Home BancShares Inc
NYSE:HOMB
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Home BancShares Inc
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Good day, and welcome to the Home BancShares Incorporated Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. I’m Donna Townsell, Director of Investor Relations, and our management team would like to welcome you to the Home BancShares’ 2020 second quarter earnings release and conference call. 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 CCFG; 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.
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 in 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 little high.
Little high.
Hope we could get down back in there and see if we can get it down to 20%.
Tax equivalent, net interest margin at 4.31%, ALLL nearly 400% to nonperforming 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 that 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 that P represents the word powerful in our Group. 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 the events that has 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’re 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 just not for what you get represented when you read or hear something.
Our regional leaders visit with most of our customers on a weekly basis, and 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, and we get that information loan by loan. And today, it’s not just a certain class of credits, it’s each individual single credit that we monitor. As I called this earlier, we’re back to the basic banking practices and that’s what we get through today.
I believe I’ve heard our Chairman use the word blocking and tackling, and that is what we’re all doing in all areas of this Company to provide the numbers that we’re reporting today while preparing for a successful future for our shareholders. Donna?
Thank you, Tracy. That’s a great overview of Centennial Bank, and now Brian Davis will walk us through the margin and CECL.
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 a 11-basis-point decline in margin. However, as a result of these crazy times, the decline in margins 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 30, 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 5 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 2 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 3 basis points. In conclusion, the 5 basis-point decline for PPP loans plus the 12 basis-point decline for excess liquidity plus the 2 basis-point decline for less accretion income, offset by the 3 basis-point improvement from event interest income resulted in 16 basis points of noise when comparing linked quarters. With that said, our net interest margin is actually up 5 basis points on apples-to-apples basis.
Let’s turn 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 was primarily related to the impact of COVID-19. Additionally, CECL requires the 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 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 the 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 health care at a $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 current 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 will reduce that even further.
Regarding loan deferments, as of June 30th, we had executed first time, 90-day loan deferment 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 $273 million. As a deferred percentage of their portfolio, hotel and restaurants were 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 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 for 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, but 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 is the 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% to 2% to the LTV. And even with a reasonable discount to pre-COVID values would result in a loan that maintains adequate collateral margin. This 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 selling. Our Keys properties averaged 50% to 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 as 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 point 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 allowance for credit losses above 2%, we believe that we’re in a very strong position at this point in the pandemic loan side.
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 were up 50% year-to-date over the same periods of 2017 through 2019. And secondary market loans were still over 80% of the balance. June locks were at the second highest level area, so 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 us 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’s 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 Chris 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. So, 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 payoffs, 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. So, 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. CCFG platform was born in 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 but cautious eye towards emerging opportunities. Benefits of products, asset class and regional diversity in our portfolio allow us to both, better manage risks and seek opportunities as they emerge. It’s pleased to see payoff continue at the expected pace, and we have experienced a surge in demand for our products, 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. And now, we’re going to hear about what’s become an even more popular pastime, boating. So, 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 industry would be impacted in the quarter. Commercial side of our business observed foreign factories temporarily suspend production and domestic dealers cautiously managed down inventory and took steps to preserve cash flow. We saw a 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 counter-intuitively, 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 and a reflection on the team’s effort, but still insufficient to offset the headwinds of prepayments and declining commercial inventories.
So, in the crosswind environment, consolidated loan balances have contracted $80 million since the acquisition of LH-Finance in late February. As dealers rebuild their inventories, 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, and our lean expense structure has averaged an efficiency ratio of 17% each month in the quarter, while core ROE has stabilized at 2.48%. Rapid growth, COVID and operational integration with LH-Finance have 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 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. The resolutions in July will likely bring them back down.
Most of our dealers were eligible for principal deferral program in the quarter with payments resuming this month. We had 244 consumers enrolled in the 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. Now 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 average 64 basis points in Q2, which was down 44 basis points on a linked quarter basis, but 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 had $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 the 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. And 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%. And 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. So, this was our first full quarter during a pandemic, and we really didn’t know what to expect. But as you 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 $660 [ph] million was the deposit growth and the cost of deposits went down $9 million, so good job. That was -- I think, I’ll little comment more on that. But, more I hear it, the better it gets.
