Home BancShares Inc (HOMB) 2021 Q2 法說會逐字稿

Good day, and welcome to the Home Bancshares, Inc. Second Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead.

Thank you, Rocco. I am Donna Townsell, Director of Investor Relations, and our management team would like to thank you for joining our second quarter conference call. Reporting today will be our Chairman, John Allison; Tracy French, President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; and Stephen Tipton, our Chief Operating Officer.

Before we jump into the numbers, I wanted to highlight a couple of developments that occurred in the second quarter. First, you may have seen our announcement earlier this week where Home's wholly owned subsidiary, Centennial Bank announced the appointment of a new Director of Corporate Social Responsibility. This move highlights our intention to enhance the development of strategic initiatives supporting Centennial Bank's focus on environmental, social and governance topics.

While these pillars of corporate citizenship have always been important at Centennial, we feel like a more formalized program will ensure that we continue to keep ESG top of mind. Also, there continues to be discussion around fintech partnerships. Home recently joined in with 65 other banks to form an investment fund designed to help accelerate technology adoption at community banks across the United States. The partnership brings together seasoned fintech entrepreneurs and bank experts to invest in the next generation of companies, changing the way financial institutions and their customers move, track and interact with money.

These are just a couple of examples that show Home's desire to continue to be one of the best banks in America. Now to transition to what you all called it for, our first report of the quarter will come from our Chairman, John Allison.

Thank you, Donna. That's pretty exciting about the fintech. It's in a good -- had somebody that had ESG for us. I think those are positive developments for our company. Good afternoon, everyone. Thank you, Donna, and again, welcome to Home Bancshares' Second Quarter 2021 Earnings Release and Conference Call. The performance for the second quarter was another solid quarter for our company with $0.48 of EPS and $71.9 million in profit, good asset quality and decent expense control. Loan demand is -- it's a frustrating part of the equation. While sitting on $2.7 billion in cash and no reasonable place to invest for a decent return, we've decided to hold closely and be patient and do not set our future.

We may be wrong, but it is a decision that we made, and we're holding tight. If we're right, we think we're only 6 months away from rising rates, which may include an earlier period of time of tapering and purchases by the Fed. I pay a lot of attention to Jamie Dimon, and I agree with what he said. He's sitting on $500 billion, and he said patience is certainly the key here because rates are going up. As I said in the first quarter, we had to wind our back and a lot of things that we've been working on came HOMB to us. I meant that as a pun, HOMB.

During the second quarter, we had the breeze to our back with continued income from investments we've made last year. Since going public in mid-'06, we together have been through the worst financial collapse or financial collapse since The Great Depression. And the worst pandemic the world has ever known, may be worse than the one in 1970.

By the way, as you well know, they throw in a couple of hurricanes in Florida during that time. These huge events created fear uncertainty and lots of anxiety for all Americans as well as people throughout the rest of the world. I want to thank you all for your support during these very difficult and stressful times.

In addition, to that, to all the events that happened, we were going over $2 billion -- $10 billion and incurred an additional $2 billion, how funny is that. We blew through $2 billion, but $10 billion was a big mark for us. And all the associated expenses, the adjustments for $10 billion took us longer and cost more than we ever anticipated. New terms to our (inaudible) like enterprise risk management, CFPB, Bank Secrecy just to mention a few.

Actually, one exam less than 5 minutes is an action exam, was spent on capital earnings, asset quality margin and liquidity. I thought these were the most important components to running a successful and profitable banking order, to say. The other 50 minutes were spent on things I've barely very heard of for the last 4 or 5 years. Through all the unseen and crazy times, Home has continued to produce peer-leading results with ROAs running from 1.80% to 1.90% and some over 2%.

We have managed here through the crisis regardless of pandemics, hurricanes or COVID-19 virus, where the business was good or bad, regardless of interest rates going up or going down or adjusting to what plan of attack that our management decides them. That's what good management teams should be doing. Let's take a walk back over the last 3.5 years of 2018, 2019, 2020 and the first half of '21. And I think you'll agree with me that the consistency of Home's earning is impressive even without all the unusual circumstances we found around us.

I'm going to read 2018, '19, '20 and '21. So in 2018, we did a 2.09% ROA. These are adjusted numbers. We've done a 2.09%, in 2019 at 1.96%, in 2020 at 1.92%, in the first 6 months of this year, 1.97%. That converted into income of in 2018, $303 million, in '19 $294 million, in '20 $309 million, in the first 6 months of this year, $167 million.

The total revenue -- total revenue net after interest expense was $663 million in 2018, $662 million in '19, $694 million in '20 and $365 million in '21. I think you have to agree with me that these numbers are pretty impressive and shows the stability of this corporation and how the management team adjust to the situation that's in front of us. I cannot ask for much more performance than those impressive numbers. As a result, we decided to pick up our M&A hat -- M&A tool, out of the toolbox.

We have worked on a couple of interesting opportunities, but to no avail so far. I was visiting with a very smart, good friend in the money management space, and I was telling the difficulties we were going through. I told him, I said, it appears that the bankers are screening alibis to see who can pay the highest price, and then they go out to potential sellers and say, hey, look how much Home can pay for your buying or someone like Home. There's not many like Home, but there's a few of us that trade at a pretty high multiple tangible book.

It's almost like a pocket list that a realtor has when the potential seller says, well, my house is not for sale but If you can get somebody that's crazy enough to pay this price, he said, then my house will be for sale and you can sell it on like a real estate pocket list. My friend then said, they don't work. And I said, what doesn't work. He said, the M&A deals just don't work. He went back to 2010, looking at all transactions, and there were very few that were, very interesting comments, he said, on announcement of a deal, Bank A buying Back B. He sells the seller immediately and shorts the bar. I said, why would you do that? He said, that's probably the highest price that the seller is going to have and expect it to go up because it's tied to the buyer's price. And he subsides that, I don't get paid until I sell and cast the money at. He said 98% of the deals are dilutive to the buyer.

if it's a 3- or 4-year earnback to tangible book, why would I sit around for 4 or 5 years waiting for that earnback to come back to get somebody back to even. The only deals that make good sense are nondilutive transactions that have all the deal costs calculated into the transaction and experienced acquirers. He said, you'll never hear this from an investment banker.

But remember, they don't get paid -- they get paid when it works or doesn't work. He said, keep your discipline. Why do you think they want to do a transactional on Home? It's because your stock is good. And why is your stock good, it's good because you're disciplined, why are you disciplined to make you stock good. It makes lots of sense. Another interesting point that came from the matrix of the deals is the high price to tangible book pad that had a run from like 1.4x tangible book all the way up to 2 to 3x tangible book, and the higher the tangible book multiple, the longer the market punished you and puts you in time out. And in some cases, it was years, because they're waiting on the earnback to tangible books and nobody wants to hang around for that because nobody keeps up with it, and nobody calculate.

We'll continue to look for like-minded partners in the space, in addition to disciplined integration risk. However, a lot of that integration risk can be mitigated when you find like-minded partners. Dilution is the killer. If a buyer dilutes himself today to buy your money and have a 4-year earnback to tangible book, don't you think he'll do it again before 4 years, and again, and again. it is conceivable that you may never get your tangible book back to where you started.

