Home BancShares Inc
NYSE:HOMB
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Home BancShares Inc
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Good day, and welcome to the Home BancShares, Inc. Second Quarter 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 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 bank, 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 in 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 good that somebody to hit ESG for us, so 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. Performance of the second quarter was another solid quarter for our company with $0.48 of EPS, and $71.9 million in profits. Good asset quality and decent expense control.
Loan demand is the 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 close 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 six months away from rising rents, 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 is sitting on $500 billion, and he says patience is certainly the key here, because rates are going up. As I’ve said in the first quarter we had the wind our back and a lot of things that we've been working on came Home to us. I meant that is upon 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 since the great depression, and the worst pandemic the world has ever known, maybe worse than the one in 1970. By the way, as you well know 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 all the events that happened, we were going over $2 billion, term sheet [ph] with $10 billion and incurred addition of $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 vocabulary like enterprise, risk management, CFPB, bank secrecy just to mention a few. Actually one spent less than five minutes on an exiting range 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 side. The other 50 minutes was spent on things I barely heard of for the last four or five 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 to go through the crisis regardless of pandemic, hurricanes, or COVID-19 viruses, 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 decide, so that's what good management teams should be doing.
Let's take a walk back over the last three and a half 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 must read 2018 ’19, ‘20 and ‘21. So in 2018, we did a 2.09% ROI, these are adjusted numbers. We did 2.09 in 2019, a 1.96% in 2020, a 1.92 and the first six months of this year, a 1.97. That converted into income of in 2018 of $303 million, in ‘19 $294 million, in ‘20 $309 million in the first six 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 those 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 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 all banks to see who can pay the house price, and then they go out to potential sellers and say, hey, look how much Home could pay for your bank, or someone like Home. There's not many like Home, but there's a few others that trade at a pretty high multiple tangible book.
It's almost like a pocket listing that realtor has, when the potential seller says, well, my house is not for sale, but if you can give somebody that's crazy not to pay this price, he said then my house would be for sale and you can sell it, like a real estate pocket list. My friend laughed and 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 an announcement of a deal Bank A and Bank B, he sells the seller immediately and shorts the buyer. I was why would you do that, and he said well, that’s probably the highest price that the seller is going to have and expected to go up. It's tied to the buyer's price.
And he subsides that, I don't get paid until I sell and cast the money out. He said 98% of the deals are diluted to the buyer. If it's a three or four year arm back to tangible book, why would I sit around for four or five years waiting for that arm back to come back to get somebody back to even. The only deals that make good sense are non-dilutive transactions that have all of deal costs calculated into the transaction and experienced acquirers. He said, you'll never hear this from an investment banker.
But remember, they get paid, whether it works or doesn't work. He said keep your distance. Why do you think they want to do a transaction with Home? It's because your stock is good. And why is your stock good? It's good because you're disciplined. Are you disciplined to make your 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 pay. Now how to run from like one four times tangible book all the way up to two three times tangible book, and the higher the tangible book multiple, the longer the market punished you and put you in timeout, and in some cases it was used, because you're waiting on earned back to tangible books, and nobody wants to hang around for that, because nobody keeps up with it and nobody calculates.
We will continue to look for like-minded partners in the space. In addition to this 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 [indiscernible], and have a four year earn back to tangible book, don't you think he will do it again before four 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, a call if it’s a diluted transaction, the company is not worth today what it was yesterday. If there is no dilution, there is no reason to short the buyer. I’ll say that again, if there is no dilution, and it's an accretive transaction, there is no reason to short to buyer.
If the company has local shareholders and is private, the odds 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 in yesterday, in the morning, they'll be gone, they all sale. To me, sophisticated bank investors, individual investors, pension funds, quality portfolio managers and ETFs 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 M&A, but are looking for other opportunities that could increase our earnings. We have a $300 million sub debt that is callable in April at 5.62 times and $71 million worth of trust preferred. 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 requests in the regulators last year special dividend is that correct?
We’re working on numbers as we speak.
We're working the numbers and we'll send them to him. So we may request a special dividend. And if I were to approve that, then we could pay off the entire debt. That's about $17 million pre-tax and it runs at about $0.08 EPS, that's without doing the trust preferred, we might save those dividend alone [ph] later date.