You know 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 in the investment community, especially [indiscernible] us or criticized us for 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? And the truth is, with the strength of our balance sheet, we can meet or beat any competitors, regardless of size. Our culture won’t allow us to fall prey to the silliness of others. There is no right way to do the wrong thing. Yes. Thank you very much for 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 there. 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, but you’re really going to get to see a comparison in between CECL and non-CECL. And I think that’s important because the investment community has a difficult time when aligning all of this, these CECL actions along with the pandemic right now. So, I thought I’d try to make it as simple as I can make it, that way I even understand it.
So, here are some of the results of staying the course. Number one record quarter pretax, pre-provision income -- pre-provision net, excuse me, PPNR. Record poorly net income, and it’s not necessarily a GAAP, but you’ll hear -- you’ll see how I bring that in shortly. And as you heard from Stephen and Brian, margin staying strong, conservative dividend payout policy, and best-in-class asset quality. And for the quarter, we actually earned pre-COVID -- I mean, pre-CECL $0.47, and that’s a 20% return on tangible common on equity.
But here’s the real power of Home for the quarter. A record 205 -- excuse me, $102.5 million in pretax pre-provision net revenue. That’s a PPNR of 2.53% ROA, coupled that with peer-leading reserves of $238 million or 2.15%. I’d say, some of them are catching up with us now. We kind of stepped out earlier last quarter. Add to that our strong capital ratio with our strong revenue forecasts into the second half of 2020. And I think we have again positioned Home continue to produce peer-leading performance in the ‘21 and ‘22, 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 tier performance has not been a short term flash in the plans, but it has been created over time with a planned long-term solid strategy. We have remained discipline and continued striving to be the best bank in America. After Forbes named us the Best Bank in America two years in a row, we have now -- 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 saying and remaining a high-performance bank is even more difficult. We’ve seen many overnight popup 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 in the ‘21 and ‘22.
But let’s go to the real numbers and this is showing 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 year, had it not been this season, this quarter had not been for CECL. So, this year, 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 to 1.92%. We reported EPS of $0.38. We would have reported EPS of $0.47. And that would have been, as Randy Sims was saying, a world record. You don’t like the world record [indiscernible]. That would have been a world record.
Net income was $78 million versus $62 million. We actually earned 78, but with the CECL deal, it’s $62, and that’s another world record. Efficiency, Donna was below -- 44% down to sub-40. Pre-tax net revenue, $102 million, that’s another world record. Return on tangible common equity, we were $0.38 or 17.40%, which is pretty good. But actually without CECL, we reported $0.47 and 21.63%. Peer-leading margins, as you heard from Brian Davis, margin was actually a great job by all.
Solid 30% dividend payout, best asset quality ever for this corporation, and that would be another world record. 2.15% reserves, $283 million. And as Kevin -- I think Tracy said too, we’re both pretty proud of it, over 400% coverage to non-performing. You heard Stephen report, deposits up [$166 billion] for the quarter. There’s a lot of banks there -- not billion, $660 million. So, that’s $1.66 billion. It’s pretty impressive. And even more impressive than that is the job that his 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 many people willing to walk from that equity, if they do, it won’t be all bad. Strong run rate should continue into ‘21 and ‘22. And as Kevin said, 80% of the first -- $1.4 billion, that has been refused in deferment are going back on P&I. That’s probably pretty good news. This is why home is the best-in-class in all metrics. Even with special focus, we earned $0.38 and around 1.55%, in spite of disappearance of $21 million that evaporated into the CECL service spend. Most banks would be proud of those numbers at 1.55% and $0.38, that we find them unexceptable.
I would 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 process and there were lots of changes and lots of terms in that and I suspect they will continue more. But 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 television. To stop buying back stock puts Bank’s stocks in serious jeopardy, and totally at the mercy of the shareholders. We all stopped buying back stock and our policies on stock buybacks don’t allow buying 3 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 shareholders. They will attempt to run a stock in the ground if they can make nickel. These people add nothing to the world and are vultures that store values of stock owned by honest, hard working Americans that do not have the time or the advantage of the lightening fast stock execution, while they are 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 and 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 in reserve if needed. It gives us $648 million to handle future losses. That’s not going to happen. But, if it does, we’re prepared to handle it. As of Sunday, July 12th 6:42 p.m., as I’m writing this deal, I don’t know of one penny of loss thus far. I’m sure we’ll have one or two, but so far so good. Anyway, we made the adjustment to cover anything that might come out.