One way to look at it is Home's market cap is $4 billion based on a multiple of tangible book. If I dilute my shareholders by 5%, I've just reduced the value of my company by $200 million. Now that tells you why smart money managers short the buyer because if it's a dilutive transaction, the company is not worth today, what it was yesterday. If there is no dilution, there is no reason to short the buyer. Let's say that again. If there is no dilution and it's an accretive transaction, there is no reason short to buyer.

If the company has local shareholders and is private, the eyes of negative treatment by the market is substantially reduced. If a company is owned by a bunch of hedge funds, it really complicates the transaction even more because they're going by daylight. If it's announced today in the morning, they'll be gone. They all sell. To me, sophisticated bank investors, individual investors, pension funds, quality portfolio managers and ETF and then there's the hedge funds. It's important to analyze the stockholder ownership before engaging in a transaction.

We still are engaged on the M&A but are looking for other opportunities that could increase earnings. We have a $300 million sub debt that is callable in April at 5.625% and $71 million worth of trust deferred. We have been putting back $5 million a month. And in April, we will have $150 million set back. We may request -- I don't know, Tracy, you think about requesting the (inaudible) allows to a special dividend, is that correct within the numbers as we speak. We're working the numbers we're going to send them to them. So we may request a special dividend. And if they were to approve that, then we could pay off the entire debt.

That's about $17 million pretax, and it runs at about $0.08 EPS. That's without doing the trust deferred and we might save those and do them in a little later date. But all told, if we do them both, that's about $0.09, maybe $0.10. I would anticipate us engaging at least on half of the sub debt and maybe all of it, probably all of it. With inflation running at historic levels. I guess you saw in June, it was up 0.9%. June was 0.9%, May was 0.5%. So that's 1.4% in 60 days. Kevin had equated, what did you say that equated to?

Almost 9%.

Almost 9% on an annualized basis. So I think we've made the right call. I mean, to invest this money in the long-term securities today, to invest this money in 2% to 3% loans today, I think, is a mistake. Time will tell, though, time will tell whether right or not right. Other than that, Donna, I think it's been pretty good. And we're just sitting here waiting on the next crisis. And I hope it's not the delta that's coming back to us. So I'm going to let you go to management reports and I'll just hand it back to you.

Well, that was the cycle of updates. And I also hope that we're not looking at a big surge of the delta virus either. So now we will move over to Tracy French for Centennial Bank.

Thank you, Donna. And good afternoon to everyone. Steady as it goes in the second quarter for Centennial Bank and Home Bancshares, maybe steady and consistent is more accurate, and that steady and consistent is our performance expectations. Our group will share with you in a moment some of the details about capital earnings, assets, liabilities. There're a few strong and safe performance numbers for the first quarter and the first half of 2021 for Centennial Bank. That represents all regions that just keep producing such powerful results.

In fact, 8 of our 12 regions had their best 6 months ever led by Central and South Florida, while others are still doing extremely well and still complaining about our transfer price and internal model, where their numbers would be better, and we understand that.

For Centennial Bank, our total revenue was $367 million for the first half of 2021, making a return on assets of 2.08%. Our return on average tangible common equity, non-GAAP, was 19.66% and our efficiency ratio was at 38.59% for the first 6 months of 2021.

The Allison P5NR was still above the 60% level, coming in at 61.99% for the first half of the year and holding that number throughout the quarter. A nice factor being our net interest income, by the efforts of all, focusing on our interest income and interest expense.

Our noninterest income was actually up over double digits for the first half of the year, while our noninterest expense is up slightly. Brian will give more detailed information on our strong capital as our risk-based capital reports at 19.5%. Stephen will share the details of the loan production and the deposit summary. As Johnny mentioned, there's now over $2.7 billion in excess and our loan-to-deposit ratio is around 73%.

Kevin will share the loan information and it continues its safe and sound numbers. Our nonperforming finished the quarter at 0.58% of the loans. Our allowance for loan and lease losses, excluding PPP, ended the quarter at 2.48%. The Quarter end shows our allowance for credit losses to loans to nonperforming as 407.99%.

While we saw an expected dip in overall loans, who would have thought that 1% annual percentage rate on PPP loans would be good and twice the return as a 3- or 5-year treasury. Let's look out, rates have gone up 50% to 80% over the past month. So Johnny, my forehead, as (inaudible) rubbing is looking promising going forward.

Inflation is receiving a lot of attention lately as we discussed nearly this a year ago as we knew that the staying in touch with our customers on these factors. And we will continue to stay the course. As we have said previously, we have made conscious decisions to sit in cash with our asset growth. And it appears the signs are showing some positive movements in the second half of the year. The first half of the year turned out the way we thought, and most of our markets are seeing good solid growth through the swing of this other side of the cycle that we're going through.

We have stayed committed to our strategy and disciplined to make decisions or not to make decisions for short-term gain that could affect our company long term. I trust that our long-term and loyal shareholders appreciate that discipline. Donna?

Thank you, Tracy. I'd say steady and consistent are certainly complementary additives, and we'll take that. Now we'll move to Brian Davis and give us a financial report.

Thanks, Donna. Today, we reported $141.3 million of net interest income and a 3.61% net interest margin for Q2, 2021. Our second quarter net interest margin decreased 41 basis points from Q1. Today, I'd like to go over to 2 items, which significantly contributed to this decrease. First, during the second quarter, we had $247 million of PPP loans forgiven. This forgiveness causes the acceleration of deferred fee income for the loans forgiven.

Our PPP deferred fee income decreased $3.5 million from Q1 to Q2. This decrease was 9 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. As a result of the excess liquidity, we had $967 million of additional interest-bearing cash in Q2, compared to Q1.

The excess liquidity was 23 basis points dilutive to the Q2 NIM, compared to Q1. From a point of historical reference, the Q2 excess cash versus the historical normal cash balance has a negative impact to the Q2 NIM of 63 basis points. Once again, that's 63 basis points negative impact of the Q2 NIM as of excess cash.

So what would that be? I mean we can't (inaudible), how much we came with...

we had 361 plus the 63.

The 420, right? somewhere in that range?

424.

That doesn't price you run his head again.

Now I switch to the unfunded commitments. This quarter, the company reversed $4.8 million of the unfunded commitment reserve liability. This reversal was primarily related to one C&I loan. During Q2, the company determined it was not necessary to maintain the reserve on this cash flow in credit. 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 2021, our Tier 1 capital was $1.8 billion. Total risk-based capital was $2.2 billion and risk-weighted assets were $11.5 billion.

As a result, the leverage ratio was 10.9%, which is 118% above the well-capitalized benchmark of 5%. Common equity Tier 1 was 15%, which is 131% above the well-capitalized benchmark of 6.5%. While Tier 1 was 15.6%, which is 95% above the well-capitalized benchmark of 8%, and finally, total risk-based capital was 19.5%, which is 95% above the well-capitalized benchmark of 10%. I think we have plenty of capital today, Mr. Allison.

That's pretty impressive. It may be going well for you, Tracy, when you ask the regulators to help us with this -- move this money up. So we're in good shape.