But all told we do involve 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 nine-tenths, June was nine-tenths, May was five-tenth. So that's 1.4% in 60 days. Kevin had equated. What would you say that equated to?
Almost 9%.
Almost 9% on an annualized basis. So I think we 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 the 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 process. And I hope it's not too big a surprise.
So, I'm going to let you go to management reports. And I’ll just hand it back to you.
Well, that was insightful as always, and also hope that we're not looking at it at a big surges 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, may be steady and consistent is more accurate. 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 are 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, eight of our 12 regions had their best six months ever, led by Central and South Florida, while others are still doing extremely well and still complaining about our transfer pricing 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 six months of 2021. The Allison P5NR is 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 non-interest income is actually up over double digits for the first-half of the year, while our non-interest 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 detail of the loan production and the deposit summary, as Johnny mentioned, there is now over $2.7 billion in excess and our loan to deposit ratio is around 73%.
Kevin will share the loan information as it continues its safe and sound numbers. Our non-performing finished the quarter at 0.58% the loans. Our allowance for loan lease losses, excluding PPP ended the quarter at 2.48%. Quarter-end shows our allowance for credit losses to loans to non-performing is 407.99%.
While we saw an unexpected dip in overall loans, who would have thought a 1% annual percentage rate on PPP loans would be good, and twice the return as a three or five year treasury. Let's look out, rates have gone up 50% to 80% over the past month. So Johnny, my forehead comic rubbing is looking promising going forward.
Inflation risk receiving a lot of attention lately, as we discussed nearly this a year ago, as we knew that we are staying in touch with our customers on these factors. 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 that appears the signs are showing some positive movement 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 discipline to make decisions for not to make decisions for short-term gain that could affect our company long-term. Our trust that our long-term and loyal shareholders appreciate that discipline. Donna?
Thank you, Tracy. I'd say steady and consistent are certainly complimentary adjectives, and we'll take that. Now we'll move to Brian Davis and give us the 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 cover two 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 diluted 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 excess liquidity, we had $967 million of additional interest bearing cash in Q2 compared to Q1. The excess liquidity was 23 basis points dilutive for the Q2 NIM compared to Q1.
From our 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 the negative impact of the Q2 NIM because of excess cash.
So what would that be? I mean we came -- how much we came up with? What would [multiple speakers].
We had 361 plus the 63.
420 right?
424.
Tracy rubbing his head again.
Now switch to the unfunded commitments. This quarter the company reversed $4.8 million of the unfunded commitment reserve liability. This reversal was primary related to one CNI loan. During Q2, the company determined it was not necessary to maintain the reserve on this cash flowing 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, 2021our 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 119% 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 is 19.5%, which is 95% above the well capitalized benchmark of 10%.
I think we have plenty of capital today, Mr. Allison.
Well, that's wow. That's pretty impressive. It may bode well for you, Tracy, when you ask the regulator's to help us with this little money.
We will be in good shape.
Yeah, should be in good shape. Thank you. That's good. Good.
Donna, that’s all I had. I’ll turn it back over to you.
Okay. Thank you, Brian. Now, Kevin Hester will update us 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 one and two and funding around three, with both going largely as expected. Credit metrics continue to improve slightly even when it appears there's not much room left room for improvement.
New lending opportunities have returned, but the excess liquidity and low loan to deposit ratios across the banking industry have resulted in even more irrational pricing and underwriting, so growth is elusive. We've 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 one and two balances have been reduced from the original $850 million to just below $150 million. We're still over 99.5% of the requested balances being forgiven. We've seen the SBA release funds on a good portion of the round one in two loans over $2 million in the second quarter, which has been helpful.
We will make a hard push to submit the remaining round one and two balances this quarter. Round three funding ended during the second quarter and we funded just over $350 million, or about 40% of the total of rounds one and two. We've initiated the forgiveness process on a few of these as well, and we 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-months 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 two-thirds 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 return 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 C&I payments, once positive cash flows is sustained.