I think, it was Brian Davis who ran the model in the first quarter that if charge off $1 billion, we still have all regulatory capital requirements, and that’s not counting $410 million in pre-tax, pre-provision earnings that we think will be coming into the shoebox over the next 12 months. Is that about right, Brian? Was that pretty close? If we charged $1 billion, we still hit all the regulatory requirements?
Yes, sir. That is correct. I reran the numbers just the other day and it was still at that same spot.
That makes you feel pretty good to have the reserves we have and know if we had to take $1 billion losses, we’re still in good shape.
But, I will just provide some clarity into the crazy CECL model in the middle of the pandemic. Moody’s [ph] never factored in to the model as Kevin Hester has referred to, the $3 trillion plus in government support that’s coming that -- and with more to come, that in itself is probably a game changer.
It’s still a little bit dangerous to lend money in the middle of this crisis. Many lenders are loaning long-term with low fixed rates in the fixed rates threes and even some in the twos. At those rates, no one is getting paid for the risk. Flooding the country with liquidity was certainly the right thing to do, but somebody soon has to pay the inflation factor. Writing five-year low rate fixed loans will -- those people who wrap those will pay the price. I’m sorry. Banking, we must have forgotten what caused inflation over the years, particularly since we’ve flooded the world with liquidity, what if that we slow inflation down with. Remember, what the Fed uses is raising rates dummy. So, 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, we won’t this time. But, 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 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 22.5 times projected earnings. That was $120 million a year that was projected. And it brought about $2.7 billion. [Indiscernible] and contrast that with today’s value market value environment. Home is $16.7 billion earnings bank. And ex-CECL, it’s earnings about $300 million a year with the market cap of $2.5 billion, trading not even at 10 times earnings. If we were trading at ‘98 level, so our price would be [indiscernible]. Our book value is 15.06 times 4.11 comes at the $61.89 a share times 165 million shares gives us -- would give us a market cap of $10,231 million. That’s $7.5 billion more. This is what people have done in the banking system. They’ve robbed American shareholders of billions of dollars to loan banks down with additional expenses, requirements and regulations, i.e. Dodd-Frank. And that CECL is the next knife into gut to kill bank earnings.
I think it’s time to put picking on banks. Banks are in the best financial position in my banking group. Some politicians have made their entire careers being at banks. I guess, it’s [indiscernible] 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 might be what’s happening to them.
We’ve had the best quarter in our 20-year history, almost 21-year history and in the middle of a pandemic. 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 from the national policies to try to find you something else to do. And hopefully we get rid of the shorts. [Ph] In conclusion, great quarter from everyone, great participation from everyone. And I think, we’re set for the rest of the year, Donna. And if you have anything you want to say? Anybody else got anything that they want to say, comments?
Donna, I’ll turn it back to you.
All right. Thank you very much for a glowing report. And Chuck, I think, we’ll turn it to you for Q&A.
Thank you. We will now begin the question-and-answer session. And our first question will come from Matt Olney with Stephens, please go ahead.
Hey. I want to drill down on the low -- loan deferment commentary. And I realize it’s still in the process of the second phase of deferrals, but I think I heard you say that 80% of the $1.4 billion of the original deferments are going back on regular payment status. So, I’m trying to reconcile the numbers here. So, if $3.2 billion of 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? And then, part two, where do you see that number going in the future? What does the crystal ball look like?
Yes. That sounds about right with the knowledge that there’s still half of 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 [ph] maybe to $1 billion to $1.3 billion somewhere in there. And that includes what we expect to be about $500 million of hotel that will -- we’ll probably carry it forward for our second 90 days, so 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.
And then, Kevin just to make sure I understand that right. That $1.0 billion to $1.3 billion that you’ve mentioned, I guess that would be the number – the kind of 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. And then -- go ahead.
