Good day, and welcome to the Home Bancshares Incorporated second quarter earnings conference call. All participants will be in the listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead, ma'am.
Thank you, Chuck. Our management team would like to welcome you to the Home Bancshares 2020 second quarter earnings release and conference call. I'm Donna Townsell, Director of Investor Relations. We just finished our first full pandemic quarter, and what an amazing quarter it was. Reporting today will be Tracy French, our President and CEO, Brian Davis, our Chief Financial Officer, Kevin Hester, our Chief Lending Officer, Chris Poulton, President of CC FG, John Marshall, President of Shore Premier Finance, Stephen Tipton, Chief Operating Officer, and our Chairman, John Allison. Our first speaker today will be Tracy French.
Good afternoon, and thank you, Donna Townsell. The new normal is normal in a lot of ways for Centennial Bank. Last quarter, we were in a time of uncertainty. Well, I feel much better today as we live the new normal. You will see why as I share with you some of the Centennial Bank information. 14% deposit growth this past quarter. 5% loan growth this past quarter. 29% decrease in interest cost this past quarter, and 53% decrease the first six months of 2020 compared to the first six months of 2019. Net interest income up 6.4 linked quarter. 9% increase in non-interest income, with mortgage up 49% comparing the first six months of 2020 to 2019. The bank's core ROA is over 2% year to date. Non-GAAP efficiency at 37%, Johnny.
It's a little high.
A little high.
We'll get Donna back in there and see if he can get it down to twenties.
Tax equivalent net interest margin at 4.31%. ALL, nearly 400% to Non-Performing Loans, and the best ever, $351 million in total revenue year to date. I've heard Johnny say that proof is in the numbers, and the numbers don't lie, even using Jonesboro math. In a moment, Johnny will share the Home Bancshares number the way that he knows how, and that is straight to the point. He, along with others, will share the powerful results of our team of bankers have produced this quarter. We've used the phrase PPP a lot over the last few months. I told our group of regional and market presidents the P represents the word powerful in our group. While our team has done some amazing things over the past 20 years that we've been together, the last six months may have just topped them all.
As we work through events that have never, ever happened before, such as the new accounting methods for loan loss reserves and the shutting down or trying to shut down the economy, our bankers continue to address the challenges and tackle them head on. The efforts have been phenomenal, and our company is prepared for the future, whatever it throws our way. I may be considered the cautious one in this group, but all of us are focused on the true basics of running a safe and sound company. We are communicating with our customers on a regular basis. Over the past several months, Johnny and I have discussed with individual customers their business situations, how are they adjusting to the new normal, and how are things in their economy that affects them.
It is refreshing to get the real information and thus just not the what you get represented when you read or hear something. That provides the real-world information that we use. When I call a lender today, they have all the current information about their market and what's going on with their customers. We get that information loan by loan. To date, it's not just a certain class of credits, it's each individual single credits that we monitor. As I called this earlier, we're back to the basic banking practices. That's what we get through today. I believe I've heard our Chairman use the word blocking and tackling.
That is what we're all doing in all areas of this company to provide the numbers that we are reporting today while preparing for a successful future for our shareholders. Donna?
Thank you, Tracy. That's a great overview of Centennial Bank. Now Brian Davis will walk us through the margin and details.
Thanks, Donna. I'm pleased to report for the second quarter, it was a record for our net interest income. For Q2 2020, we reported $148.7 million of net interest income. This is an increase of $8.9 million or 6.4% from the first quarter of 2020. I'm also pleased to report the second quarter net interest margin was 4.11% compared to 4.22% for the first quarter. Normally, we would not be pleased with an 11-basis point decline in margin. However, as a result of these crazy times, the decline in margin is primarily the result of COVID-19. With that said, let me walk you through the margin. First, the company participated in the PPP loan program during the second quarter of 2020. As of June 30th, 2020, we had $848.6 million of PPP loans.
These loans are 1% plus the accretion of the origination fee. While these loans are valuable assistance to our customers and carry no credit risk to our company, they are dilutive to the margin. The PPP loans were five basis points dilutive to the NIM. Second, the COVID-19 crisis and the resulting governmental response has created a tremendous amount of excess liquidity in the market. We believe this is a good thing for the banking industry and the economy. As a result of the excess liquidity, we had $416.8 million of additional interest-bearing cash in Q2 compared to Q1. The excess liquidity was 12 basis points dilutive to the NIM. Third, for Q2, we recognized $7.0 million of interest accretion from acquisitions versus $7.6 million of accretion for Q1. The $600,000 reduction in accretion income was two basis points dilutive to the NIM.
Lastly, Q2 2020 event interest income was $1.5 million compared to event interest income of $558,000 for Q1 2020. The higher event income during Q2 increased NIM by three basis points. In conclusion, the five basis point decline for PPP loans, plus the 12 basis point decline for excess liquidity, plus the two basis point decline for less accretion income, offset by the three basis point improvement from event interest income, results in a 16 basis points of noise when comparing linked quarters. With that said, our net interest margin is actually up five basis points on an apples-to-apples basis. Let's change to CECL. Our CECL provisioning model is significantly tied to projections and unemployment rates, which have remained elevated during Q2. During Q2, we recorded $11.4 million of credit loss expense. This expense is primarily related to the impact of COVID-19. Additionally, CECL requires a liability for unfunded commitments.
This quarter, we increased our liability for unfunded commitments by $9.2 million. The increase in the expected funding of unfunded commitments was $5.9 million of the expense. The remaining is primarily related to the COVID-19. I'll conclude with a few remarks on capital. Our goal at Home Bancshares is to be extremely well capitalized. I'm pleased to report the following strong capital information. For Q2 2020, our Tier 1 capital was $1.6 billion compared to total risk-based capital that was $2 billion and risk-weighted assets were $12.5 billion. As a result, the leverage ratio was 10.3%, which is 105% above the well-capitalized benchmark of 5%. Common Equity Tier 1 was 12.0%, which is 85% above the well-capitalized benchmark of 6.5%. Tier 1 capital was up 57 basis points to 12.6%, which is 58% above the well-capitalized benchmark of 8%.
Total risk-based capital was 16.3%, which is 62% above the well-capitalized benchmark of 10%. With that said, I'll turn the call back over to Donna.
Thank you, Brian. It's really amazing to be able to report a record for net interest income during the middle of a pandemic. Now, let's dive into the loan portfolio, and we'll go to Kevin Hester.
Thanks, Donna. It's been a crazy quarter on the lending side of Home Bancshares. PPP and deferments have been the order of the day, but both of those are entering a different phase as we go into the third quarter of 2020. As of June 30th, we had made over 8,600 PPP loans totaling almost $850 million. We've been able to handle all applications from qualified existing bank customers, and we were able to go out and locate some significant new customers as well. We had close to one-third of our employees working on this project, and I'm very proud of the product that we built in a very short time. From a dollar perspective, the top three industries were construction at $142 million, hotels and restaurants at $117 million and healthcare at $100 million. As for numbers of PPP loans, professional services replaced healthcare in the top three.