There's even good news on the movie theater customer that you've heard Johnny discussed from time to time. He has received notification that he will receive funding from the Shuttered Venue Operators 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, non-performing loans improved to 58 basis points only at 5 basis points pre-COVID and down 1 basis point on a linked quarter basis. Non-performing assets are 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 remain 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 to hear that things are going as predicted and the credit quality remain strong. Did you have a comment?
Yeah. When you said a hotel, your [indiscernible] upturn, his hotel, big Florida hotel. And I think that he said, oh, Johnny, he said we're 100% full. He said, crammed back full. He said somebody canceled you will have to worry about it. He's said rain has fallen [ph] and he said the hotel's full and he didn't talk about the rates. He said they're up a little bit. He had a pretty good smile on his face.
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 on 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 them 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 a 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 commitment 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. It's 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 of success for Centennials 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 of a function of limited inventory available for sale rather than the 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. Pre-owned vessel finance now comprises 68% of our applications, that's year-to-date versus 52% in all of 2020. So we have moved from 50-50 new to use ratio to closer to a 30-70 split, as 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 at $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 to fight 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 and price it 2.5% to reduce their more expensively priced boat loans.
Repayments in the second quarter were the highest in the past two years, swallowing $55 million in interest earning assets. We're seeing some evidence of pre pay cycle may be slowing and despite of or perhaps because of our falling asset values and disciplined expense management, our contribution to Centennials bottom line has grown year-over-year, as our efficiency ratio is below 18% which has lifted ROA to 2.7%.
And Donna, while the pre pay rate is frustrating our growth goals, the good news is that we are replacing prime assets with prime assets. Origination cycles pre-COVID were 778, and last quarter held steady at 777.
Additionally, we have no COVID-related impairments or deferrals. Non-accruals reached a three year low of $1.6 million, and our accruing delinquent loans have been hammered down at 13 basis points. I believe we're well positioned for growth, once surplus cash has been exhausted and factories resume shipments.
On that note, Donna I’ll return the call to you.
Thanks, John.
That was a pretty good report.
Very good report.
Good job, Donna.
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 deposits 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.
Four 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, non-interest bearing account balances increased over $200 million on a linked quarter basis, and now stands at over $4 billion or 29% of our total deposit base.
To achieve the funding costs, interest bearing deposits average 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 were 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're continuing to work deposit rates down where we can, as liquidity levels persist. In addition, we're continually evaluating our product stat 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 began to show in the bottom line this quarter.
Switching to loans, we saw total production a little over $700 million in the second quarter, with nearly $400 million coming from the community bank footprint. We continue to monitor the competitive environment and focused on the disciplined approach to pricing and underwriting as 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 markets.
Brian mentioned in his remarks, when normalizing for the impact from PPP 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 a live Q&A, do you have any additional comments?
No. Obviously, it was a good quarter that those are interesting numbers. It's interesting times with all this liquidity. I mean we used to run 105% loan to deposits, we call it running hot around here. Now we're always around 70%, 75%, so if the market picks up, we certainly had a great position to if we can deploy that money into 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 hadn’t gone to sleep almost, Donna, I think we would be ready for Q&A.
Okay, Rocco, we'll turn it to you.
[Operator Instructions] Today's first question comes from Michael Rose at Raymond James. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. 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. Thanks.
Well, we're active. We're very active on M&A. And probably farther 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 when you can make it private, make friends instead of our money bombing, the stock. And I'll have some appreciation directly if we bring money in at AAA. And you know, we don't do them without that mountain.
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 long-term future of the value of the company. So, they understand what dilution does, and those that don’t understand I don’t understand, but that part is a little frustrating.
Our stock was 2.7 times tangible book and bankers were saying Home can pay you some big number and Home could but Home doesn't. There's reason Home price where it is, you know that Michael. It's a discipline of this company. And when you find, as I said already you find like-minded people, I think you can see an asteroid coming off for Home hopefully.
Great. And 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-PPP and ex action if we think about it that way? Or, are we still going to be subject to some ongoing pressures and 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 we would just love some color on the margin dynamics as we think about the next couple quarters. Thanks.