It’s tracking a little better than that, but hopefully those would probably be -- probably a $1 billion. So, I’m hoping for $1 billion. But it is what it is, right. If they haven’t been able to open that hotel, it doesn’t matter. We’ve got a deferral. The good news is, we’ve been here before with a lot of these customers, from the level five hurricanes that appeared. So, as Kevin said, we had the forms, the paperwork, we went straight into that mode. So, it is just -- 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. I mean, he’s been digging for losses, but so far so good.
Good. That’s fantastic. And 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. But also, our unfunded commitment balance did go up about $83 million, and that accounted for about $1.1 million. So, 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. And then, 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. And as a result of that, I think, Johnny, 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 of the 8-K you put out there back in April?
Yes. Thanks for that. I’ve actually wanted to comment on that. The [Technical Difficulty] was Randy Sims who was the President and CEO of the Holding Company resigned, I don’t remember, October-November. Actually, we didn’t increase -- we didn’t put anybody else in that role, and I just assumed that role. I was already the Chairman. I took the CEO and President’s role. So, we didn’t have any additional expense to the Company. We could have averaged Sims' salary with my salary or my bonus. I think that got aggravated my bonus or something. They worked some kind of metrics, and I’m not sure what it is. When you run the best bank in America, and 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. And for -- 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 look down on the shareholder list, and I didn’t see that they only share. So, 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. And if you look at the performance of this Company over the years and years, we’ve continued to do that. And by the way, they might want to pick up from the knowledge that the first 10 years of this corporation’s life, which is about half of it, their Chairman didn’t take a salary or a bonus, not a penny, no expense, checks, no nothing.
So, they come in kind of late and they sniper shoot you from out afar. We try to cooperate -- we’ll try to cooperate, but we have a business to run. We’ve been in the middle of a pandemic, and we’ve come out of the worst financial crisis ‘08-’09, in my business life. And we have to run our Company in the way we run it. So, we made a few adjustments on the Board, but just 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 analysts while we spend lots of time talking online, offline, wherever. So, anyway, I think it’s a little unfair, but it is what it is. We’ll try -- as I said, we we’ll try to cooperate, but we have a business to run and we’ll run it the best as we can. And 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. So, I appreciate the question. Thanks for that.
Okay. Sounds good. Thank you, guys.
And our next question will come from Brady Gailey with KBW. Please go ahead.
Hey. Thanks. Good afternoon, guys.
Hi, Brady.
So, 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, but that’s okay. I mean, I’d rather be over-reserved than under-reserved. So, actually I’m feeling good. I’ll let Kevin, who deals with that more than anyone in the company or Tracy who is trying to find a bad one somewhere. So, I got a nice comment from somebody who just send it, said, I agree, you run the best banks in America. They ought to leave you alone. So that’s a nice comment. Thank you very much. I won’t call your name, but I appreciate that. Kevin, have you got any comment on what you see on the loss side or anything, reserve?
Yes. My comment would be that the models that generate, while we put in reserve, really talk about what we need and there’s a disconnect there. I don’t feel like we’re going to need the 215 basis points at this point. But the models that are put in place because of CECL, indicate that. And 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. And then, it was 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. So, 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’s slowed a little bit. So, which is not all bad, right? As Chris Poulton says, there’s nothing wrong with getting paid off and sometimes you get paid off. So, I just go back to the ‘08, ‘09, ‘10, I don’t care if I wrote another loan. The key was to remain stable and strong, that’s when we did efficiency deal, it protects your capital. And as I said, we’re in that same mode right now. So not that we won’t loan money, we will loan money. But, I think it’s got -- I think, the country is a little shook up right now with all of this. I don’t know if we’re in a V or a W. So, it appears in the most our markets were in a V. There is some of them that could be a W, but most of our markets were in a V. But I don’t -- Tracy, Kevin, Stephen got a comment on that? Anybody?
I agree. I think that we’re seeing the loan. We’re seeing the opportunities that are out there. Again, stay in our discipline underwriting, that’s not when and all of them that are out there, they pay offs, they probably were a little bit more than what we thought during this time. I expect some of that to come down, but there’ll be some opportunities to as we go through the time period we’re dealing with at some of our excellent safe borrows will restructure some stuff potentially. And we also have a lot of customers sitting in the wings to take advantage of any opportunity was out there.