Yes.

Should be in good shape. Thank you, that's good. Good enough.

Thanks. And Donna, I'll turn it back over to you.

Okay. Thank you, Brian. And now Kevin Hester will update on the loan portfolio.

Thanks, Donna. The first half of 2021 was much like we anticipated. We've been fully engaged in PPP with forgiveness of rounds 1 and 2 and funding of round 3, with both going largely as expected. Credit metrics continue to improve slightly even when it appears there's not much room left for improvement.

New lending opportunities have returned, but the excess liquidity and low loan-to-deposit ratios across the banking industry have resulted and even more rational pricing and underwriting, so growth is elusive. We said all along that we felt that it would be the second half of 2021 before we could see any loan growth, and we still feel that way.

The good news is that our production pipeline is stronger today than it was 90 or 180 days ago. To the specifics. In the area of PPP round 1 and 2 balances have been reduced from the original $850 million to just below $150 million, with still over 99.5% of the requested balances being forgiven.

We've seen the SBA release funds on a good portion of the round 1 and 2 loans, over $2 million in the second quarter, which has been helpful. We will make a hard push to submit the remaining round 1 and 2 balances this quarter. Round 3 funding ended during the second quarter, and we funded just over $350 million or about 40% of the total of rounds 1 and 2.

We've initiated the forgiveness process on a few of these as well and have received about $30 million on these balances in a very short amount of time. COVID modified loan balances remained flat during the second quarter and ended June at $265 million. As we discussed 90 days ago, little change was expected in early 2021 because a large majority of these balances were placed on an 18- to 24-month interest-only modification to provide sufficient time to recover from the remainder of the pandemic.

Roughly 70% of this balance is hotels and the recovery is definitely underway with virtually all the modified properties experiencing a significant improvement in cash flow. It appears that as much as 2/3 of the modified properties experienced at least a breakeven RevPAR in the month of April and May. I would not be surprised to see a good portion of these loans, especially the Florida properties, returned to P&I payments at some point during the last half of the year if positive cash flow continues.

Remember that we stipulated no disbursements as long as they were on interest only. So the incentive will be there to go back to P&I payments once positive cash flow is sustained. There's even good news on the movie theater customer that you've heard Johnny discuss from time to time. He has received notification that he will receive funding from the shuttered venue operator grant, and it will likely be sufficient to get him back on track with us. As I mentioned, credit metrics continued to improve in the second quarter.

As Tracy mentioned, nonperforming loans improved to 58 basis points, only up 5 basis points pre-COVID and down 1 basis point on a linked-quarter basis. Nonperforming assets were even better at 35 basis points, down 9 basis points pre-COVID and down 3 basis points on a linked-quarter basis.

Early stage past dues remained very low at 41 basis points which I believe is the lowest figure we have achieved in recent history. These measures are even more impressive given the lower loan balances in the last couple of quarters.

On the technology front, we're in the latter portion of the build phase of an end-to-end commercial loan origination system. We anticipate the go-live date to the early fourth quarter, and we expect to gain efficiency as well as visibility and control. It will also provide the platform for growth and sustainability as we continue to evaluate M&A opportunities.

Overall, the second quarter of 2021 was very much like we expected when we visited back in April. It feels like we're getting back to normal, except for market pricing and underwriting. With that, Donna, I'll turn it back over to you.

Thank you, Kevin. It's reassuring these are that things are going as predicted and the credit quality remains strong. Do you have a comment?

We had set a hotel you're in (inaudible) tournament? All we heard is a (inaudible) -- heard (inaudible) hotel. And I think that he said John -- he said, we are 100% full. He said, cram-back full. He said, somebody cancel, you don't have to worry about it. He said the arena is full, he said the hotel is full.

I said, how about the right fees and there up a little bit. He had a pretty good smile on his face.

Good.

That's great news. And now we will hear from Chris Poulton with CCFG.

Thank you, Donna, and good afternoon. CCFG generated modest growth during the second quarter of about $40 million. We ended the quarter with loan balances of approximately $1.56 billion. I'd note that this number does vary over the course of the reporting period, along with the timing of draws and pay downs, et cetera.

So by way of reference, our high balance during the quarter was $1.68 billion. Increased economic activity during second quarter, especially in New York and California is starting to show up in our production and loan pipeline. We saw sales and rental activity and pricing picking up throughout 2021, particularly in New York and California markets, which are joining some already active markets in Florida, Texas and the Mountain West.

We'd expect this to lead to more opportunities in these markets, but we also expect that we'll see some payoffs accelerate during the second half of the year as our borrowers are able to complete their exit strategies. New loan commitments for the quarter were $213 million, and that brings us to a total of about $430 million year-to-date.

That number is in line with both our 2019 and our 2020 first half production. As you might expect, in 2020, second half production was impacted by the shutdowns. We don't anticipate that for 2021. And we would think that the expansion that we're seeing now will also help us increase that commitment volume through the rest of the year.

Unfunded commitments stand at over $800 million at quarter end. That's a bit higher than we've carried in the past few quarters. And I would hope that this build in future funding will help us offset some of the potential higher payoff volume over time. Overall, the second quarter continued the trend we've experienced in Q1, which were markets are reopening, activity was increasing, particularly sales and rental volume and prices in New York and California that had lagged behind some other markets. We are seeing both an increase in the number of new leases and the number of sales in those markets, and we are seeing prices start to rebound.

We remain pleased with the size and quality of the existing portfolio and the makeup of our pipeline, where we have several loans in closing and late-stage underwriting. While markets are recovering, we do continue to see that it takes a bit longer than usual to close loans, particularly the time from term sheet signing to closing remain several months longer than our historic norms. I'd expect that this will moderate over the remainder of the year and start to return to our historic timelines. Donna, happy to turn the call back to you.

Thank you, Chris. That's an encouraging report. And now we will get an update on Shore Premier from John Marshall.

Thank you, Donna, and good afternoon. I'm pleased to report the second quarter a success for Centennial's marine finance lending unit as we explore the new post-COVID realities. Retail applications have moderated to 120 per month from a COVID peak of 210 per month, more a function of limited inventory available for sale rather than a satiated consumer demand.

Interestingly, and I suppose, in support of inflation hawks, our average application amount has grown from $504,000 pre-COVID, to $657,000 in this June just ended. Preowned vessel finance now comprises 68% of our applications, that's year-to-date, versus 52% in all of 2020.

So we moved from 50-50 new-to-used ratio to closer to a 30-70 split as a new product just isn't available. We've addressed the collateral value risk by managing down our loan to values from an already conservative 71% pre-COVID to 66% in the past quarter.

Second quarter retail production was a near record-setting pace of $59.5 million. Our commercial business continues to shrink as sold inventories cannot be replaced due to suspended production in Europe last year, supply chain gaps due to labor shortages and limited shipping container capacity. Just despite strong production for the quarter, our balance sheet contracted by $36.7 million as businesses spend stimulus money and consumers use stockpiled cash or tap newfound home equity priced at 2.5% to reduce their more expensively priced boat loans.