Let me just give me an example. One of our regions called Tracy yesterday, and somebody quoted 3.5% fix for 7. And the next guy said, well, I'll tell you what I'll do, I'll do 3% fix for 10. And the other guy, so I got the loan now, I'll do it at 2%. So it was absolutely a race to the bottom. And when you see that Kevin really gets frustrated and that impacts the NIM, we're not playing that game. But I don't think the NIM at Home other than excess liquidity has really been hit. Brian, am I right?
Yeah, I would agree with that. As the excess liquidity that's caused to 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, the reported NIM Mike, we still see a little compression because we reported $6.3 million of PPP income this particular quarter.
And just for point of reference, there's $18.2 million of it left. So it'll be difficult to continue at the $6.3 million because some of the round two forgiveness is this five years, and there's not a tremendous amount of the round one 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'm going to 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'll decide to do and deploy in the excess cash, because we deploy it anywhere it's accretive to the NIM. Although, I would like to go on record is going to go down because I'm usually wrong and so it would probably jinx myself so it might improve. But it really shouldn't bottom out there on what we have from excess cash and less 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% and something easy an investment portfolio that is technically accretive to the margin. And I know Stephens sitting here balmy and he's got a few things he may want to add some more color to that on the NIM himself.
Yeah. Hey, 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 today. 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. If we could put some of that off and then bring it back, but that's kind of a game, just is what it is. We like actually, at some point in time, we'll be able to deploy that money and when we're going to have to deploy it, I think it'll be like, time will tell.
Tracy has rubbed most of the hair off the front of his head, what to do with $2.7 billion. That was a $1 billion and $2 billion and now $2.7. He didn't have nearly as much hair left there as he used to. You got to comment on that Tracy.
Cheaper at the barber shop.
Michael, the list of questions you sent were right. That was a really to talk about thorough set of questions, those were really excellent.
Appreciate. 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 percentage earning assets are 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 size in terms of percentage 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 the loan demand going up, because every time I do it goes down. But I heard Chris talking favorably and you heard John talking favorably, you heard Kevin talking favorably and we had a good executive loan committee yesterday with about $100 million. So, I'm optimistic that maybe things are turning around a little bit.
We have a lot of stuff working lots and lots of big loans working and just had come to Bruce. And I asked Chris, I said what's the problem? And Tracy stayed longer to close these loans than we anticipated in the past, because a lot of municipalities are involved and they're not working full staffs. You can't get the information you need and you can't do a check on the progress. So it is little frustrating but that too sure resolve it so.
Okay. Thanks for taking my questions guys. And Tracy I got an extra sport haircut coupon if you need one. Just let me know.
Thank you, Michael.
He is going to need one, Mike.
Our next question today comes from Brady Gailey of KBW. Please go ahead.
Hey, good afternoon, guys.
Hey, Brady.
Hey, 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, I'm not going to put on a loan with a two or three handle?
Hey Brady, this is Kevin. It's a mixture. 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, its 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 rate. 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. We're stable assets.
We're seeing some $0.95 and $1 stuff, that just doesn't make any sense. And that's just people getting too aggressive taken alone that needs to have recourse only in legging in non-recourse. I think it was a panic in the world out there, Home, not panicking. We got a great company, we may still make a lot of money and even with all this excess liquidity. So we're going hold tight 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 buy except the margin. It takes years to fix the margin. When you do seven and 10 year fixed rate stuff out here at low rates, you don't be living with that for a long time. So we think we're on the right track. I don't believe the Fed can – as said last quarter keep their foot on this inflation.
I know pals trying to convince the world he is going do that, but I’m afraid you may have gone too far. So this thing could get a little crazy here. It could 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 taking off a little bit. I mean, we bought gasoline and food lately. You know what I'm talking about this still is -- I get it 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 needs it’s out there for the demand.
Yep. 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 a premium finance or equipment finance? Like would you ever look at those sorts of acquisitions in addition to the bank M&A?
Certainly, I mean, I'm a business man. If it makes sense, it makes money. I mean, we moved out into Shore and of course, we would look at something that made some sense. But we think finding like-minded partners in the banking space are probably the place for us to be. Our group is looking at one of those opportunities right now, by the way, those outside opportunities.