I was thinking of one of our larger relationships in South Florida today, also you would see some of the values decrease over the -- over this time. It is 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 barn and base that’s ready to go. You think about it. You got some stuff going on in 2% to 3% money out there. You’re not getting paid for your risks. You’re in a time, you don’t know if you’re a B or W. It’s a time to hold tight.
It’s time to what you got, protect your assets, manage your business the way we manage this company. And if we don’t grow for the next six months, so be it, we’ll be fine. This company will continue to do produce the numbers. I mean, the little loan growth would be great, but we’re not -- you don’t have this form we are, we don’t get off of that desk. Thank God we never got off of that desk. We were pushed and pushed to get off of that desk when we never did be it. And I liked to put some important with asset quality in the earnings and performance of this company.
Then finally for me, Tracy and John, I am guessing M&A is dead in the near term? Or am I wrong?
Well, I keep -- couple of analysts have mentioned, some people having some furloughs and banks having some furloughs. And when it’d be a bad time, but look at one, it was struggling. It’s probably a good time to do that. Probably it’s going to back ride. You got to back ride to think there will be a deal, you got to back ride or it has the combination has to make lots and lots of sense for both the seller and the buyer when they team up. So I like people who are more concerned at this point in time about business as usual, protecting their assets, getting the numbers down. I think they’re more concerned with operational opportunities right now than they are M&A, but if the right deal came up, how we do it, we’re in a position to do that. We have plenty of capital to do it with. Think about if we can continue this around since $400 million reserve and $230 plus million dollars. I can’t imagine. I can’t imagine every even deep into that, but you know, it is a sense of pride that we built the fortress balance sheet we like where we’re sitting.
And our next question will come from Jon Arfstorm with RBC Capital Markets. Please go ahead.
Couple of follow-ups. Kevin, you talked about 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 of size that? How material is that?
Of the PPP, I’m going to say, it was probably of the dollar amount of that, it was probably 10% to 15%, maybe 20%. But you know some of the customers, we targeted some out of that and some of the customers that we’ve gotten out of kind of into some significant deposit relationships, some long relationships. And I mean, first thing, we had to just take care of our existing customer base. And we did that at different points we had, we knew we had some capabilities to do extra. And so we would, if that was points, we would send people out to the folks that they had targeted, but other times we were making sure we could take care of our own folks.
And then on the deferral, in terms of what staying into deferrals 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’s going to -- he’ll probably be on a second referral and you’ve got some ALS that we’re in the latter stages of stabilization that this is going to extend out a little bit. So those are the types of things from a size standpoint that, that gets my attention.
John, 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 you think we’ll start to see industry losses happen? What categories do you think we’ll see the most damage? And does that tie into M&A thinking and all?
Well, I’m not sure you wouldn’t be recognized in problems today. We know the good news about our customers is, we know our customers, and we pick up with them as Tracy said in column and busy with them. So we’re big enough to have a personal relationship with these customers. We’re small in that type of personal relationship, a little bit big enough to take care of their needs. And is one of the strengths of Home Bancshares is our customer base and customers we deal with. I can’t answer what other people are going to do, but I can tell you again. We can have some loss and we probably will have some loss. Our movie theater, I am happy that get to reopen, I mean that’s $4 million or $5 million. That could be loss.
Oil and gas, it’s coming back a little bit. We only got total. Chris has got 50 and we got 16 here. So that exposure’s not bad. And some back little bit and people are doing a little better, but the hotels would be the ones that are going to continue, particularly the airport hotels are going to struggle a little bit long. But as Kevin said, if they’re 50% loan to value and we deferral for six months then there is 53% loan-to-value or 54%. The good news is having that equity in the deals that protects you. So 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. I mean, our movie theater guy could blow up and we could do, we can lose $4 million to $5 million on that trade. But outside of, I think, our hotel book is fine. We did a complete deep dive in that hotel book and learned much. Actually, we have learned more than we learned much of deep diving in. So, I can’t answer that. I can tell you that any banker honestly is looking at his book today. He would tell you, he would be seeing and identifying problems in the book, and 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 this banks begin to recognize that if we’re doing our jobs, what we are doing here back to the basic banking. We’re going to -- but we’re identifying things that have an issue today. If it has some loss today, we try to identify. And as Johnny said, so far, we haven’t seen that. We mentioned the one credit well ago. That’s one isolated products. We don’t have a certain class that we sit here and have identified saying, this is an entire portfolio.