Prepayments in the second quarter were the highest in the past 2 years, swallowing $55 million in interest-earning assets. We're seeing some evidence that the prepay cycle may be slowing and despite of -- or perhaps because of our falling asset values and disciplined expense management, our contribution to Centennial's bottom line has grown year-over-year as our efficiency ratio was below 18%, which has lifted ROA to 2.7%.

And Donna, while the prepay rate is frustrating our growth goals, the good news is that we are replacing prime assets with prime assets. Origination FICOs pre-COVID were 778, and last quarter held -- have held steady at 777.

Additionally, we have no COVID-related impairments or deferrals. Nonaccruals reached a 3-year low of $1.6 million, and our accruing delinquent loans have been hammered down to 13 basis points. I believe we're well positioned for growth once surplus cash has been exhausted in factories resumed shipments. So on that note, Donna, I will return the call to you.

Thanks, John. And now final...

That was a pretty good report, Donna. Good job, John.

It is a good report. It's a very good report. And for our final report today, we will turn to Stephen Tipton.

Thank you, Donna. I'll give the standard color on deposit activity, repricing efforts and trends and a few additional details on the balance sheet. On the deposit side, core inflows continued during the second quarter of 2021 as total deposits increased $379 million from $331 million to just under $13.9 billion.

The 4 Florida regions accounted for $263 million or 69% of the increase in the quarter. Our Florida franchise now accounts for 52% of the total deposit base. Focusing on our core base, noninterest-bearing account balances increased over $200 million on a linked-quarter basis and now stand at over $4 billion or 29% of our total deposit base.

Switching to funding costs. Interest-bearing deposits averaged 26 basis points in Q1, down 7 basis points on a linked quarter basis and exited the quarter in June at 25 basis points. Total deposit costs were 19 basis points in Q2, and we're down to 17 basis points in the month of June.

CDs are now at an all-time low at 7.7% of total deposits. We are continuing to work deposit rates down where we can as liquidity levels persist. In addition, we're continually evaluating our product set and commercial fees to align with the market and drive additional revenue in this low interest rate environment.

I'm pleased to see the efforts over the past few quarters here begin to show in the bottom line this quarter. Switching to loans. We saw a total production of a little over $700 million in the first -- in the second quarter with nearly $400 million coming from the community bank footprint.

We continue to monitor the competitive environment and focus on the disciplined approach to pricing and underwriting has long served as well. Payoff volume was in line with prior quarters at $882 million as we again saw borrowers continue to liquidate large assets and/or go to the permanent financing market.

Brian mentioned in his remarks, we're normalizing for the impact from PPP event income and a tremendous amount of excess liquidity. We're pleased with how the net interest margin continues to hold up. And with that, I'll turn it back over to you, Donna.

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

No, I was -- it was a good quarter. Those are interesting numbers. It's interesting times with all this liquidity. I mean, we used to run 105% loan to deposits, which -- call it running hot around here.

And now we're a 75%. So if the market picks up, we certainly have a great position to -- if we can deploy that money in the loans at a reasonable price, I think it sets us up pretty good for the year. So we're continuing to hang in and I think that all good reports from all parties, and if Rocco hasn't gone to sleep on this, Donna, I think we'll be ready for Q&A.

Okay. Rocco, we'll turn it to you.

(Operator Instructions)

Today's first question comes from Michael Rose of Raymond James.

So Johnny, it sounds like you're a little frustrated with the M&A backdrop but continuing to look. Can you just give us an update on what you'd be looking for at this point? And it does seem like there has been some deals that you might have potentially been interested in some of your markets. And just any general update on M&A would be appreciated.

Well, we're active. We're very active on M&A and probably further along on an M&A deal at this point in time than we've been in some time. So you find like-minded people like we are, that run good operations and understand what dilution does to a deal.

When you find those kind of people, then you can make a project makes sense instead of everybody bombing the stock and I'll add some appreciation. Particularly, if we bring money in a AAA, and we don't do them without fitting that moat. So we're excited about what's going on in the marketplace, and we think we found at least one group of people that are like minded to us, that are interested in the long-term future of the value of the company, so that understand what dilution does.

And those that don't understand ought to understand, but that part is a little frustrating because -- our stock was at 2.7, 2.7x tangible book and the bankers from the stay at home can pay you some big number and Home could but Home doesn't. There's a reason Home trades where it is. You know that, Michael. It's a discipline of this company. And we find -- as I said earlier, we find like-minded people. I think you could see an asteroid coming off of Home, hopefully.

Great. Maybe just as a follow-up. So the NIM compression was, even on a core basis, was a little bit more than I think what me and others were looking for. Do you think we're nearing a bottom here for the core NIM, kind of ex the PPP and ex accretion, if we think about it that way? Or are we still going to be subject to some ongoing pressure as we move forward?

Just given the lack of loan growth opportunities, I know you guys are super disciplined on pricing and things like that and aren't going to, I think in your words, Johnny, push a rope, you said in the past. But would just love some color on the margin dynamics as we think about the next couple of quarters.

Let me just give you an example. One of our regions called Tracy yesterday and somebody quoted 3.5% fixed for 7. And the next guy said, well I'll tell you what I'll do. I'll do 3% fixed for 10 and the other guy said, we'll, I've got the loan now. I'll do it at 2%.

So it was absolutely a race to the bottom. And when you see that kind of stuff, it really gets frustrating and impacts the NIM. We're not playing that game. But I don't think the NIM is at Home other than the excess liquidity has really been in it. Brian, am I right?

Yes, I would agree with that. It's the excess liquidity that's cost us 63 basis points on our margin from Q2 based on the excess liquidity that we have. You asked the question if it was going to be excluding PPP, no.

We reported NIM, and markets still see a little compression because we reported $6.3 million of PPP income this particular quarter. And just for a point of reference, there's $18.2 million of it left. So it will be difficult to continue at the $6.3 million because some of the round 2 forgiveness is this 5 years, and there's not a tremendous amount of the round 1 left. So that will kind of die off a little bit.

Will we continue to build excess cash? So far for the first 15 days, I won't go with no. Our deposits are functionally exactly flat from where we are at the end of the quarter. So we really won't receive any more pressure there. It's just a matter of what we decide to do in deploying the excess cash because if we deploy anywhere, it's accretive to the NIM.

Although I would like to go on record that it is going to go down because I'm usually wrong. And so it would -- I would probably have jinxed myself saying it might improve. But that it really shouldn't bottom out there on what we have from excess cash unless deposits just continue to come in.

But just keep in mind, if we move it out of the Fed, which has earned 15 basis points and just move it to 1% in something easy, in the investment portfolio, that is technically accretive to the margin. And I know Stephen, he's sitting here by me, and he's got a few things. He may want to add some more color to that on the NIM himself.

Yes. I mean -- Michael, we've been able to -- I mean, despite loan balances being down a little, the loan yields come down some, but we've been able to offset that with deposit cost decreases. It's really just a function of kind of mix and liquidity today. And we're always hesitant to say we see loan growth at some point, but we're up a little bit quarter to date, and we'll see where the pipeline goes this quarter.