Alright. Lastly, for me, it looks like you bought back maybe a little bit of stock this quarter. But your stock has pulled back a little bit. It's now trading at 225 times tangible, which is pretty attractive to you guys. So just did you buyback stock into your quarter? And talk about your appetite for continued buyback from here?
Yes, we did and Stephen can talk about that. But our appetite is it goes down becomes more as you understand. But we bought it all the way to 27, 28, I think, it was Stephen.
Yeah, we bought about well over 600,000 shares in Q2, and then we've got a 10b5-1 placed at the end of the quarter that's been pretty active for last two weeks or so.
If we hadn't had the 10b5 we wouldn't have our hands tied. You'd probably see us in there with both feet right now. So yeah, we have more stock, and we'll continue to be in there.
Okay, great. Thanks, guys.
Thank you.
And our next question today comes from Matt Olney at Stephens. Please go ahead.
Hey. Thanks, guys. Good afternoon.
Hey, Matt.
I want to go back to the discussion of the loan balances. And I think Tipton gave us overall level of originations in 2Q. Just trying to appreciate if there was any kind of deceleration or acceleration from the April to June timeframe within that?
Hey Matt. It’s Stephen. On payoffs, they were a little heavier in the last month of the quarter, in June they were 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 payoff potentially in Q3 that were pulled forward. So that's what drove that number up a little bit.
And that's on payoff. What about on the other side on the origination side, any kind of trend into the quarter that you noticed?
No, not necessarily. $700 million in last three 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 things he thought we're going to fund in June that didn't kind of got pushed. The discussion has not been 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.
Hey, Chris, your backlog is about as good as several been in it.
Yes, sir. We continue to again, I think we said this last quarter too. I mean, that’s a nice backlog. We're underwriting deals. We're signing them up and we're getting them negotiated. As Kevin mentioned, that I mean, in June, I had two deals I fully expect to close in June and what has been sitting with documents in escrow for two weeks waiting for somebody from the city to finally get back to work. But I assume they will do that, hope they're not listening right now. I love you, but yeah, I mean, we're just seeing stuffs. We're just saying things just take a while. I mean, closing a loan is a nine, 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 six, seven parties together to get something done. It's just taken 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, that's because, every day, I don't have a close, it's a day less than earning, but we still have confidence they'll get done. And these are usually outside our control and even outside the borrower's control sometimes. So, I think everybody's looking forward to getting back.
It does help that New York has reopened now. I mean, as of July 5, right, the city's reopened in terms of the all city employees had 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 with bars 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 pay downs at the back-half the year. Can you just kind of clarify those comments as well? And you expect to have some net long growth in the back-half of the year? Or is it -- just what's the outlook there?
Yeah, I'd like to have net loan growth, a lot of that's going to be timing oriented. 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, 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's 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'll come through whether that future funding comes through before the payoffs come through, or as they do, over time, that'll all settle out, whether at next quarter-end, is that, what's that number going to look like, I don't know. We are seeing some payoffs. 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 that would 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 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 payoff, they get their TCO, they would lease up probably payoff towards the end of the quarter, and they're probably going to pay us off this month, because they're not a TCO yet, but they're going to get permanent financing pre TCO, which is not unusual today.
Got it. Okay. Great. That's all for me. Thanks for taking my question.
Your next question comes from Stephen Scouten with Piper Sandler. Please go ahead.
Hey, good afternoon, everyone. I'm curious if you could talk about what other things you guys or maybe Tracy in particular, if you say he's the one rubbing all that hair off his head had been thinking about in terms of investing the excess liquidity. I mean, if you looked at other banks sub debt, I mean, what kind of initiatives have you looked into to try to put some more of that money to work?
Yes to all above that you mentioned there. We have done some of the sub debt from primarily with banks that we are familiar with, making sure that they're safe and sound too. Yes, we talked to Chris, we talked our Brian great house and work through these essays. This is trucked here every day at seven, he beats me to work Johnny. So I think 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 it's back to the short-term pain, making sure our short-term gains that we don't have the pain that comes along with it.
It's very challenging, but we look at it, as Johnny mentioned every single day.
Yeah, 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 you have been a while on one. I mean, would a deal potentially help you put any of this liquidity to work? Or, would any bank you likely acquire kind of have the same issue today and also have excess amount of excess liquidity?