As we shared with the loans, and Kevin and his team did an outstanding job of bringing them up to speed and got a better report on those today from Kevin, there are -- few of those that’s going to go through some challenging times over the next few months, but they have the wherewithal. I noticed on some of those extension credits. And again, we’re kind of the case I look at all but we’re trying to Johnny most of the time, but some of those are certainly not in need of another deferral.
It’s just that they’re only continued 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 moment any more risky than probably what it is today. So, 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, right. We’ll certainly have that identified when that happens by a bit little later.
Well, the good news is there, I don’t know if anybody else is running the 250 ROIs that homes running pre-tax, pre-provision. I mean, we’re in a great position to, if you look at the banks getting themselves out of a problem if there is a problem. This is certainly one that can argue and sales out of a problem, so, overall, Kevin any comment on that?
Yes, just one thing about hotels. Everybody thinks that hotels are in a really difficult spot and they are as a group, but there are some sub segments of that asset class that are performing well. Our coastal properties in our extended state properties are both doing well. Coastal is 37% of our portfolio and extended stay at 27%. So, you combine the two of those, that’s really two thirds of our of our hotel portfolio consists of two sub segments that are really doing pretty well right now and will out outperform the other. So, you really have to dig deeper than just making a broad brush across one, one asset class. And that goes for all the other things that we’re looking at retail and everything else. You have to dig deeper.
That answers your question, Jon?
Yes, that helps, that helps. I appreciate it. Thank you.
And our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.
So, question is -- 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 and in terms of loan size or what’s been reviewed I guess to-date?
I don’t think I can tell you as far -- nothing as far as loan size. I mean, they’re doing it largely based on the day when the first ones came in. Those are the first ones are working on because they were really due to be worked on when we rolled out our process. So, it’s probably more related to timing than anything else.
Got it. And what is the process for those loans, I guess on deferral now as that could get a second deferral in terms of potential downgrades, moving them into special mentioned or anything of that nature? Or any of these within special mentioned today or would that transition occur with a second deferral potentially?
So, 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. There will be, those will likely all move to the forth. They weren’t as past watch already. They would at least go there. Some will go to a special mentioned, just based on what we see in the future prospects. So, that’s the process we’re going through right now.
Stephen, I know Kevin is -- they put together one heck of just like a underwriting the credit again with a lot more detail. He’s got our regional markets that are re-underwriting the credit of certain size and those to we call it a pick-type committee that works through all of our senior leaders in the Company and then ask the certain ones would come to our executive board level, if that’s the case. But, it’s a well done, Kevin and the staff put together, the documentation that they’re doing and it’s like we 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. So, that’s one of the things that I’ve personally been really pleased with how they’re doing that.
That’s great. That’s really helpful. And you guys gave a lot of color during the quarter on your hotel book and given 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 and healthcare or any other types of loan book that people are maybe slightly concerned about?
That was I think the retail book and maybe one other segment where we’re going to be the two segments we were going to tackle next in our series of visits. So, we’re probably a couple of weeks away from being ready to do that.
Do you think it’s helpful? Somebody said, I think Johnny has picked his friends, which was an insult.
[Multiple speakers]
I took that as an insult, they all are friends. We got 100, 200 hotels. We got 200 some hotels.
Yes.
I mean, I welcome them to pick any one of those customers. We don’t orchestrate a color like that. So, that was a little aggravating.
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 you gave. I appreciate it.
Thanks. I’m glad. We will continue as long. I mean, Chris came back, someone mentioned we’re about CCFG, came back during the quarter CCFG and I thought that went well. I mean, we don’t, unless something pops up, as I said earlier, we don’t see any problems, but there might be some. But anyway, we work hard at it, if it’s beneficial to the street aspect that actually the hotel book is Kevin said our coastal hotels are sprayed up there revenue is better than it was last year. If you can believe it, I guess they get sick of sitting in the house and took off and went on vacation. So that area has been good and keys were later open up. And that’s why we’ve been in that market for many years and that will be fine.
