone, for your participation today. Thanks for supporting HomeBancShares. We work at it. Even though we had a 2% ROA and one of the top 10 in the nation the first quarter, we felt like we didn't do a very good job. So we work hard at it, and we'll continue to work hard at it, as you know. And hopefully things will settle down in the marketplace, and we'll have more loans and generate more income. And that's our game, is to continue to grow the company over a period of time. This concludes today's call. Thank you for attending. You may now disconnect.