You answered your own question. They are in the margin space, so you got the same situation we got. The key is that you have overlap. Is it accretive, accretive, accretive? And do you have overlap? And are you like-minded in global cultures fit, and those kinds of things are extremely important to both a seller and a buyer, when they partner in. We are looking forward to hopefully bringing one Home that you'll see that it fits AAA like-minded overlap lots of savings. So I think, hopefully we will get one brought Home before long.
I'd be disappointed if we don't get this with. Others, you just kind of 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 assigned it and sent it out. So we're waiting on it to come back. Hopefully, that transaction could be just go forward and altitude 30 days or so.
And, if you know, Stephen, I keep thinking about is, the question you used to ask a few years ago was when our loan to deposit ratio was pretty high. We could turn the faucet on. And the nice thing about this is we've got a great core relationship with these customers today, not we could, when we went to the Florida market, it certainly has proven that and our staff just really have done an outstanding job of developing relationship. So never thought – I’m never going to say I don't want to deposit. But I think we all know, excess funds today is just not, it's a cost. But that will turn around someday, and we're ready.
I had a customer call to see how much attention I paid to it. And I said that is so ABC and I got $16 million in cash, Johnny and I need to park it somewhere, and I park with you and I charge you the 10 basis points. He said, obviously, you don't want the money. And I said I don't. And Tracy said it was that massive damn fire remember?
So normally, I would have made a list of that and tattooed his name on my arm, but not in this environment.
Yeah, it's strange. I mean, I know, we all still probably think about deposits as being kind of the fuel that makes the boat 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 three or four 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 longer-term?
I think that's a fair number. I mean, I'm sitting here thinking about the trillions that they're talking about spending that we haven't even spent yet. It could get worse before it gets better.
Yeah, 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 in a world awash in money, that's usually when rates go up. So you got to believe at least if history repeats itself, which it normally does it of the nine camps in June, and five or six in in May. And this inflation, I don't know where pals looking, but I know he's trying. But this 10 year at 137 like it's artificial. I don't believe that's real. Like that's just results of us just buying all the 10 years we can buy.
So that to me has to change at some point. I mean, even Moody's, which I don't know, if they got all answers or not, they're calling for a 1.90 by the end of the year. So it could bode well for buying stocks going forward and people have projects out there might want to get out and get them done sooner rather than later.
Who knows, we wish we knew that answer. But you got the county state cities have been flushed with excess money. And part of Chris' problem getting long flows, they got plenty of money in the bank, they don't need to generate the revenue against. And then, we are both a commercial bank and a retail bank through the PPP programs. And we are in markets that didn't close, so that’s put some good cash in the business pockets. It didn't have to spend all of it. And then the individual accounts have been flushed too over the last year with this. So I think you'll see some of that began to trickle out, because once they stop putting it in.
Yep. Makes sense. And then last thing for me and, Johnny, I think you said maybe the expense management was decent, I think 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 is already a really impressive number?
Yeah. I said 38% efficiency ratio.
Please tell him that’s combined. [Indiscernible] He gets lost sometimes. He said, we'll get rid of this damn holding company.
We will make a lot of money. What was your question?
Reduce expenses expense?
Well, a little bit, probably we, as I said, getting ready for over $10 billion was took us longer and cost more money than wherever 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 regulator's 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 on sub debt that $17 million pre-tax. 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 are 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 might be an opportunity on five, six, seven maybe eight or nine branches, though. And we're looking at that.
So we're not looking at those expensive deals at this point in time. So we're only and we usually are able to do scrounge up a little bit of savings.
Yep. Great. Okay. Thanks, guys for the color. I really appreciate it.
And our next question comes from Will Curtiss at Hovde Group. Please go ahead.
Hey, good afternoon, everyone. Tracy, I was going to wear my Razorback shirt as to make good on the bed, but you never sent it.
He never sent it?
So, now even we did a double or nothing. So alright, maybe next quarter.
If I remember, you were supposed to go by your own shirt pay for hammer.