So I worry about our airport hotels, however, airfreight picking up a little bit, so that might be better. Our 40 airspace hotels, our 40 hotels, our 30 hotels have running, as Kevin said about 40%. So, that’s a kicking up that’s taken up. So that might be -- the next quarter that might not be as big a problem, but we’re going to look at other asset classes and if that works for us, and if that works for you guys, then we’ll bring them out. We’ll bring some more on what escape. 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 taken down a specific class. And then, we’ll put them up on the board and we’ll just pick the phone up and call the customer. We’ll call our lenders and we’ll reach out and make sure, so it’s not anything as Kevin and Johnny pointed out that. There is a certain class of credit that we were overly concerned about compared to anybody else. It’s been pretty, 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 deferral for six months then you’re 60% loan will deposit. It’s not the end of the world where we got in trouble in a way as we were 90 we’re loan at a 100%, and they needed money and we’re going to be 105. So it’s a different world. Plus you got PPP money, plus you got lots of banks helping and federal government helped them all.
Perfect. Maybe last thing for me, it sounded like, maybe this more for Stephen. Stephen, with a lot of the detail that you gave around June deposit cost 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 there?
You’re asking Stephen or me. Stephen -- don’t say much drift a little bit, I don’t say it’s not going to. So go ahead, Stephen. [Multiple Speakers]
We gave guidance last quarter. It would go down and went up. So I’ll just keep saying it and go down. Certainly, in the first month or two of Q2, we’re able to be really aggressive and install some steep decline on funding cost, still got down little bit in the month of June, but you know, maybe at a little slower pace. But I think everything we see on our loan yields, the yields on the construction balances a yet to fund or 30 basis points, 40 basis points higher than where our book yield is today. The balances that we have coming due over the next six months, and I think as 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 and I think that’s all of our prospects so that we’re able to keep funding costs kind of in line with what happens on the loan side.
And 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 a longest earnings call. So, you said, 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, us and others loss, projections are wrong and 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.
We’re not -- I’ve just been jumping the beat to get back in, first Trump asked us not to do that and we stopped that day. I didn’t know if we were going to penalize to get put in penalty box for continuing to buyback stocks. 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 would love to be back in the game and I’m not going to rule it out either. I’m not going to rule out going back with something that I think has been good for our company and that’s like and it will continue to be good for our company. And we’re building lots of cash. We’ve not been able to go in and buy in better market at some point in time because we’re steadily building some capital, you’re right.
And our next question will come from Joe Fenech with Hovde Group. Please go ahead.
Hey guys, most of my questions were answered here, but just one for Brian and one for Johnny. 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 have the upward revaluation and market values during the second quarter. Would you consider those markets that have basically normalized at this point? I’m just trying to figure out, relative to where the mark-to-market would have been, let’s say at the end of January or February. Is there a 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 books versus what the market is. So, we’ve been building our unrealized gain or loss throughout the year. It might level out a little bit, but that’s pretty much the factor is that, our rights that are left on the books historically are higher than what’s current market rates are.
Okay. But for the most part, the disruption from March, April is kind of settled down?
That’s correct. And we know took a little bit of a reserve on our portfolio in the first quarter. We ran that same analysis and probably we didn’t take any more reserve. It actually probably showed it was a little bit less than probably needed, but we’ve put a management adjustment factor on it because Q2 didn’t seem like the time to be reversed in any reserves.
Okay. Fair enough. And then Johnny, correct me if I’m wrong. But it seems like 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 things lined up like could we see it do something or consider something more transformational?
I’m not afraid of that. I’d rather let some time pass. I mean, I know our book. I don’t know if we did something that was of size. I don’t know their book and I don’t know that we can get to know their book and the due diligence. I don’t know that we could do that. I would be hesitant to do a big deal, would mind to do it. As I said in the past, you can do a smaller deal and not hurt yourself. And we could do a five day in a third of our size or something that would be -- that’d be a pretty good size trade for us. But that one wouldn’t be afforded as is probably bigger that right now we’re probably in the market.
But as we get more clarity down the road from some of these other people see, what they’re doing, I don’t know what their reserves are. We looked at some different banks and I was like, we don’t have a lot of over gas exposure. Here’s the key. What are you alone? What asset classes don’t put your money in? Credit cards, I mean, car loans. Were we’re -- where are these people, where are these banks putting their money in a lot of asset class and there’s risk in every asset class.