We read about Congress potentially allowing an entity to apply for a second PPP loan under certain circumstances, and we are preparing for that possibility by making sure that we have the ability to reach maximum approval bandwidth very quickly. We've also been building out the forgiveness workflow, but it does not appear that the SBA is in any hurry to provide details of how that forgiveness will be transmitted to them. We believe that the June PPP changes will extend the covered period to spend the PPP money, among other things, will serve to significantly decrease the possibility that a material portion of our PPP fundings will not be forgiven. Any approval of an automatic forgiveness under, say, $150,000 would reduce that even further.
Regarding loan deferments, as of June 30th, we had executed first-time 90-day loan deferments on just over 4,200 loans totaling $3.18 billion, or 27% of our loan portfolio. Geographically, Florida borrowers made up 58% of the deferment balance, followed by Arkansas at 35%, with CCFG, Alabama, and Shore at 3%, 2%, and 2% respectively. As a percentage of their respective portfolios, the community bank regions were between 30% and 35% deferred, while Shore and CCFG were much lower at 11% and 5% respectively. Based on industry, real estate lessors made up the largest balance at $1.2 billion, with hotels and restaurants at $607 million. After that, it drops off sharply to healthcare at $272 million. As a deferred percentage of their portfolio, hotel and restaurants were at 67%, followed by healthcare at 52%, and real estate lessors and retail trade both at 33% each.
As we mentioned last quarter, we were very quick to implement the deferment process as we had procedures and forms already in place from earlier disasters on a regional basis. We were very quick to move, and as in earlier uses, we were very liberal with the first deferral. While this may have resulted in a higher initial deferral percentage than our peers, we believe that the early ability to help our customers in this situation is very important and helpful to their overall ability to stay in business. The second deferral process is in place and has been operational for about two weeks. It involves a defined process of information gathering and discussions with the borrower about current operations. Levels of approval are based on loan size, and assessments of current risk grade, and ultimate ability to stay in business are being captured and monitored as we progress.
As of today, we've processed about $1.5 billion or almost 50% of the initial $3.18 billion of deferred loan balances, and 80% of those, or $1.2 billion, are going back to normal P&I payments at this time. I know it's still early to attempt to see the end of this event. Looking forward, as we review our largest community bank customers that have been on deferral for 90 days, nearly all of these are commercial real estate secured. Projecting what I could see as a worst-case scenario for any of these that do go through a second 90-day deferral and still need further assistance, one option would be a longer-term modification to interest-only payments combined with a capitalization of accrued interest.
Using our average community bank LTV of 61% for CRE loans, this capitalization of interest would only add 1%-2% to the LTV, and even with a reasonable discount to pre-COVID values, would result in a loan that maintains adequate collateral margin. Since last quarter's call, we've had a couple of calls to discuss various aspects of our lending business. We started with a call in mid-June on hospitality. Month-end June numbers have come in since that call, and the extended stay portfolio continues its strong showing. Our Keys properties averaged 50%-60% in June after being closed in May. Overall, our Arkansas properties continued to improve into the 40% range, while our Texas properties lagged behind, but many of those are highly dependent upon airport business. On the whole, June appears to have been an improvement over May.
All asset quality metrics improved this quarter, with NPAs at 0.39% and NPLs at 0.5%, down 5 basis points and 3 basis points quarter-over-quarter respectively. As Brian mentioned, the allowance coverage for non-performing loans improved to almost 400%, while past dues decreased to pre-COVID levels in dollars, and at 0.56% are near a historic low. Combined with the significant migration of deferred loans back to P&I payments this quarter and an allowance for credit losses above 2%, we believe that we are in a very strong position at this point in the pandemic loan cycle. Before I end, I would like to talk about our mortgage group. They just posted their most profitable quarter in the company's history. Closings are up 50% year-to-date over the same periods of 2017 through 2019, and secondary market loans are still over 80% of the balance.
June locks were at the second highest level area. We expect third quarter to continue to be well ahead of previous years. Congratulations to Keith Little and his group for their strong showing. We continue to look for ways to assist our customer base through this tough time, and we believe that our lending posture over the last three or four years leading up to this difficult time has put us in a position to succeed. That concludes my remarks, and I'll turn it back over to Donna.
Thank you, Kevin. It is good to hear that hotel occupancy rates are going up and so far deferral requests may be going down. Up next is going to be Christopher Poulton with our CCFG division.
Thank you, Donna. Good afternoon. As many of you know, two weeks ago, we provided an in-depth discussion of the CCFG portfolio and product segment. Today I'll focus my comments primarily on the portfolio movements in the second quarter. Portfolio was roughly flat for the quarter with ending balance of approximately $1.76 billion. Going into the quarter, I was particularly interested in the impact COVID would have on payoffs and pay downs. We were pleased to see that we received just over $150 million of payoff pay downs during the quarter, with the vast majority of that in the CRE book. As I often note, we look at payoffs as a feature of our portfolio and a signal as to the health of the overall market.
The payoffs we did receive were from refinances as well as asset sales, indicating that both the sales and refinancing markets have continued to operate during this post-COVID period. We do remain open for new business, though cautiously so. During the quarter, we originated approximately $125 million in new loans, which is a bit below our normal Q2 volume. We continue to experience significant inbound volume and have an active pipeline building, though we remain quite cautious as to leverage and structure. We're seeing it takes a bit longer to reach a signed term sheet and that underwriting and closing timelines have expanded as well. Overall, despite a turbulent backdrop, we experienced a reasonably quiet quarter. During the presentation a couple of weeks ago, I stated that the past few months have been unprecedented in the severity and speed at which the best economy, likely in generations, abruptly halted.
Times like these are important reminders that risk, like water, finds its own level. The CFG platform was born of financial crisis and built on the idea that at any time, and for any reason, risks can, and often do, emerge. We continue to manage and monitor our portfolios while also keeping a keen, precautious eye towards emerging opportunities. Benefits of product, asset class, and regional diversity in our portfolio allow us to both better manage risk and seek opportunities as they emerge. Was pleased to see payoffs continue at the expected pace, and we have experienced a surge in demand for our product, especially in CRE. We'll continue to balance confidence with cautiousness as we proceed through the summer and fall. Donna, I'll turn the call back over to you.
Thank you, Chris. Now we get to hear about what's become an even more popular pastime, boating. John Marshall, can you please give us an update on Shore Premier?
Donna, good afternoon, and thank you once again for allowing me the opportunity to tell the boat story. Naturally, the COVID dominated the narrative with speculation of how the boating yacht industry would be impacted in the quarter. The commercial side of our business observed foreign factories temporarily suspend production and domestic dealers cautiously managed down inventories and took steps to preserve cash flow. We saw floor plan line utilizations drop from 58% to 47% as our dealers prudently reduced inventory and borrowings by about $26.8 million in the quarter. Conversely, and perhaps counterintuitively, our consumer business received and underwrote record numbers of applications early in the quarter, leading to an all-time record for a single month funding in June of $32 million. That brought the quarter to a total fundings of $61 million on the consumer side.
A tremendous achievement in reflection on the team's effort, but still insufficient to offset the headwinds of prepayments and declining commercial inventories. In this crosswind environment, consolidated loan balances have contracted $18 million since the acquisition of LH-Finance in late February. As dealers rebuild their inventory, we're well positioned to substantially catapult loan growth in the second half of the year. Most likely we'll see that in the fourth quarter. Less ambiguous has been the benefit of scaling the business on our profitability. Our bottom line contribution to the bank has grown from about $1 million a month to $3 million as our lean expense structure has averaged an efficiency ratio of 17% each month in the quarter, while core ROA has stabilized at 2.48%. Rapid growth, COVID, and operational integration with LH-Finance has not negatively impacted asset quality.
Commercial systems were merged in late March and consumer platforms consolidated this past weekend. Consumer FICOs held steady for originated loans in the quarter at 773, compared to an overall portfolio FICO of 774. Delinquencies improved in the quarter from 44 basis points to 30 basis points, and non-performing loans increased from 29 basis points to 38 basis points, through resolutions in July will likely bring them back down. Most of our dealers were eligible for a principal deferral program in the quarter with payments resuming this month. We had 244 consumers enroll in a deferral program with payments also resuming this month. Of those participants, only 21 have requested a second deferment, and that's assessed based on the individual's need. While the future is uncertain, our dealers are seasoned over economic cycles, and our consumer borrowers have strong credit profiles.
I believe we're well positioned to benefit from a return to normalcy, whenever that may occur. Thank you, Donna, and that concludes my comments.
Thanks, John. Stephen Tipton has an interesting report on our deposit side of the house.
Thank you, Donna. I will give some color on deposit activity, repricing efforts and trends, and a few additional details on the balance sheet today. The second quarter of 2020, in some respects, may be one for the record books. PPP loan funding, the inflows of economic impact payments, along with general core account balance growth, produced an increase in total deposits of $1.66 billion. Our mix continued to improve as time deposit balances declined by $147 million, while non-interest bearing balances swelled by $989 million to over $3.4 billion or 26% of our total deposit balances. We would like to congratulate our branch network and online support teams as they opened nearly 16,000 new accounts in the second quarter. While much of this is attributable to PPP funding, it is a testament to the relationships our bankers have and our commitment to the continued success of these customers.
Switching to funding costs, I want to first highlight our efforts on interest-bearing deposit costs in the quarter. Interest-bearing deposits averaged 64 basis points in Q2, which was down 44 basis points on a linked quarter basis. For additional color, averaged 60 basis points in the month of June. Total deposit costs, which includes non-interest-bearing deposits, were 48 basis points in Q2 2020, which was down 37 basis points from the previous quarter. Total deposit costs in June averaged 44 basis points, and our teams continue to work negotiated rates down as the market will allow. As I mentioned last quarter, we continue to see opportunity in repricing our time deposit portfolio.
In the second half of 2020, we have $845 million in CD balances maturing at a weighted average rate of 1.53%. Switching to loans, we saw total production excluding PPP of $530 million in Q2, with a little over $420 million coming from the Community Bank and Shore Premier footprint. Payoff volume at $708 million was elevated from prior quarter and highlighted by a higher level of payoffs, as Chris has mentioned, in a large multifamily project out of one of our Arkansas regions. I would like to update you as to the variable rate components of the loan portfolio. As we have mentioned in the past, the CCFG loan portfolio of approximately $1.7 billion is variable rate, with the vast majority tied to one-month LIBOR adjusting monthly. As of June 30th, approximately $1.5 billion of these balances are now protected by floors.
The Community Bank and Shore portfolios consist of approximately $1.5 billion in variable rate balances set to adjust over the next six months. Over $800 million of these balances are tied to Wall Street Journal Prime as the index, with a balance tied to LIBOR and other various indices. As of June 30, over $850 million of the variable rate balances are now protected by floors. The majority of the remaining balances have repriced into the current zero or low rate environment. As a result, the loan yield, when adjusted for PPP, accretable yield, and event income, held up extremely well in Q2, only declining 26 basis points to an adjusted 5.20%. With that, I'll turn it back over to you, Donna.
Thank you, Stephen. Those are tremendous numbers on deposit growth and cost of deposits. This was our first full quarter during a pandemic, and we really didn't know what to expect. As you've heard, it's been a remarkable quarter for Home. To share some final thoughts with you before we go to Q&A is our Chairman, John Allison.
Thank you, and welcome everyone. I think that was pretty impressive, that $1,660 million worth of deposit growth and the cost of deposits flipped down $9 million. Good job. I think I commented a little more on that, but the more I hear it, the better it gets. We've all been preparing for the worst and expecting the best. There'll be winners and losers as the strong ones separate themselves from the weak ones. Over many years, Home has played in the quote, "underwriting safe game" on both sides of the ball, offensively and defensively. Some of the investment community has fussed at us or criticized us for a lack of growth. I can assure you, sometimes doing the right thing can be much more difficult and lonelier than the easy way.
Holding the course by remaining disciplined has certainly been one of those difficult times, because it's so easy to fall victim, to follow the weak, and do the silly stuff that others are doing. I hear this all the time, "Well, why can't we do that?" The truth is, with the strength of our balance sheet, we can meet or beat any competitors, regardless of size. Our culture will not allow us to fall prey to the silliness of others. There is no right way to do the wrong thing. I played around with that, by the way. That's not my quote, but I liked it when I heard it, so when you think about it, there's a lot of truth to that. There is no right way to do the wrong thing.
You're going to hear some GAAP numbers, some non-GAAP numbers out of me today, you're really going to get to see a comparison between CECL and non-CECL. I think that's important because the investment community has a difficult time unwinding all of this, these CECL actions along with the pandemic right now. I thought I'd try to make it as simple as I could make it. That way, I even understand it. Here are some of the results of staying the course. Number 1, record quarter pre-tax, pre-provision income. Pre-provision net revenue, excuse me, PPNR. Record quarterly net income. That's not necessarily a GAAP, you'll see how I bring that in shortly. As you heard from Stephen and Brian, margin staying strong, conservative dividend payout policy, and best in class asset quality.
For the quarter, we actually earned pre-COVID, I mean, pre-CECL, we earned $0.47, that's a 20% return on tangible common equity. Here's the real power of Home for the quarter, a record $102.5 million in pre-tax, pre-provision net revenue. That's a PPNR of 2.53% ROA. Couple that with peer-leading reserves of $238 million, or 2.15%. I see some of them are catching up with us now. We kind of stepped out earlier last quarter. Add to that our strong capital ratio, plus our strong revenue forecast into the second half of 2020, I think we have, again, positioned Home to continue to produce peer-leading performance into 2021 and 2022. Arguably positioned, if not the best in the U.S., certainly one of the safest and best in the U.S.
Home has continued to be recognized for the best-in-class performance metrics, exceeding nearly all competitors, and has for almost 14 years. This top peer performance has not been a short-term flash in the pan, but it has been created over time with a planned, long-term, solid strategy. We have remained disciplined and continue striving to be the best bank in America. After Forbes named us the best bank in America two years in a row, we now have the honor of being named to the list of best banks in the world. Being a high performance bank is not easy, but staying and remaining a high performance bank is even more difficult. We've seen many overnight pop-up stars, but there's only a few of us that have continued to perform year after year. Home and a few others have led the bank group performance metrics for many years.