Yeah, I was going to. Send me the link of the store. I think most of my questions have been addressed. So just a couple quick ones and then following up on Stephens question about the expenses. So if I understand as we think about maybe the next quarter, or next two quarters, is there anything that we need to consider in the expense base? Or are some of those things Johnny, you were talking about probably more intermediate type discussions?
Well, the big part $300 million in sub debt matures in April. So it won't come until then we have to give notice prior to that on this. That's what they did. I think was kind of hopefully get that paid for in the trust preferred. 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 take half of that.
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?
Wow. That's a tough one there.
We've tried to put it in our reforecast models every quarter. Unfortunately, it's not been very close. $18.2 million, I mean, theoretically, it could spread out over the next four years. I would probably just say there'll be a couple million next quarter and then probably is going to trail off after that. You got any better feel, Kevin, because it's all related to getting the money back from them -- what's causing that.
We're down pretty low on the round one stuff. So forgiveness will be on round two stuff. And we've gotten, like I said in earlier about I think $30 million so far out of that $350 million forgiving on the second round. And we'll start pushing hard on that the back-half of this year.
But, it's just really 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.
Understood. Thank you, guys.
I think Brian's numbers are about as good as I can come up with at this point.
Understood. Thank you.
And your next question today comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks. Good afternoon.
Hey, Jon.
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've probably hard to first the reports, you look at the stability of their earnings over years, we've always led in that group and our peer group $10 billion to $15 billion we're always in the top two or three 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 call it right and rates start moving, I think you'll see a change in 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. And I'm not saying we're bulletproof, but you heard the capital we have [ph]. And you see how much past this company throws off, as Alex says, into the shoe box. So it's a pretty powerful earning machine that has great asset quality that's sitting in the cat bird's seat [ph], if we can just find the right place and deploy the assets, the cash.
So I think that'll come, I just have to believe it. We have some really big credits that we’ve worked on for a long time that because of situations have not come to the top. But they're actually going 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 like $100 million a little over yesterday. And those are 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 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 $424 million 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 a boss 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 got $2.1 billion, and then weeks later, we got $2.4 billion. The discipline is difficult. So I do the same thing with my money that I do with the company's money, so I don't treat it any differently. I feel like this is ours, something 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, because we step down in the threes and the terms and I was talking to a guy while back, he said, I'm doing 3.25 fits for 10.
He said, you're [indiscernible], you have any idea how many loans we can load on 18 [ph] or 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 bike to me, and I don't know what you got. So I said, you 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 have window we play the game if we have to so.
Yep. Okay. And just one more maybe kind of an internal question for Tracy. You referenced the transfer pricing, the 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 will pass the buck to Steve and I think, he gets blamed for everything. So what we try to do on that is, we measure out in front of 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're on, it tends to hurt those if they have more loans or deposit.
So it's more of an internal. They get it, they understand it. We have a lot of fun with it. And all in all, it still comes back to Centennial Bank and Home BancShares number. So when I mentioned the eight that have done above, I promise you if the loan demand and all of those things and excess deposit, some of these guys have got plenty excess deposits, and we're probably charging them a little more than what they would really be getting out there.
Okay. Yeah, that helps. And for the record…
They press the range for 7% or 8% when they are 5, 4, 3, 2, 1 it just gives them something to argue with, you've charged me too much prices with that.
Some of those, that excess deposits to 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 the only reason it matters.
Okay. I think, [indiscernible] is still listening, but we're both a little offended by all the hairline talk for the record.
If I can get Tom just sent me a picture handwriting to my office, it made me feel better.
And our next question today comes from Brian Martin at Janney Montgomery. Please go ahead.
Hey, guys. Good afternoon. Couple last ones for me. Just Brian on the split on the PPP most of that's, I guess round two or three. I have the most recent round. Is that kind of what's left in that bucket today?
Yeah, there's 100 -- this is as of June 30, we had $144 million left in round one. And it looks like we had probably $347 million in round two.
And that's balance, and loan balances, but the fees would be even more heavily weighted towards that last round.
That’s right. So if we had – so what's left of round one is not the lion’s share, it's more of round two.
Okay. And I guess just with the forgiveness of the $2 million loans, I guess, my thoughts you guys were more optimistic that some of that could get cleared up in the next two 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 getting cleared up?