So, you just got to manage those class those classes well, and know your customer and be able to pick up the phone and call them. I know I’m getting off a little off track here. But I think it’s very good applause for Home BancShares and is a major plus for Home BancShares knowing their customers. And most of them we’ve had a drink with and had dinner with so and the ones that we had and we want to we want that to happen. So, I don’t I wouldn’t be doing a big deal in this market right now. I think they are down a third of our size or something that makes some sense, but I don’t know.
All things equal, Johnny, you still looking west or be opportunistic around the southeast.
I’d be both at the moment. There’s I want to see how this shakes out, Joe. We’re not necessarily bottom freezer, but we’ve made a bunch of money over the years and helped build our franchise by looking at being an opportunistic. So, I think we have the capital to go do something, if we find an opportunity. And -- but otherwise there’s nothing wrong with running this company away, it’s running and kicking out $300 million a year free CECL. That’s about the new numbers, I mean, Brian, I haven’t run new forecasts for me.
And I think we’re all over 300 million for the next 12-months for getting CECL. I mean, the timing of this CECL deal is absolutely ridiculous. And we’re up and down and sideways. At free funding, I mean, the commitment on the unfunny, I had no idea that that went to operating expenses. I mean, how crazy is that really showing it as a liability, and then we’re going to have to adjust it every month. It’s another complicated factor they just thrown in on top of banks and anywhere else.
And your next question will come from Brian Martin with Janney Montgomery. Please go ahead.
Just one couple things for me just on the PPP. I mean, do you guys, I don’t know what’s I guess I missed some of what you said there, but just kind of the expectations as far as forgiveness goes and kind of timing of that benefit, I guess. 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-large percentage to be forgiven at this point, given they’ve, extended the covered periods, they’ve made it easier 40% can go to other things. All the things they did improve the probability of getting forgiven. So, I would think it’s 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. So, 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. So, I’m really hopeful by October, the December that the majority of these are gone.
Okay. So I guess you hopefully be like, it sounds like in that month of December, maybe forgiveness occurs. And so, it’s a fourth quarter event for the large piece and then some may extend out into next year?
That’s the way it seems to be lined up at this point.
Okay. Fair enough. That makes sense. And then just, how about maybe just going back to the margins for Steven for one second just as far as kind of the liquidity that’s on the balance sheet today? I mean, I guess how long do you expect that to stick around? And I guess Steven, when you kind of talk about big picture, maybe holding the margin kind of worth that, I guess, is that, I guess I’m assuming that’s with the liquidity sticking in there. I guess, any thoughts on that would be helpful?
Sure. I mean, I think the comment around, I think Brian gave some really good color in his prepared remarks around where the adjusted NIM is, X liquidity or the impact from liquidity and PPP and other things. I think that’s kind of really what we’re talking about. We talked daily I guess from a liquidity standpoint. Brain and his team meet daily and weekly. There are talks daily that. We’ve had, probably $100 million, 150 million go here recently that we were originally kind of proactively holding on to.
We’ll see some of this paradigm with tax payments going out yesterday. So, yes, and then I would expect at some point what we feel like a good portion of the PPP balances that are still in the bank and operating accounts that some of that gets spent overtime. So, 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 clear things going the economy and what the governmental support is.
Okay, all right. That’s helpful and just maybe one last one for Kevin. Just on the deferrals. Kevin, unless I missed it. I mean, $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. I guess maybe I missed your comments about the billion. It sounds that you expect 1 billion, you’ll be left to the billion after, I guess, take a look at how those are performing, how many of those are going back to payment? Is that what it 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. So out of that $1.6 billion, there will be some number of that stays on deferral. Whatever number that is, we will add to the $300 million that we’ve already identified in the first time.
Okay. I got you. That makes sense. So, okay, that’s all I have 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, which 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. And I want to tell you that my wife asked me about the dividends, 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. And overall I am dam happy. I think to be in the middle of this process. I’m happy I think.
And I thank you all for your support very much. It’s important to us and your input is important to us. If you have something you want to say about the asset classes or what we made recommendations, give Donna call. We’re always open to that. So, it was great 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 you, Tracy and your group. So, you got any comments for us.
We will continue to work hard.
Talk to you 90 days. Thank you very much.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.