I think some companies have pushed off some of that excess liquidity. We haven't. We haven't pushed it off. We could push some of that off and then bring it back, but that's kind of a game. Just is what it is. We don't actually -- at some point in time, we'll be able to deploy that money and when we get an opportunity to deploy it, I think it will be -- time will tell.

Tracy has rubbed most of the hair off the front of his head trying to figure out what to do with this $2.7 billion. It was $1 billion. A $1 billion, then $1.5 billion, then $2 billion, now $2.7 billion and you don't have near as much hair left as you used to. You going to comment on that, Tracy?

It's cheaper at the barber shop.

Michael, the list of questions you sent were great. Those are really, you talked about a thorough set of questions, those were really excellent.

Appreciate it. Just one quick follow-up. It does look like you built the bond book a little bit this quarter. If I look at it as a percentage of earning assets or just stated assets, and I think what you're trying to convey is that you may build a little bit more if you get more liquidity, but if not, the bond book may be sized in terms of percentage of assets or earning assets is about where you want it to be at about 17.5%. Is that fair?

I think it's fair. We have a 10:10 call daily, every day, 10:10, and we're discussing what to do with this money. But actually, I'm not going to predict loan demand going up, because every time I do, it goes down. But you heard Chris talking favorably and you heard John's talking favorably. You heard Kevin talking favorably. And we had a good executive loan committee yesterday, it was about $100 million.

So I'm optimistic that maybe things are -- turn around a little bit. We have a lot of stuff working. Lots and lots of big loans working, just had to come to (inaudible). I think I'd ask Chris as to what's the problem. And Tracy's taking longer to close these loans than we anticipated in the past because a lot of municipalities are involved, and they're not working full stabs. You can't get the information you need and you can't get -- they can't do a check on the progress. So it is little frustrating, but that too shall resolve itself.

Our next question today comes from Brady Gailey at KBW.

So one more on the topic of loan growth or the lack of loan growth. Is it more truly a loan demand issue? Or is it more you don't want to lend at today's rates? I'm trying to figure out how much of it is truly loan demand versus Home being thoughtful and saying, hey, we're not going to put on a loan with a 2 or 3 handle?

Brady, this is Kevin. It's a mixture, that -- things are coming back in Florida for sure. Arkansas is a little bit slower. But I mean, there -- it's more than just interest rate, it's leverage, too. We're seeing, I think, particularly in our community bank markets, in the smaller markets, our smaller competitors are doing some really crazy stuff on leverage as well as rates.

So you can play with that rate a little bit, but we're not going to do crazy stuff on leverage for sure, not with prices as high as they are resalable assets.

We're seeing some 95 and 106 stuff, it just doesn't make any sense. And that's just people getting too aggressive taking a loan that needs to have a recourse on it and make it a nonrecourse. I think there's a panic in the world out there. Home's not panicking, we've got a great company.

We still make a lot of money and even with all this excess liquidity, so we're going to hold that to what we do, what we've done the entire time. And I think in the long run, Home will win. You can change -- you can fix about anything with a bank except the margin. It takes years to fix some margins. When you do 7- and 10-year fixed rate stuff out here at low rates, you're going to be living with that for a long time.

So we think we're on the right track. I don't believe the Fed can, I said last quarter, keep their foot on this inflation. I know Powell is trying to convince the world he is going to do that, but I am afraid he may have gone too far. So this thing could get a little rate to get a little crazy here for too long if things don't change. Hopefully, the Fed will taper a little bit, and we'll see rates start ticking up a little bit.

I mean we got -- if you bought gasoline and food lately, you know what I'm talking about. This still is -- I get used cars are up 40%. That could come back. It probably will come back at some point in time, but it probably won't until the new car business can fill the need that's out there for the demand.

Yes. And back on the topic of M&A, it sounds like you guys are clearly focused on bank M&A. Would you ever look at other types of M&A like acquiring kind of some niche specialty lender like a commercial finance or premium finance or equipment finance? Would you ever look at those sort of acquisitions in addition to bank M&A?

Certainly. I mean, I'm a businessman. If it makes sense, it makes money -- I mean, we moved up in the shore and then we -- of course, we would look at something if it made some sense. But we think finding like-minded partners in the banking space is probably the place for us to be. Our group is looking at one of those opportunities for us now by the way, one of those outside opportunities.

All right. And then lastly for me, it looks like you bought back maybe a little bit of stock this quarter. But yes, your stock has pulled back a little bit. It's now trading at 2.25x tangible, which is pretty attractive for you guys. So just -- did you buy back stock intra-quarter? And talk about your appetite for continued buybacks from here.

Yes, we did, and Stephen we can talk about that. But our appetite, as it goes down, it becomes more, as you understand. But we bought it all the way to [27, 28] I think, didn't we, Stephen?

Yes, we bought about -- a little over 600,000 shares in Q2 and then we've got a 10b5-1 plan in place since the end of the quarter that's been pretty active in the last 2 weeks or so. Yes.

Yes, if we hadn't had the 10b5, if we had been -- our hands tied, you'd probably see us in there with both feet right now. Yes, we'll -- we have more stock and we'll continue to be in there.

And our next question today comes from Matt Olney at Stephens.

I want to go back to the discussion of the loan balances. And I think Tipton gave us the overall level of originations in 2Q. Just trying to appreciate if there was any kind of deceleration or acceleration from the April to June time frame within that.

Matt, it's Stephen. On payoffs, they were a little heavier in the last month of the quarter in June. They were a little over $300 million, but in a relatively tight range there from April to June. We had a couple of projects, I think, in June that we thought would pay off potentially in Q3 that were pulled forward. So that's what drove that number up a little bit.

And that's on payoffs. What about on the other side, on the origination side? Any kind of trend intra-quarter that you noticed?

No, not necessarily. $700 million has been last 3 quarters or so has been pretty consistent. We generally fund about half of that. At quarter end, balances about half of that was funded.

Chris talked about a couple of things he thought we're going to fund in June that didn't kind of get pushed, the discussion of not being able to get title work and appraisals and cities to do those things. I think that happened a little bit in June, particularly with Chris.

Chris, your backlog is about as good as it's ever been, isn't it?

Yes, sir. It's -- we continue to -- again, I think we said this last quarter, too, I mean we have a nice backlog. We're underwriting deals. We're signing them up, and we're getting them negotiated. Kevin mentioned that, I mean, in June, I had 2 deals that I fully expect to close in June. And 1 of them has been sitting with documents in escrow for 2 weeks, waiting for somebody from the city to finally get back to work.

But it's sitting there to do that. I hope they're not listening right now, but -- if they are, I love you. But yes, I mean we're just seeing stuff -- we're just seeing things just take a while. I mean closing a loan is a 9, 10-party affair. And I think we hear people saying that they're more productive working remote. I think that might be true individually, but not when you need to get 6, 7 parties together to get something done. It's just taking a while.

So none of the ones that we have in there look like they're going to fall out because of that, but it is frustrating to sit there and wait for these things to close. If nothing else, it's because every day, I don't have it closed, it's a day less I'm earning, but we still have confidence that they'll get done. And these are usually outside our control and the borrowers or even outside the borrowers' control sometimes.