I have no reason to believe that that won't continue into 2021 and 2022. Let's go to the real numbers, and this will show you the real difference between CECL and non-CECL. Because we had such a good reserve, and because asset quality was at the level it was at, we probably would have not taken a reserve this quarter, had it not been for CECL. Just hear the impact so you understand what it does to the EPS and the ROAs of the company. We reported return on assets of 1.55. That's after the expenses of CECL. Actually, had we not had the CECL quarter, we would have reported an ROA of 1.92. We reported EPS of $0.38. We would have reported EPS of $0.47, and that would have been, as Randy Sims would have said, a world record.
You don't like the world record, [inaudible] . That would have been a world record. Net income was $78 million versus $62 million. We actually earned $78 million, but with the CECL deal at $62 million, and that's another world record. Efficiency, Donna, was below sub 40, from 44% down to sub 40. Pre-tax net revenue, $102 million. That's another world record. Return on tangible common equity, we reported $0.38 or 17.40%, which is pretty good. Actually, without CECL, we would have reported $0.47 and 21.63%. Tier 1 leading margins, as you heard from Brian Davis, margin was actually a great job by all. Filed 30% dividend payout, best asset quality ever for this corporation, and that would be another world record. 2.15% reserves, $238 million. As Kevin and I think Tracy said too, we're both pretty proud of it, over 400% coverage to non-performing.
You heard Stephen reporting on deposits up $166 million for the quarter. There's a lot of banks that are not a $660 million. That's $1.66 billion, that's pretty impressive, and even more impressive than that is the job that this team did on the cost of funds by lowering the price cost of funds by $9 million quarter to quarter. That's also another world record. 57% loan to value continues. We like our book. Not going to be many people willing to walk from that equity. If they do, it won't be all bad. Strong run rate should continue into 2021 and 2022, and as Kevin Hester said, 80% of the first $1.4 billion that has been reviewed in deferment are going back on P&I. That's probably pretty good news. This is why Home Bancshares is the best in class in all metrics.
Even with CECL circus, we earned $0.38 and around a 155, in spite of the disappearance of $21 million that evaporated into the CECL circus tent. Most banks would be proud of those numbers at a 155 and $0.38. We find them unacceptable. I'd like to congratulate the House, the Senate, the President, SBA, the Fed, the Secretary of the Treasury, for an outstanding job on the creation and execution of PPP. I know it was work in progress. There were lots of changes and lots of turns in that. I suspect there'll continue more. I'm convinced this plan has saved many small businesses from failure. It shows how, when we work together for a common cause, what can be quickly accomplished. On the stock buyback side, we stopped buying back stock the day the President asked us to do that on television.
To stop buying back stock puts bank stocks in serious jeopardy and totally at the mercy of the shorts. We all stopped buying back stock, and our policies on stock buybacks don't allow buying three weeks prior to earnings release. The reason for that is we don't want to front run the legitimate shareholders, but there is no stop or mercy from the shorts. They will attempt to run a stock in the ground if they can make a nickel. These people add nothing to the world and are vultures that destroy the values of stocks owned by honest, hardworking Americans that do not have the time or the advantage of the lightning fast stock execution while they're working for a living. I'm asking our congressional leaders to ask the SEC to stop the shorting of bank stocks.
They've done it in Europe, they should have done it here. All publicly traded banks and their investors should ask their politicians to do the same thing. From a sense of strength, if we annualize the quarter's PPNR of 102, that's over $410 million, plus our $238 million reserve, if needed, it gives us $648 million to handle future losses. That's not going to happen. If it does, we're prepared to handle it. As of July 12th at 6:42 P.M., as I'm writing this deal, I don't know of $0.01 of loss thus far. I'm sure we'll have one or two, so far so good. Anyway, we made the adjustment to cover anything that might come out.
I think it was Brian Davis that ran a model in the first quarter, that if we charge off $1 billion, we still hit all regulatory capital requirements, and that's not counting the $410 million in pre-tax, pre-provision earnings that we think will be coming into the shoe box in the next 12 months. Is that about right, Brian? Was that pretty close? If we charged $1 billion, we'd still hit all the regulatory requirements?
Yes, sir. That is correct. I re-ran the numbers just the other day. We're still at that same spot.
It makes you feel pretty good to have the reserves we have and know if we had to take $1 billion in losses, we're still in good shape. I hope this provides some clarity into the crazy CECL model in the middle of a pandemic. Moody's never factored into the model, as Kevin Hester has referred to, the $3 trillion plus in government support that's coming, and with more coming. That in itself is probably a game changer. It's still a little dangerous to lend money in the middle of this crisis. Many lenders are loaning long-term with low fixed rates in the threes and even some in the twos. At those rates, no one's getting paid for the risk. Flooding the country with liquidity was certainly the right thing to do, somebody soon has to pay the inflation piper.
For adding five-year low rate fixed loans, those people who wrap those will pay the price, I'm sorry. Thank you. We must have forgotten what caused inflation over the years, particularly since we flooded the world with liquidity. What is it that we slow inflation down with? Remember, what the Fed uses is raising rates, dummy. Get ready when this is over for raising rates. Thank you for your support. I don't think we've ever let you down before, and we won't this time. I just want to put this in perspective. My last bank was First Commercial Corporation, great bank in Little Rock, Arkansas. We grew it to $7 billion and sold it in 1998 for 4.11 times book. Now, that was not tangible book, that was total book. The bank was earning about $110 million per year.
We sold it for 22 and a half times projected earnings. That was $120 million a year. That was projected. It brought about $2.7 billion. Try that and contrast that with today's market value environment. Home is a $16.7 billion earnings bank, and ex CECL is earning about $300 million a year with a market cap of $2.5 billion, trading not even at 10 times earnings. If we were trading at '98 levels, our price would be, catch this, our book value is $15.06 times 411, comes out to $61.89 a share, times 165 million shares, would give us a market cap of $10 billion, 231 million. That's $7.5 billion more. This is what people have done to the banking system.
They've robbed American shareholders of billions of dollars to load banks down with additional expenses, requirements, and regulations, i.e., Dodd-Frank. Now CECL is the next knife into the gut to kill bank earnings. I think it's time to quit picking on banks. Banks are in the best financial position in my banking career. Some politicians have made their entire careers beating up banks. I guess it's fashionable and political to just hammer and hammer. Wells Fargo didn't help us either, and those guys ought to be tarred and feathered, and it looks like that may be what's happening to them. To have the best quarter in our 20-year history, almost 21-year history, and in the middle of a pandemic, support your strong belief and support of Home. We never give up. We never quit.
Obviously, the proper discipline of years of building and developing our culture has allowed us to build one of the premier financial institutions in the world, at least in the U.S. Thanks to all of you for being a part of this amazingly strong American success story. The banks have been picked on enough. Politicians, try to find you something else to do. Hopefully we get rid of the shorts. In conclusion, great quarter from everyone, great participation from everyone, and I think we're set for the rest of the year, Donna. If you have anything you want to say, anybody else got anything else they want to say? Comments? If not, I'll turn it back to you.
All right. Thank you very much for a glowing report. Chuck, I think we'll turn it to you for Q&A.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Matt Olney with Stephens. Please go ahead.
Hey, guys. Good afternoon.
Hi, Matt.
Hey, I want to drill down on the loan deferment commentary. I realize it's still in the process of the phase 2 of deferrals.
I think I heard you say that 80% of the $1.4 billion of the original deferments are going back on regular payment status. I'm trying to reconcile the numbers here. If $3.2 billion of the loan balances were deferred on June 30, I'm getting around $2 billion are currently deferred as of now, which represents around 16% or 17% of loan balances. Does that sound about right? Part two, where do you see that number going in the future? What's the crystal ball look like?
Yeah, that sounds about right with the knowledge that there's still half of them, that $1.6 of that is still being reviewed and we're not sure yet how that will turn out. At 80%, that's a really strong percentage of what we've already looked at being half of the $3.2 billion. We're proud of that. We believe that that number's probably going to be at the end from $3.2 billion, maybe $1 billion-$1.3 billion, somewhere in there. That includes what we expect to be about $500 million of hotel that we'll probably carry forward for a second 90 days. Significant drop, and again, we're looking closely at each one of those.
It's a very defined process with a lot of information gathering, talking to our customers, talking out past the next 90 days, trying to figure out where we go from here if they're taking the second one.
Kevin, just to make sure I understand that right, that $1 billion-$1.3 billion that you mentioned, I guess that would be the number, your estimate at some point over the next few weeks, once you've reviewed the entire first phase of the second deferral. Is that right?
Yes. That would be our hope.
Got it. Okay. That's very helpful. Thank you. Go ahead.
It's tracking a little better than that, hopefully, those will probably be $1 billion. I'm hoping for $1 billion. It is what it is, right? If they haven't been able to open their hotel, it doesn't matter. We got to defer them. The good news is we've been here before with a lot of these customers from the level 5 hurricanes that have hit. As Kevin said, we had the forms and the paperwork, and we went straight into that mode. I think I made a statement earlier in my prepared remarks that I haven't seen a penny of loss thus far, and I can assure you, Tracy French has been digging for it. He's been digging for losses, so far so good.
Good. That's fantastic. Then I was a little surprised to see the unfunded commitment expense of around $9 million in 2Q. What was the driver behind that? Did the bank see any strong growth in the unfunded pipeline?
I'll take that one, Mr. Allison. It's really a factor of three components. The primary factor is that our expected funding percentage went up quite a bit, and our loss rate went up some. For example, our expected funding percentage went up from 46% to 55%, and that accounted for $4.8 million of expense. Our loss rate on the total gross balance went up about 24 basis points. That was related to the higher unemployment rates in our CECL model. Also our unfunded commitment balance did go up about $83 million, and that accounted for about $1.1 million. To recap it, the change in the expected funding percentage went up $4.8 million. The balance itself went up $1.1 million, and the loss rate went up $3.4 million for a total of $9.3 million.
Got it. Okay. That's helpful. Just lastly, I just want to go back and revisit a topic from a few months ago. I think that the bank put out an 8-K back in April that talked around the company's response to the say on pay around the shareholder vote. As a result of that, I think, John, I believe you took a voluntary salary cut and a few board members were reassigned some committees. Can you just add some context to the announcement, the 8-K you put out there back in April?
Yeah. Thanks for that. I've actually wanted to comment on that. The say on pay was Randy Sims, who was the President and CEO of the holding company, resigned, I don't remember, in October, November. Actually, we didn't put anybody else in that role. I just assumed that role. I was already the Chairman. I took the CEO and President's role, we didn't have any additional expense to the company. We could have averaged Sims' salary with my salary or my bonus. I think they got aggravated at my bonus or something. They want some kind of matrix. I'm not sure what it is. When you run the best bank in America, and we're one of the top four banks in America, they want you to compare peer groups we really don't have a lot to compare with.
The reason I made the moves was to try to cooperate, give a token that we're trying to cooperate. However, we have a business to run, and I looked down on the shareholder list, and I didn't see that they owned a share. When I'm being told to get rid of boards of directors from people who have no idea what they're talking about, then I'm not going to do that. When you run this kind of performance of a financial institution, you have to continue to do that. If you look at the performance of this company over the years and years, we've continued to do that. By the way, they might want to pick up on the knowledge that the first 10 years of this corporation's life, which was about half of it, their chairman didn't take a salary or a bonus, not a penny.
No expense checks, no nothing. They come in kind of late, and they sniper shoot you from afar. We'll try to cooperate, but we have a business to run. We've been in the middle of a pandemic. We've come out of the worst financial crisis of 2008, 2009 in my business life, and we have to run our company the way we run it. We made a few adjustments on the board. For someone to tell me to get rid of those two guys, one of them was a former bank commissioner of the state of Arkansas with all his expertise, and the other one is reputed to be the top financial guy in the state of Arkansas. What they don't know is that I talk to these people, and particularly the financial analyst, a lot. We spend lots of time talking online, offline, wherever.
Anyway, I think it's a little unfair, but it is what it is. As I said, we'll try to cooperate, but we have a business to run, and we'll run it the best we can. I hope my shareholders understand that I am the largest individual shareholder, so I'm going to do what's totally in the best interest of all shareholders, whether other people like it or not. I appreciate the question. Thanks for that.
Okay, sounds good. Thank you, guys.
Our next question will come from Brady Gailey with KBW. Please go ahead.
Okay, thanks. Good afternoon, guys.
Hi, Brady.
If you look at the ACL, it's now 215 basis points of non-PPP loans. That's definitely towards the top end of the range as far as where other banks are at. My question is, as you look towards the back half of the year, do you think there's any need to continue building reserves, or do you think you're at peak reserve levels right now?
Unless something goes haywire, I believe we're over-reserved at this point. That's okay. I'd rather be over-reserved than under-reserved. Actually, I'm feeling good. I'll let Kevin, who deals with that more than anyone in the company, or Tracy, who's trying to find a bad loan somewhere. I got a nice comment from somebody just in that said, "I agree, you do run the best banks in America. They ought to leave you alone." That was a nice comment. Thank you very much. I won't call your name, but I appreciate that. Kevin, you got any comment on what you see on the loss side or anything, additional reserve?
Yeah, my comment would be that the models that generate what we put in reserve don't really talk about what we need. There's a disconnect there. I don't feel like we're going to need the 215 basis points at this point. The models that are put in place because of CECL indicate that. What goes in or out in the next two, three, four, five quarters will all be determined by estimates of GDP and unemployment rate and things like that, not losses that we're seeing.
All right. That's helpful. It's such a strong quarter from Home, but I did notice that if you back out the PPP loans, I think period-end loans were down around 10% linked quarter annualized. Maybe just a comment, if you back out the noise associated with PPP, how are you thinking about forward loan growth from here or potential loan shrinkage?
Well, we're loaning money. We've had a couple of big loans that we did this quarter. It has slowed. I think it scared some people. It slowed a little bit, which is not all bad, right? As Chris Poulton says, there's nothing wrong with getting paid off, and sometimes you get paid off. I just go back to the old 2008, 2009, 2010. I didn't care if I wrote another loan. The key was to remain stable and strong. That's when we did the efficiency deal, protect your capital, and I think we're in that same mode right now. Not that we won't loan money, we will loan money, but I think the country is a little shook up right now with all of this. Don't know if we're in a V or a W. It appears that most our markets were in a V.