No, actually more. You may have misunderstood my comment that we had about in rounds one and two, we had roughly $100 million worth of loans that were loans of over $2 million. And they were holding those up. We sent in -- 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 start happening.
Yeah, I guess I was just thinking if more of that happens for the most recent round that 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 collecting $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, that they weren't as attentive in the second phase as they were the first phase, because they were busy. These folks have businesses and they're operating again. And so when we were talking about funding a round three, it was harder to get all their stuff in and get it done than it was the first two rounds when they were sitting at home. And maybe this forgiveness may fall prey to the same thing.
Got you. Okay, perfect. And just maybe one last or two last ones. Just back to the margin, whether it be Stephen 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? I guess, is your expectation it sounds like that's relatively stable at this point, I guess as we think about it?
Yeah, this Stephen, Brian. 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 costs in line with where the loan yield is that just as mix, as investments are bigger percentage of the earning assets overall, may have a little downward pressure too.
And if you look back over the last year and a half, two years do all this stuff we've held fairly strongly in there our thought on our margin yet.
Yeah, you mentioned the $420 million number, and we used to target 4% on a core basis. So I think over time, that's trended up.
Yeah, I think we've managed that. I think we've managed it well over the time. You're not giving us credit for that.
Q - Brian Martin
No. Yeah, definitely. How about just on the discipline is evident, Johnny 100% 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 either of those comments you can offer?
Other is a service charge one. Lion’s share that is related to CFG, I think we're up about $2,000,048 for that particular line item you're referring to. And $1.4 million of that is related to our New York operation. The rest of it, I think, is related to some increased interchange fees that we had for the quarter.
Mortgage, I’ll let somebody else talk mortgage.
Mortgage is having a good year, they're down a little bit from the frenzy of the end of last year and kind of the beginning of this year. I think they still feel like it will be a very strong ‘21. But there's just not a lot of product out there that's the difficulty is.
You heard Shore Premier, our commercial lines are just not very strong. He's writing lots of business, but there again, we're getting lots of payoff paper. We are actually going out and refinancing their housing that loan right and paying off their 5% book loans we have 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 said, our production we’re pushing out $60 million a quarter, but our prepays are about $55 million to $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 banker [ph] and I said, how is 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. [Indiscernible] was so loud, so that's what happens. Cherry one day and feathers the next.
Well, last one or two for me, Johnny. The sizing at 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 is a little bigger when we're looking at a little bigger.
Okay. And then just the comments maybe I misunderstood you and decisive was on the sub debt in the trust preferred. Just the timing of when those could occur? I think you guys gave the color on the back there but the timing of one of those was in April.
April.
April was the sub debt or trust preferred.
April is the sub debt. And the trust preferred, we have to give notice on that. We can do that at any time. That's not as significant as the sub debt. The sub debt is much more significant. I think when I talked to Brian ran the numbers on the sub debt we got $71 million, and I think he was going to pay out 41 or keep 41. Do you remember?
We were going pay off 47. I mean, the problem or it’s a good problem to have some of our sub debt is at extremely low rate. So no one I'm sitting here looking at it today with all the excess cash because I don't have all this excess cash isn't at the holding company. But, right now, there's a some of that stuff that doesn't make any sense to pay off because it's at such low rates. But we would pay off the $300 million in sub, my preference to fill term main and sub debt first, even though we could pay off the trust differed today, you just don't get much bank for your buck for paying off that little bit of sub debt right now. Let's get that lower rate. So I’m more focused 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 times, we will have $150 million for sure in available cash and whatever else the regulators' let’s take out the banks. But will they fill sub debt?
You remember, we didn't put back $5 million a month for some time. We didn't start it. They want, but we decided to kind of have a mental sinking fund and start to retire that debt battle. That being asked at some point in time as well as the company's doing to be debt free. But if we need to go back into sub debt market, we can always go back and the rates are down are probably going to could get some sub debt down today at 3%. So maybe we might get a two handle on it.
Okay. Cool, thanks for taking the questions, guys.
Thank you.
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. It has been some interesting and trying times, but we've gotten through. If you can get through pandemics and you get through the worst financial collapse in the world, and 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 all long and we'll see 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. Thank you, sir.