So I think everybody is -- I think everybody is looking forward to getting back. It does help that New York has reopened now. I mean as of July 5, right, the cities reopened in terms of all city employees have to be back, and those types of things. So I think we are seeing things start to accelerate. And I know we are getting to the point now where -- we really want to get these closed. So we'll hopefully get through those this quarter.

Okay. That's helpful, Chris. And Chris, I think in your prepared remarks, you also mentioned potential for some heavier paydowns at the back half of the year. Can you just kind of clarify those comments as well? And you expect to have some net loan growth in the back half of the year? Or is it just -- what's the outlook there?

Yes, I'd like to have net loan growth. A lot of that is going to be timing oriented, right? I mean I think we ended the quarter, I think I mentioned in my comments, for a good part of the quarter, we were sitting probably [16 50]. We end up at [15 50] or [15 56]. I'm back up over $1.6 billion today, for instance.

So some of that is just what happens when you get the pay down, when do you do the funding it moves around by maybe $100 million here or there. We are starting to see unfunded balances grow, which is good because that's future funding that will come through. Whether that future funding comes through before the payoffs come through or as they do?

Over time, that will all settle out, whether next quarter end, is that -- what's that number going to look like? I don't know. We are seeing some payoffs -- or I have some expectations of some payoffs because we have borrowers who have a plan and they weren't able to execute that plan as well as they'd like to under COVID.

And at some point, I do want them to, as much as I love them, I want them to go away. And so we do have a couple that I expect this quarter that will execute their plan, have executed their plan and they will take their permanent financing now. And it's a good market for them, right?

We want that for our clients as well. They're going to go out and get permanent financing. It's a good market to do that. It's the flip side of that, which is they can go out and get good long-term financing right now. And so we want them to do well as well. So I expect we'll have a few do that. One of them is one that we thought would probably pay off.

They get their TCO, they'd leased up probably path towards the end of the quarter, and they're probably going to pay us off this month because they're not at TCO yet, but they're going to get permanent financing pre-TCO, which is not unusual today.

Next question comes from Stephen Scouten with Piper Sandler.

I'm curious if you could talk about what other things you guys -- or maybe Tracy, in particular, if you're saying he's the one rubbing all that hair off his head, I have been thinking about in terms of investing the excess liquidity. I mean if you looked at other banks sub debt, what kind of initiatives have you looked into to try to put some more of that money to work?

Yes, to all the above that you mentioned there. We have done some of the bank sub debt primarily with banks that we are familiar with, making sure that they're safe and sound too. Yes, we talked to Chris, we talked to our (inaudible) and worked through his -- I see his truck here every day at 7. He beats me to work, Johnny.

So they're just looking at all sorts of different avenues that we can invest in, but it's still nothing there that gets our excitement level up with the term and the commitment out there. So back to the short-term pain making sure -- short-term gain that we don't have the pain that comes along. It's very challenging, but we look at it, as Johnny mentioned, every single day.

Yes. That makes sense. And then thinking about M&A, again, if you look at a potential deal, and I know, Johnny, you said you're further down the line, and it has been a while you won one, I mean, would a deal potentially help you put any of the liquidity to work? Or would any bank you likely acquire kind of have the same issue today and also have a fair amount of excess liquidity?

You answered your own question. They're in a budget space, so they've got the same situation we got. So the key is, do you have overlap -- is it accretive, accretive, accretive? And do you have overlap, and are you like-minded and will the cultures fit? And those kind of things are extremely important to both a seller and a buyer when they partner in. We're looking forward to, hopefully, bringing one home that you'll see that fits AAA, like-minded, overlap, lots of sizings. So I think, hopefully, this -- hopefully, we'll get one brought home for. I'd be disappointed if we don't get this one.

The other is, you just can't throw your hat in the ring, but this one, really, we've worked on pretty hard and, I think, it makes lots of sense for us. And we have not signed the LOI yet, but we -- I signed it and sent it out, so we're waiting on that to come back. Hopefully, that transaction could be -- continue to go forward [as announced here] 30 days or so.

Stephen, the thing I keep thinking about the questions you used to ask a few years ago is when our loan-to-deposit ratio was pretty high. We could turn the faucet on. But the nice thing about this is we've got a great core relationship with these customers today. Now we could -- when we went to the Florida market, it certainly has proven that, and our staff really have done an outstanding job of developing that relationship. So never thought -- I'm never going to say I don't want a deposit. But I think we all know the excess funds today is just not -- it's a cost. And -- but that ship will turn around someday and we're ready.

I had a customer call us to tell how much attention I paid to it. He said I just sold ABC and I got $16 million of cash, Johnny, and I need to park it somewhere. Can I park it with you? And I said, yes, I won't charge you but 10 basis ponts. He said, obviously, you don't want the money, and I said, I don't, and I hung up. And Tracy said, who was that? And I said, damn, if I remember, normally, I would have made a list of that and tattooed his name on my arm, but not in this environment.

Yes. It's strange. I mean I know we all still probably think about deposits as being kind of the fuel that makes the bank run, but it's a strange environment just to have so much of it. I mean it feels like even if growth comes back, it's going to take 3 or 4 years to deploy that liquidity and ever get back to that 95% loan-to-deposit ratio. I mean is that kind of a fair assessment as you guys look at it over the term?

I think that's a fair number. I mean I was sitting here thinking about the trillions that they're talking about spending we haven't even spent yet. So it could get worse before it gets better.

Yes, it certainly could. If we're going to spend these trillions and trillions of dollars, I mean, the world is awash in money, right? And I guess what happens when the world is awash in money? That's usually when rates go up. So you've got to believe if history repeats itself, which it normally does, it -- of 9,10s in June and 5 or 6 in May, this inflation, I don't know where (inaudible) is looking, but I know he's trying.

But this 10-year at 1.30 some, I think it's artificial. I don't believe that's real. I think that's just the results of us just buying all the 10-years we can buy. So that, to me, has to change at some point in time.

And even Moody's, which I don't know if they got all the answers or not, but they're calling for a 1.90 by the end of the year. So it could bode well for bank stocks going forward and people who have projects out there may want to get out and get them done sooner rather than later.

Who knows? We wish we knew that answer, but you've got the county state cities have been plush with excess money. Part of Chris's problem, getting loans closed. They've got plenty of money in the bank. They don't need to generate the revenue, I guess. And then we're both a commercial bank and a retail bank and through the PPP programs. And we're in markets that didn't close. So that's put some good cash in the business pockets that didn't have to spend all of it. And then the individual accounts have been plush too over the last year with this. So I think you'll see some of that begin to trickle out because -- once they start pouring it in.

Yes. Yes. Makes sense. And then last thing for me. Johnny, I think you said maybe the expense management was decent. I think it was the word maybe you used. I know you always want efficiency ratio lower. But I mean, do you think there are opportunities there somewhere within the expense base to take it even lower from what's already a really impressive number?

Yes. I said 38% efficiency ratio. He's talking about the bank. We've got -- we have a little thing called a holding company here. We add to this deal called Home Bancshares. He gets lost sometimes. He states, when we get rid of this damn holding company, we'll make a lot of money. What was your question?

Can we reduce expenses?