There were some of them that could be a W, but most of our markets were in a V. Tracy, Kevin, Stephen got a comment on that? Anybody?
No, I agree. I think we're seeing the loans. We're seeing the opportunities that are out there. We're, again, staying our discipline underwriting. That's not winning all of them that are out there. The payoffs, they probably were a little bit more than what we thought during this time. Expect some of that to come down, there will be some opportunities, too, as we go through the time period we're dealing with, that some of our excellent, safe borrowers will restructure some stuff potentially. We also have a lot of customers sitting in the wings to take advantage of any opportunity was out there. I was speaking to one of our larger relationships in South Florida today, thought that you would see some of the values decrease over this time, and he's ready to pounce if it has, but it's just been just the opposite.
It's just the opportunities have not been there.
For some of our borrowing base that's ready to go. If you think about it, Brady, you got some stuff going on in 2% and 3% money out there. You're not getting paid for your risk. You're in a time, you don't know if you're in a V or a W. It's a time to hold tight. It's a time to hold what you got, protect your assets, manage your business the way we manage this company, and if we don't grow for the next 6 months, so be it. We'll be fine. This company will continue to produce the numbers. A little loan growth would be great, but you know how disciplined we are. We don't get off of that discipline. Thank God we never got off of that discipline. We were pushed and pushed to get off of that discipline. We never did.
I think the proof's in the pudding with the asset quality and the earnings and performance of this company.
Yep. Finally from me, Tracy and John, I'm guessing M&A is dead in the near term, or am I wrong?
Well, a couple analysts have mentioned some banks having some struggles, and it wouldn't be a bad time to look at one that was struggling. It's probably a good time to do that. The problem is you got to buy it right. You can't do a deal for the sake of doing a deal. You got to buy it right, or the combination has to make lots and lots of sense for both the seller and the buyer when they team up. I think people are more concerned at this point in time about business as usual, protecting their assets, getting their deferment numbers down. I think they're more concerned with operational opportunities right now than they are M&A. If the right deal came up, Home would do it. We're in a position to do it. We have plenty of capital to do it with.
You think about if we can continue this run rate, as I said in my remarks, that's $400 million plus reserve of $230 plus million. I can't imagine us ever even denting into that. It is a sense of pride that we built a damn fortress balance sheet, and we like where we're sitting.
Got it. Thanks, guys.
Thank you.
Our next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hey, John.
Hey. Couple follow-ups. Kevin, you talked about on PPP, significant new customers from PPP, and I think some of us tend to carve it out and say it doesn't count, but you mentioned the new customer. Just curious if you can size that. How material is that?
Of the PPP, I'm going to say, of the dollar amount of that, it was probably 10%-15%, maybe 20. Some of the customers, we targeted some out of that, and some of the customers that we've gotten out of it are going to turn into some significant deposit relationships, some loan relationships, and so first thing we had to do is take care of our existing customer base, and we did that. At different points, we knew we had some capabilities to do extra, and so at those points, we would send people out to the folks that they had targeted. Other times we were making sure we could take care of our own folks.
Then on the deferral, in terms of what's staying in deferral, you mentioned $500 million in hotel. Any other themes for what else is staying on deferral?
We've got a guy that has movie theaters. He'll probably be on a second deferral. You've got some ALFs that were in the latter stages of stabilization that this is going to extend out a little bit. Those are the types of things from a size standpoint that gets my attention.
Johnny, maybe another way to ask the M&A question that Brady asked, but from an industry perspective, I think we all understand your credit discipline, but from an industry perspective, when do you think we'll start to see industry losses happen? In what categories do you think we'll see the most damage? Does that tie into M&A thinking at all here?
I'm not sure you wouldn't be recognizing problems today. The good news about our customers is we know our customers, and we pick up the phone, as Tracy said, and call them and visit with them. We're big enough to have a personal relationship with these customers. We're small enough to have a personal relationship with them, but big enough to take care of their needs, and that is one of the strengths of Home Bancshares is our customer base and the customers we deal with. I can't answer what other people are going to do, but I can tell you, again, we could have some loss and probably will have some loss. Our movie theater guy, if he doesn't get to reopen, it's $4 million or $5 million. That could be a loss. Our oil and gas, it's come back a little bit.
We only got total Chris has got 50, and we got 16 here. That exposure is not bad. Oils come back a little bit, and people are doing a little better. The hotels would be the ones that are going to continue, particularly the airport hotels, are going to struggle a little bit along. As Kevin said, if they're 50% loan to value and we defer them for six months, then they're at 53% loan to value or 54. The good news is having that equity in the deals that protects you. I don't know what other people are expecting, but when I said to you earlier today that I don't see a penny's worth of loss, I don't see one. Now, that doesn't mean that we probably won't have one.
Our movie theater guy could blow up, and we could lose $4 million or $5 million on that trade. Outside of I think our hotel book is fine. We did a complete deep dive in that hotel book and learned a bunch. Actually, we learned a bunch deep diving in. I can't answer that. I could tell you that if any banker honestly is looking at his book today, he would tell you, he would be seeing and identifying problems in the book. I can tell you, we do not see a problem in our book that concerns us at this point. Tracy?
I totally agree. I think when you say, when does banks begin to recognize it, if we're doing our jobs the way we are doing it here, back to the basic banking, we're identifying things that have an issue today. If it has some loss today, we try to identify it. As John said, so far, we haven't seen that. We mentioned the one credit a while ago. That's one isolated product. We don't have a certain class that we sit here and have identified saying, "Hmm, this is an entire portfolio." As we shared with the loans, Kevin and his team did an outstanding job of bringing everybody up to speed and got a better report on those today from Kevin. There are a few of those that's going to go through some challenged times over the next few months, but they have the wherewithal.
I noticed on some of those extension credits, and again, I can't say I look at all of them, but we're trying to, John, most of the time. Some of those are certainly not in the need of another deferral. It's just that they're wanting to continue to keep their liquidity in the position they are. They are in the position Kevin mentioned. It's not anything that's going to make our loan at any more risk than probably what it is today. It's a case by case, and I think banks should begin to recognize any potential loss over the next three or four months if they are doing their job and doing it right. We'll certainly have that identified. When that happens, it'll probably be a little later.
The good news is that I don't know anybody else that's running the 250 ROAs that Home's run in pre-tax, pre-provision. If you're looking for banks that can earn themselves out of a problem, if there is a problem, this is certainly one that can earn themselves out of a problem. Overall, Kevin, any comment on that?
Yeah, just one thing about hotels. Everybody thinks that hotels are in a really difficult spot, and they are as a group, but there are sub-segments of that asset class that are performing well. Our coastal properties and our extended stay properties are both doing well. Coastal is 37% of our portfolio, and extended stay is 27%. You combine the two of those, that's really two-thirds of our hotel portfolio consists of two sub-segments that are really doing pretty well right now and will outperform the others. You really have to dig deeper than just making a broad brush across one asset class. That goes for all the other things that we're looking at, retail and everything else. You have to dig deeper.
Does that answer your question, John?
Yeah, that helps. I appreciate it. Thank you.
Thank you.
Our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, guys. Good afternoon.
Hey, Stephen.
Question, just one more question maybe on the deferral process. I'm curious on the $1.5 billion. Was there any sort of concentration in terms of the loans that have been reviewed for that second deferral as of yet, or policy on the terms of loan size or what's been reviewed, I guess, to date?
I don't think I can tell you as far as Nothing as far as loan size. They're doing it largely based on.
Date
on the date. When the first ones came in, those are generally the first ones they're working on because they were really due to be worked on when we rolled out our process. It's probably more related to timing than anything else.
Got it. What is the process for those loans, I guess, on deferral now, or that could get a second deferral in terms of potential downgrades, moving them into watch, Special Mention, or anything of that nature? Are any of these within Special Mention today, or would that transition occur with a second deferral potentially?
Just take the $300 million that really has already come through that will stay in for a second deferral. Those are being graded based on what we learned in this process. Those will likely all move to a 4. If they weren't enough as a passed watch already, they would at least go there. Some will go to a special mention just based on what we see in the future prospects. That's the process we're going through right now, John.
Stephen, I know Kevin, they put together one heck of an underwrite, just like re-underwriting the credit again, with a lot more detail. He's got our regional markets that are re-underwriting the credit, and then if it's a certain size, that goes to a, we call it, a PIC-type committee that works through it with all of our senior leaders in the company, and then naturally, certain ones would come to our executive board level if that's the case. It's well done. Kevin and the staff put together the documentation that they're doing, and it's kind of like re-underwriting the credit again, and sometimes they send the lender back to get a little more information and give it a little direction on it. That's one of the things that I personally have been really pleased with how they're doing that.
That's great. That's really helpful. You guys gave color on, obviously, a lot of color during the quarter on your hotel book and giving the balances on the oil and gas portfolio. Do you have any other detail available there in terms of current balances within restaurants, retail, CRE, healthcare, any of those other types of loan books that people are maybe slightly concerned about?
I think the retail book and maybe one other segment were going to be the two segments we were going to tackle next in our series of visits. We're probably a couple of weeks away from being ready to do that.
Do you think that's helpful?
Okay.
Do you think that was helpful? Somebody said, "I think Johnny just picked his friends," which was an insult.
You have no friends.
Huh?
You don't have any.
I don't have any friends, Tracy said. I took that as an insult. They're all our friends. We got 100, 200 hotels, whatever we got. Haven't we got 100 and something hotels?
Yep.
I'd welcome them to pick any one of those customers. We don't orchestrate a call like that. That was a little aggravating. It wasn't aggravating.
No, I thought it was very helpful. I think we'd all been hearing kind of anecdotal stuff around extended stay hotels and coastal hotels, so it's good to have some data points there that you guys give.
Well-
I appreciate it.
Well, thank you. I'm glad. We'll continue as long Chris came back. Someone mentioned, "Well, what about CCFG?" Came back, did a report on CCFG, and I thought that went well. Unless something pops up, as I said earlier, we don't see any problems, but there may be some. Anyway, we work hard at it. If it's beneficial to the street to dissect that. Actually, the hotel book, as Kevin said, our coastal hotels are straight up. Their revenue's better than it was last year, if you can believe that. People just got, I guess, they got sick of sitting in the house and took off and went on vacation. That area's been good. The Keys were a little late opening up. The Keys will be fine. That's one that we've been in that market for many years, and that one will be fine.
I worry about our airport hotels. However, airfare is picking up a little bit, so that may be better. Our I-40, our interstate hotels, I-40 hotels, I-30 hotels have run, as Kevin said, about 40%, so they've taken up. That's taken up. That may be, the next quarter, that may not be as big a problem. We're going to look at other asset classes. If that works for us, and if that works for you guys, then we'll bring them on. We'll bring some more on. We don't have anything to hide.
We spend an awful lot of time on that, Johnny, Kevin, Stephen, and myself. I know we sat in here many a day just taking down a specific class. We'll fill them up on the board, we'll just pick the phone up and call the customer. We'll call our lenders, we'll reach out to make sure. It's not anything, as Kevin and Johnny pointed out, that a certain class of credit that we're overly concerned about compared to anybody else. As I said, I feel a lot better today than I did 90 days ago with uncertainty.
Remember, Stephen, if you're 57% loan deposit and you have to defer them for 6 months, then you're at 60% loan deposit. It's not the end of the world. Where we got in trouble in 2008, 2009 is we were loaning 100%, and they needed money, and we're going to be 105. It's a different world. You got the PPP money, you got lots of things helping, and the federal government's helped a bunch.
Perfect. All right. Maybe one last thing for me. It sounded like, maybe this is more for Stephen. Stephen, with a lot of the detail that you gave around June deposit costs and incremental declines there and what feels like some relative stability on the average loan yields, do you think you can keep the NIM kind of in this range north of 4% in the months ahead, in the quarters ahead, that is?
You asking Stephen or me? Stephen's going to tell you it might drift a little bit. I'm going to tell you it's not going to. Go ahead, Stephen.
Stephen, give the Randy Mayor.
That's right. That's what we said we gave guidance last quarter, it would go down, it went up. I think we'll just keep saying it may go down. Certainly, in the first month or two of Q2, we're able to be really aggressive and saw some steep decline on funding costs. Still got them down a little bit in the month of June, maybe at a little slower pace. I think everything we see on loan yields, the yields on the construction balances yet to fund are 30, 40 basis points higher than where our book yield is today. Yet the balances that we have coming due over the next six months, I think it's Tracy and Johnny mentioned some of that on the loan side, depends on what competition does and what we have to do to fight back.
If pricing is somewhat rational, I think that's all of our prospects, so that we're able to keep funding costs in line with what happens on the loan side.
Got it. Very helpful. Congrats, guys, on a great quarter. Really nice to see.
Thanks, Stephen.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, guys. Thanks for taking my question. I just have one. I don't want this to turn into the world record for longest earnings call.
I like that.
I just had one question around buybacks. Obviously, probably on hold for now, but somebody like Jamie Dimon says he hasn't ruled it out for the fourth quarter. You guys are clearly building a lot of capital. If us and others' loss projections are wrong and come in less, you're building even more capital. How do you think about that in this type of environment where unemployment and GDP are still going to be soft as we move into next year? Thanks.
I just have been jumping to get back in. President Trump asked us not to do that. We stopped that day. I didn't know if we were going to be penalized or get put in the penalty box for continuing to buy back stock. We have the ability to buy it back. I would like to be in the game to buy it back. I hate to be at the mercy of the shorts when we can't buy it back. I'd love to be back in the game. I'm not going to rule it out either. I'm not going to rule out going back because it is something I think has been good for our company. I think it'll continue to be good for our company. We're building lots of capital.
We might be able to go in and buy a bigger block at some point in time because we're steadily building some capital. You're right.
All right, guys. Thanks.
Thank you, Michael.
Our next question will come from Joe Fenech with The Hovde Group. Please go ahead.
Hey, guys. Most of my questions were answered here, but just one for Brian and one for John. Question for Brian. Brian, for the types of securities you guys hold, which I assume aren't all that different from most other banks, you had the upward revaluation in market values during the second quarter. Would you consider those markets to have basically normalized at this point? I'm just trying to figure out if relative to where the mark-to-market would've been, let's say, at the end of January or February, is there potentially more upward revision to come, or are those marks kind of back to where they were pre-COVID?
Well, the main driver in that is the fact that we have a higher yielding investment still on our book versus what the market is. We've been building our unrealized gain or loss throughout the year. It may level out a little bit. That's pretty much the factor is that our rates that are left on the books historically are higher than what the current market rates are.
Okay. For the most part, the disruption from March, April has kind of settled down?
That's correct. We took a little bit of a reserve on our portfolio in the first quarter.
Yeah.
We ran that same analysis, we didn't take any more reserve. It actually probably showed it was a little bit less than what we needed, we put a management adjustment factor on it because Q2 didn't seem like the time to be reversing any reserves.
Okay. Fair enough. John, correct me if I'm wrong, but it seemed that the Liberty deal was the closest you guys came to a transformational acquisition in the last cycle in terms of size. Assuming you're active this next M&A cycle, should we expect more of the same? In other words, don't bet the ranch or your culture on any one deal, or if things lined up right, could we see you do something or consider something more transformational?
I'm not afraid of that. I'd rather let some time pass. I know our book. I don't know if we did something that was of size. I don't know their book. I don't know that we can get to know their book in a due diligence. I don't know that we could do that. I would be hesitant to do a big deal. I wouldn't mind doing, as I said in the past, you can do a smaller deal and not hurt yourself. We could do a $5 billion, a third of our size or something, that'd be a pretty good size trade for us. I wouldn't be afraid of that. Probably bigger than that right now would bother me in the market.
As we get more clarity down the road from some of these other people to see what they're doing, I don't know what their reserves are. We've looked at some different banks, and I think we don't have a lot of oil and gas exposure. Here's the key. What are you going to loan? What asset class are you going to put your money in? Credit cards? Car loans? Where are these banks putting their money and what asset class? There's risk in every asset class. You just got to manage those classes well and know your customer and be able to pick up the phone and call them. I know I'm getting a little off track here, but I think it's a plus for Home Bancshares, a major plus for Home Bancshares, knowing their customers.
Most of them, we've had a drink with and had dinner with. The ones that we haven't, we want that to happen. I wouldn't be doing a big deal in this market right now. I think a $5 billion or down a third of our size or something might make some sense.
I don't know if I answered your question.
All things equal, John, you still looking west or be opportunistic around the southeast?
I would both. I'd be both. I want to see how this shakes out, Joe. We're not necessarily bottom-feeders, but we've made a bunch of money over the years and helped build our franchise by being opportunistic. I think we have the capital to go do something if we find an opportunity. Otherwise, there's nothing wrong with running this company the way it's running and kicking out $300 million a year pre-CECL. The new numbers, I think, Brian, I had him run new forecasts for me, and I think we were all over $300 million for the next 12 months. Forget CECL. The timing of this CECL deal is absolutely ridiculous, and we're up and down and sideways. The commitment on the unfunded, I had no idea that that went to operating expenses. How crazy is that, really?
Showing it as a liability. Then we're going to have to adjust it every month. It's another complicated factor they've just thrown in on top of banks. I'll hush.
All right. Thanks a lot, Johnny.
Yeah, thank you.
Go ahead.
Our next question will come from Brian Martin with Janney Montgomery. Please go ahead.
Hey, guys. Thanks for taking the question. Just one couple things for me, just on the PPP. I guess I missed some of what you said there, just the expectations as far as the forgiveness goes and timing of that benefit. Can you give any thought on how you're thinking about that, given you haven't gotten a lot of clarity from the SBA?
Hey, Brian, this is Kevin. I would expect a large percentage to be forgiven at this point, given they've extended the covered period. They've made it easier. 40% can go to other things. All those things they did improve the probability of getting forgiven. I would think you can throw out a number. I've seen 90, I've seen 85. I think a large percentage will be forgiven. Timing, I'm hearing that we're getting close to having some guidance on how we're going to transmit these. If that happens soon, then we'll get our process completed, and we'll be ready to start taking them relatively soon. I don't know how many people are actually ready, but between now and October, those folks will complete their covered period, and they'll be ready to start getting those off their books.
I'm really hopeful by October to December that the majority of these are gone.
Okay. I guess your hope would be, it sounds like in that month of December, maybe forgiveness occurs. It's a fourth quarter event for a large piece of it, and then some may extend out into next year.
That's the way it seems to be lining up at this point.
Okay. Fair enough. That makes sense. Just how about maybe just going back to the margin for Stephen for one second. Just as far as the liquidity that's on the balance sheet today, how long do you expect that to stick around? I guess, Stephen, when you talk about big picture, maybe holding the margin worth that, I guess I'm assuming that's with the liquidity sticking in there. Any thoughts on that liquidity piece would be helpful.
Sure. I think Brian gave some really good color in his prepared remarks around where the adjusted NIM is, ex liquidity or the impact from liquidity and PPP and other things. I think that's kind of really what we're talking about. We talk daily, I guess, from a liquidity standpoint. I know Brian and his team meet daily and weekly, but our exec group talks about things daily. We've had probably let $100 million, $150 million go here recently that we were originally kind of proactively holding on to. We'll see some of this pare down with tax payments going out yesterday. I would expect at some point, what we feel like a good portion of the PPP balances maybe are still in the bank in operating accounts that some of that gets spent over time.
I don't know, maybe when we talk 90 days from now, I would expect things maybe to trend back towards a more normal level from a liquidity standpoint if we all have the comfort where things go in the economy and what the governmental support is.
Okay. All right. That's helpful. Just maybe one last one for Kevin, just on the deferrals. Kevin, unless I missed it, $3.2 billion, you said $1.2 billion is kind of going back to paying. That remaining $2 billion that's out there on the deferrals, maybe I missed your comments about the $1 billion. It sounds as though you'll be left with $1 billion after you take a look at how those are performing or how many of those are going back to payment. Is that what I heard you say?
Let me say it a little bit differently. There's still $1.6 billion for us to look at. Out of that $1.6 billion, there will be some number of that that stays on deferral. Whatever number that is will add to the $300 million that we've already identified in the first half.
Okay. I gotcha. That makes sense. Okay. That's all I had for me, guys. Thanks.
You bet. Thank you very much.
This concludes our question and answer session. I would like to turn the conference back over to John Allison for any closing remarks. Please go ahead.
Thank you for joining. I know it's kind of a long call, a lot of questions. There was a lot to talk about today. There's a lot going on. So far, it's all good. I think to have a record quarter in the middle of this pandemic speaks for the strength of the people of this corporation. I want to tell you that my wife asked me about the dividend, so don't worry about the dividend. The dividend is solid, so we don't anticipate anything there. We don't anticipate any losses to speak of. Overall, I'm damn happy. To be in the middle of this crisis, I'm happy, I think. I thank you all for your support very much. It's important to us, and your input's important to us.
If you have something you want to say about the asset classes or what we need, what recommendations, give Donna a call. We're always open to that. It was a great quarter. Performance was outstanding, and congratulations to the home team. I get a lot of credit for being here, but it's really the people who run this company, Tracy and his group, and congratulations to you, Tracy, and your group. You got any comments, Tracy?
Thank you. Well said.
We'll talk to you.
We'll continue to work hard.
We'll talk to you in 90 days. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.