Well, a little bit. Probably. We have -- we -- as I said, getting ready for over $10 billion took us longer and cost more money than we ever anticipated. And we threw millions and millions of dollars at it. So I have to think at some point in time, we'll go back and look at that.

Now I think you can pretty much -- if the regulators allow -- give us approval, which I think they will with our capital ratios, to move up $150 million, $175 million. I think you can see the cost of that trust preferred going away. So that's about $17 million in sub debt, I mean, excuse me, sub debt, about $17 million pretax.

So we're looking at that. And Donna's group has not gone back in some time and looked at branching. And she has just pulled up all the branches at a certain level or below, and we're comparing that to back where they were prior to all of this free money flowing. And we're probably going to look at -- there may be an opportunity on 5, 6, 7, maybe 8 or 9 branches though.

And we're looking at that. So we're back looking at those expense deals at this point in time. So we're on it. And we usually are able to do a -- scrounge up a little bit of savings.

And our next question comes from Will Curtiss at Hovde Group.

Most of my questions have been addressed. So just a couple of quick ones and then following up on Stephen's question about the expenses. So if I understand, as we think about maybe the next quarter or the next 2 quarters, is there anything that we need to consider in the expense base? Or some of those things, Johnny, you were talking about probably more intermediate-type discussions?

Well, the big part, the $300 million in sub debt matures in April. So it won't come until then. We have to give a notice prior to that on this subordinated debt. I think, we just kind of -- hopefully, we'll get that paid for in the trust preferreds. We'll just kind of take those as they come down the road.

So I think you can kind of count on that. I don't think the regulators would oppose us doing that. But if they do, we won't do it. But at least we're going to have half of it -- we take half of it out.

Okay. And then last one, Brian. I think you said there's $18.2 million of remaining fees. What's your best guess on when you think those will be realized from a timing perspective?

That's a tough one there. We've tried to put it in our reforecast models every quarter and, unfortunately, it's not been very close. $18.2 million, I mean, theoretically, it could spread out over the next 4 years. I would probably just say, there'll be couple of million next quarter and then probably is going to trail off after that. Have you got any better feel, Kevin, because it's all related to getting the money back from forgiveness. It's what's causing that.

Yes. We're down pretty low on the round 1 stuff. So the forgiveness will be on round 2 stuff. We've gotten, like I said earlier, about, I think, $30 million so far out of that $350 million forgiven on the second round. And we'll start pushing hard on that the back half of this year. But I mean it's just really hard to -- it's hard to gauge what people -- whether they have any -- whether they want to do it now or push it off until some other time. I mean it's a little bit hard to know what that's going to be.

I think Brian's numbers are about as good as I could come up with at this point.

And our next question today comes from Jon Arfstrom with RBC Capital Markets.

Just a couple of follow-ups. How do you feel about your ability to defend the net interest income line and, if the growth doesn't show up, your ability to keep this kind of high teens to 20% return on tangible equity level?

Well, how do I feel about that? I would hate to see us fall off of that. We've always run -- in ROTCE, we've always run 17%, 18%, north of 20% on those ROTCEs, return on tangible. So it's not anything unusual for us. And over the last -- you probably heard the first report, if you look at the stability of the earnings over years, we've always led in that group, in our peer group, $10 billion to $50 billion. We're always in the top 2 or 3 of the ROTCEs in the group.

So I wouldn't anticipate -- we're going to try to defend the NIM. Hopefully, we can. If we're right -- if we called it right and rates start moving, I think you'll see a change, and this silly race to the bottom will go away pretty quick. So we can play the game, believe me. We got the muscle to play the game. I'm not saying we're bulletproof, but you heard the capital ratios and you see how much cash this company throws off, as Alex says, into the shoe box. So it is -- it's a pretty powerful earning machine that has great asset quality that's sitting in the catbird's seat, if we can just find the right place to deploy the assets, the cash.

So I think that will come. I just have to believe it. We have some really big credits that we worked on for a long time that -- because the situations have not come to the top, but they're actually gone to the Board to get approval to do some of these because they're big credits for us. And they just haven't hit yet, but they're hitting. They're coming. As I said, we did, I think, $100 million or a little over yesterday, and those will fund pretty quick.

So I'm optimistic that we have not given away the ship, and we're not going to give away the ship. If we have to, to defend ourselves, we can do that. But I'm pretty optimistic about the ROTCE, and I'm pretty optimistic about the NIM. I mean if you add the excess liquidity back, it really takes you to about a 4.20...

4.24%.

4.24% NIM. So through all this chaos and all this crisis, Home's held really in very, very strong.

Okay. Two more questions. Maybe an odd question, Johnny, but would you run the company any differently if you were private versus public? Or do you feel like you're running it as if you're owners today? Or would you do something different if you didn't have us to answer to?

Well, the answer is no. The discipline -- let me tell you something, the 10:10 call every day and Brian says, we got $2 billion, and the next day he says we've got $2.1 billion and then a week later, he says we've got $2.4 million. The discipline is difficult. So I do the same thing with my money than I do with the company's money. So I don't treat it any differently. I feel like this is ours. I feel like we do own it. I feel like we run it like owners. We don't run it like employees. We run it like owners. And we are doing what we think is totally in the best interest of this corporation.

So we step down in the 3s and the 2s -- and I was talking to a guy a while back. He said, "I'm doing 3.25 fits for 10." He said, "Have you ever done any of that?" I said, "Do you have any idea how many loans would you load an 18-wheeler or a warehouse full of loans at that kind of rate?" But I said, "You're selling your future, and you're here trying to sell your bank to me, and I know what you got." So I said, "You've got to pay the piper sometime, right? You don't have a free lunch every day when you give that stuff away." So we're holding tight. I think we're doing the right thing and time will tell. If we miss it, we will play the game with them if we have to. So...

Yes. Okay. And then just one more maybe kind of an internal question for Tracy. You referenced the transfer pricing, internal model and some complaints. Just share with us what you can on that to kind of give us an idea of what the message is internally.

I'm passing the buck to Stephen Tipton. He gets blamed for everything. So what we try to do on that is we measure out and try some markets have more loans than deposits and some markets have more deposits than loans. So you try to give a transfer pricing figure, to be fair.

And of course, depending on what wagon you own, it tends to hurt those if they have more loans or deposits. So it's more of an internal. They get it. They understand it. We have a little fun with it. And all in all, it still comes back to Centennial Bank and Home Bancshares number. So when I mentioned the 8 that have done above, I promise you if the loan demand and all of those things and excess deposits, some of these guys have got plenty of excess deposits, and we're probably charging them a little more than what they would really be getting out there.

Yes, that helps. And for the record...

They fussed about it when rates were 7% or 8%. When they were 5%, 4%, 3%, 2%, 1%, it just gives them something to argue with. You're charging me too much, Tracy...

Some of those who are carrying the excess deposits and loans are very critical to this company.

But it only matters to them because they're competitive with each other. They want to be the best. And even the worst of our group in any particular month would be at the top of most banks. So that's only reason that matters.

And our next question today comes from Brian Martin at Janney Montgomery.

A couple of last ones for me. Just on the -- Brian, on the split on the PPP, most of that's, I guess, round 2 or 3. The most recent round, is that kind of what's left in that bucket today?

Yes, there's like -- this is as of June 30. We had $144 million left in round 1. And it looks like we had probably $347 million in round 2.

And that's balance -- loan balances, but the fees would be even more heavily weighted towards the second, towards that last round.

That's right. So if we had -- so what's left of round 1 is not the lion's share. It's more of round 2.

Okay. And I guess just with the forgiveness of the $2 million loans, I guess, is it -- I guess, I was -- my thoughts, you guys were more optimistic that some of that could get cleared up in the next 2 quarters rather than potentially like you said earlier, Brian, dragging out. But just an unknown at this point is, I guess -- it seems like you're maybe less optimistic on that getting cleared up.

No, actually more. You may have misunderstood my comment. We had about -- in rounds 1 and 2, we had roughly $100 million worth of loans that were loans of over $2 million, and they were holding those up. We -- almost all of them have been sent in, and they were holding them up until this quarter. And we've gotten roughly -- I think, about half of that has been released and paid. So I would have hoped it would have happened before now, but it was good to see it finally started happening.

Yes. I guess I was just thinking if more of that happens for the most recent round the PPP kind of exits and you're done with it by the end of the year as opposed to maybe what Brian was saying that maybe it's just an unknown, and it drags out maybe into next year on the actual fees of that -- collecting the $18 million.

It's all going to be up to our customers being willing to send in their forgiveness. And what we're finding at least with the funding part in the last phase, they weren't as attentive in the second phase as they were in the first 2 because they were busy. These folks have businesses and they're operating again.

And so they -- when we were talking about funding of round 3, it was harder to get all their stuff in and get it done than it was the first 2 rounds when they were sitting at home. And it may be -- forgiveness may fall prey to the same thing.

Yes. Got you. Okay. Perfect. And just maybe one last one -- 2 last ones. Just on the -- back to the margin, whether it be Steven or Brian. Just from a core margin standpoint, I mean, there's a lot of noise you talked about from both the PPP and the liquidity. But just as you go forward, I guess, how are you guys thinking kind of about that core margin? And I guess, is your expectation, it sounds like, that's relatively stable at this point, I guess, as we think about it?

Yes. This is Steven, Brian. I mean, I think it stands to have a little continued pressure just in terms of where investment rates are and the cash flows that we have there. Like I said earlier, we've been able to kind of keep the deposit cost in line with where the loan yield is, but just as mix -- as investments are a bigger percentage of the earning assets overall, it may have a little downward pressure to it.

But if you look back over the last 1.5 year, 2 years to do all this stuff, we've held fairly strongly in there, I thought, on our margin yet. I think we...

Yes. You mentioned the 4.20% number. I mean, we used to target 4% on a core basis. So I mean I think over time, that's trended up.

Yes. I think we've managed it well over the time. You're not giving us credit for that?

No -- yes, definitely. Definitely, Johnny. How about just on the -- the discipline is evident, Johnny, 100%, in the -- just on the fee income side, I think just the -- kind of just a crystal ball on kind of the mortgage line. And I also noticed the service charge line was up a little bit in the quarter. Just anything on the -- on either those comments you can offer?

I'll do the service charge one. The lion's share of that is related to CFG. I think we're up about $2.48 million for that particular line item you're referring to, and $1.4 million of that is related to our New York operations. The rest of it, I think, is just related to some increased interchange fees that we had for the quarter. Mortgage, I'll let somebody else take mortgage.

Mortgage is having a -- it's having a good year. They're down a little bit from the frenzy of the end of last year and the beginning of this year. I think they still feel like it will be a very strong '21, but there's not a lot of product out there. That's the difficult -- the difficulty is...

I mean, you heard -- I'm sure you're familiar, our commercial lines there are just not very strong. He's writing lots of business, but then again, we're getting a lot to pay offs. People, they're actually going out and refinancing their housing at low rate and paying off their [5% book loans]. That's what they've been doing. So John reported that he's continuing to see that. Any comment, John, on that?

No, sir. Right now, just exactly as you've said, our production were pushing out $60 million a quarter, but our prepays were about $55 million, $56 million a quarter. The commercial side of our business, Johnny, I really think is going to slingshot back in second quarter of 2022. And again, what that looks like, that's a tailwind of about $100 million, $120 million. So I'm optimistic that we will sustain net growth, but it's going to take inventory once it starts going back.

I was visiting with an Arkansas [pulp dealer], and I said how was business? He said, "I had the best year last year I've ever had." And he said, "I'm having one of the worst years this year because I have no inventory." He said, "I wouldn't think (inaudible)." So that's what happens. Chicken one day and feathers the next.

Well, last 1 or 2 for me, Johnny. The sizing on M&A, I think you had talked about -- if you get back in the game, I know there's been a lot of opportunities looked at. But just, is your expectation or your hope still that it's more on the smaller side, on potential M&A opportunities?

Well, this was a little bigger. One we're looking at is a little bigger.

Okay. Okay. And then just the comments maybe I misunderstood, Johnny, just the last thing was on the sub debt and the trust preferreds. Just the timing of when those could occur? I think you guys gave the color on the bad debt, but the timing of -- one of them was April...

April.

April is the sub debt or the trust preferred?

April is the sub debt. And the trust preferred, we have to give notice on that. We could do that anytime. That's not as significant as the sub debt. The sub debt is much more significant. When I talked -- Brian read the numbers on the sub debt. We got $71 million, and I think he was going to keep -- he was going to pay off $41 million or keep $41 million, do you remember?

We are going to pay off $47 million.

We're going to pay off $47 million and keep the bad...

I mean the problem -- it's a good problem to have. Some of our sub debt is at extremely low rate. So when I'm sitting here looking at it today with all the excess cash flow because I don't have -- all this excess cash isn't at the holding company. But right now there's some of that stuff that doesn't make any sense to pay off because it's at such low rates.

So we would pay off the $300 million of -- my preference would be to pay off $300 million of sub debt first. Even though we could pay off the trust preferreds today, you just don't get much bang for your buck for paying off that little bit of sub debt right now. Let's hit that lower rate. So I would focus on trying to get $300 million or as much of it paid off as possible when April 2022 comes down. As Mr. Allison said a couple of times, we'll have $150 million for sure in available cash and whatever else the regulators let us to take out the banks, but we'll do pay off sub debt.

Remember -- you remember we didn't put in back $5 million a month for some time. We had started day 1. We decided to kind of have a [mental] sinking fund and start to retire that debt. That will be nice at some point in time as well as the company is doing to be debt-free. But if we need to go back in the sub debt market, we can always go back. And the rates are down. Probably we could get some sub debt done today at 3%. So maybe you might get a [2 handle] on it.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Allison for final remarks.

Rocco, thank you, and thanks, everyone, for participating today. There have been some interesting and trying times, but we're -- we've gotten through -- if you can get through pandemics and you get through the worst financial collapse in the world, you still have a company that's as strong as this one is. It makes us all -- I think this -- not me, but this management team has done a good job maneuvering through this process. Anyway, I appreciate your support. And hopefully, we'll have an M&A deal we can announce here for Home, and we'll see you in 90 days.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect.